Apple Computer: The Reseller Conflict

"Our strategy isn't to put our resellers out of business, but to work side by side with them."
- CEO Steve Jobs, During the Launch of Apple's Retail Stores, in May 2001.
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Thomas Armes (Armes) had been an authorized reseller of Apple Computer, Inc. (Apple), since
1989. He was the owner of Elite Computers of Cupertino, California, and had five retail stores that
sold Apple's products. He had the habit of selling new product launches of Apple on the eve of
their introduction in the market through a midnight party organized at his stores. These parties
were a huge success and people thronged his stores making him the best reseller of the computer
company. However, Armes complained that this situation underwent a change after Apple
decided to start its own retail shops in May 2001, to boost its Macintosh computer sales.
In 2002, Apple rolled out Operating System X version 10.2, code-named Jaguar, Armes announced
a midnight party as usual to sell the product. He was taken aback to find that only around 80
people attended the party. When Armes went to an Apple retail store, he found a large number of
customers waiting outside to enter the store at midnight. On enquiry, Armes found that Apple had
e-mailed all the customers to purchase the operating system directly from its stores. In another
incident, Armes had around 500 customers on hand for Apple's flat-panel display for the iMac,
Apple's new Macintosh computer. Some of the customers had even paid money in advance. But
Apple did not send him the flat-panel displays in time. When customers got the information that
Apple retail stores had a stock of the flat-panel displays, most of them cancelled their orders with
Armes. As a result, Armes' business was severely affected. In April 2003, he shut down his stores.
He filed a lawsuit against Apple and claimed damages of US$7.5 million.
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Armes was not the only reseller who filed a lawsuit against Apple. In January 2003, Tom Santos
(Santos), owner of one of Apple's largest reselling store, MACadam, filed a multimillion-dollar
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(around USS7.5 million) lawsuit charging Apple with fraud, breach of contract, unfair competition,
false advertising, intentional interference with prospective economic advantage, and
misappropriation of trade secrets. Later, a number of small and big retailers of Apple also filed
lawsuits against the company accusing it of following unfair and unlawful practices. They alleged
that Apple had promoted its own retail stores at the cost of its independent dealers, who had
been selling Apple's products for many years.
Apple entered retailing by opening a retail store on May 19, 2001. Till then, Apple had been selling
its computers through independent authorized resellers and large electronic retailers. When Apple
announced a chain of retail stores, many resellers expressed the fear that the Apple stores, which
had a better ambience, would attract people and that this would affect their businesses. They also
felt that the company might show unfair preference to its stores at the cost of reseller stores. In
response, Apple justified the retail format stating that the stores would promote their distributors
by creating more brand awareness among the people. On the contrary, after May 200i, the
resellers alleged that it had become increasingly difficult for them to procure products from the
company and that this had affected their businesses. They said that the Apple retail stores had the
full inventory of products while their stores were not sent supplies even after many requests. This,
they said, had resulted in customers going to the company-owned stores. According to the
company documents obtained by www.thinksecret.com,'
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Apple planned to target its reseller's
customers and reallocate them to its stores through direct selling. Further, the documents
revealed that Apple also indulged in procuring information about customers who bought through
resellers and asking them to buy from the nearby Apple stores to avail of discounts.

By 2002, Apple was selling its products online (started in 1997} and through retail stores and had
even opened boutiques. Resellers alleged that Apple distributed the products first to these stores
before considering them. They said that Apple's salespeople portrayed resellers in a poor light and
advised customers to purchase directly from Apple stores. These stores, they charged, sold
products unfairly at prices relatively lower than the prices offered by resellers. The resellers
charged that Apple had a fraudulent billing system that over-billed them. Santos claimed to have
evidence in the form of invoices which confirmed that Apple stores were selling at discount prices.
Three more dealers filed lawsuits against Apple along with Amies and Santos. All the five suits
were filed in the Superior Court in Santa Clara County, but Apple's request to shift the suits to the
U.S. District Court in San Jose delayed the allocation of a trial date.
According to thinksecret.com, in April 2003, Apple cancelled dealerships of around fifty dealers
including Santos, Target stores, and Dell who sold Apple's iPods,
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after they objected to Apple's
new contract agreement. The website published some facts about the contract and according to
it, Apple's new agreement limited Apple's liability to US$300,000 or less and gave no right to a jury
trial for the resellers in matters of dispute. The contract made it imperative for dealers to provide
information about their sales and other transactions to inspection officers (appointed by Apple)
who would inspect dealers during their working hours. After negotiations, Santos, Dell, and some
resellers signed the contract. Apple retail stores earned & profit of US$9 million in the quarter
ended on December 28, 2003. By the end of 2003, Apple had around 64 retail stores, which
generated revenue worth more than US$600 million.
In the first quarter of 2004, according to the website www.thinksecret.com, Apple again issued a
new contract to its resellers and service providers, which legalized the discrimination that Apple
was snowing between company-owned stores and reseller stores. Accordingly, Apple retail and
web stores would be given the first priority over resellers in the distribution of products. The
resellers complained that this would give the Apple stores an undue advantage. The new contract
also gave Apple the power to cancel the dealership of any reseller, if found to be indulging in
unfair practice.
For the fiscal year that ended in September 2004, Apple's retail stores generated revenues of
US$1.2 billion, nearly double the amount generated in 2003 during the same period. By
September 2004, Apple had 86 stores, which accounted for 14.3% of Apple's overall revenue.
Again in February 2005, a class action lawsuit was filed by a group of five consumers and dealers in
the Superior Court in San Francisco. The lawsuit accused Apple of selling used products simply by
refurbishing them and of deliberately reducing the warranty period. Apple's warranty period was
valid from the day the product was shipped to the dealer rather from the day of purchase by the
customer. The resellers alleged that Apple attracted their customers by giving discounts that were
not possible for them to give and also accused the company of charging for parts of machines
under warranty. Industry analysts were waiting for the verdict of these lawsuits, and its
implications on channel conflict resolution in a hybrid channel system.








Questions for Discussion:
1. "Our strategy isn't to put our resellers out of business, but to work side by side with them."
According to you how far was Apple successful in working in tandem with its resellers?
2. Although Apple was successful in its venture with company outlets, this move had its own
downside. In this context, explain the problems faced by Apple despite achieving a turnover of
US$1.2 billion in 2004 through its stores.

Additional Readings & References:
3. Cohen, Peter, "Independent Mac Dealers Line up to Sue Apple," www.macworld.com,
February 03, 2003.
4. Norr, Henry, "Apple Dealers Biting Back," www.SFGate.com, February 03, 2003.
5. Plume de, Nick, "Lawsuit Alleges Apple Retail Impropriety; Product Invoices Raise Accounting
Questions," www.thinksecret.com, March 19, 2004.
6. Plume de, Nick, "Apple Issues Revised Contracts for Independent Dealers,"
www.thinksecret.com, March 26, 2004,
7. Mullins, Robert, "Apple Resellers in Mutiny," www.sanjose.bizjoumals.com, April 02, 2004
8. Plume de, Nick, "Apple Dealers Reject New Reseller Contracts," www.thinksecrct.com, April
03, 2003.
9. Doyle, T.C, "Inside the Channel's Battle with Apple," www.varbusiness.com, January 05, 2005.