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Some days, Andy Gold starts his morning thinking nostalgically about 13045 West Alameda Blvd., in Lakewood, Colo. That's the setting where he operated The Neighborhood Computer Store for 24 years. Now the 2,400-square-foot facility is a tai kwan do training center. And Gold? He's closer to Denver, in a 900-square-foot house on Wadsworth Boulevard. Though he's literally only a few minutes, depending on traffic, from his former address, Gold is figuratively years away from where he stood as a proud reseller of Apple's computers. Sadly, it seems aptly fitting for a business that has lost 70 percent of its revenue in three years.
Suffice to say, Gold never dreamed he would wind up this way. During the years, he survived everything imaginable from Apple: regime overthrows, product cancellations, program changes, corporate restructurings and strategy overhauls, just to name a few scenarios. The Neighborhood Computer Store took them all in stride--all except for the opening of Apple's retail stores, which began in May 2001.
In the three years since the first retail store opened in Colorado, and the two since the second store followed, The Neighborhood Computer Store has seen its business collapse to the point where Gold, one of the longest surviving Apple resellers in the country, foresees a day when he'll have to close his door for good.
He's not alone. Thomas Armes, owner of Elite Computers, of Cupertino, Calif., has already shuttered his five Apple stores. Others, including Kent Leung, owner of MacMedia, of Chester, N.Y., have simply stopped selling Apple's products. Leung's company got out of that business a year ago, following years of dwindling margins and Mac sales.
The fate of these and other Apple partners begs an interesting question: At a time when Apple is on the rise, why are the Apple businesses of so many Apple partners falling down? The answer, some believe, is a master plan by Apple to control as much of the Apple market as possible. That includes everything from where customers large and small buy products, their experiences with the Apple brand, how they are serviced and the types of solutions they eventually deploy.
This is the story of what has happened to several Apple partners and why their experiences may spell trouble for others. Although retail-oriented companies are among the most acutely impacted today by Apple's current business practices, the fear among many involved in the Apple market is that the manufacturer's ever-expanding ambitions may put it on a collision course with all sorts of partners, including vertical-market specialists, consultants and systems-integrators.
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| Steve Jobs can smile over recent success, but Apple's practices are killing loyal resellers. |
"It sort of feels like Apple has changed its business model, and we haven't been told [officially]," he says. While Schechter does no retail whatsoever, he feels for his brethren who rely on foot traffic and wonders what's to become of companies like his--a.k.a. fellow members of the Apple Consultants Network. "I do think the retailers are canaries in tunnel, and that other Apple third parties should be concerned," Schechter says.
The Lesson of the Canaries
That Apple is at odds with many of its business partners is hardly new; anyone who has followed the company can no doubt recall several periods when relations with resellers were strained. Now, relations are so strained that at least five partners, including Gold's company, are at open war with the company. These partners have banded together and filed a lawsuit in the Superior Court of California in Santa Clara County (Case No. 1-02-CV-813373), claiming various causes of action, including breach of contract, fraud, negligent and intentional interference with economic relationship, negligent misrepresentation, trade libel, unfair competition and false advertising. The plaintiffs are hoping the judge will soon assign a trial date so they can proceed with their legal fight against Apple, which is being assisted by one the nation's most powerful corporate law firms, Latham & Watkins, in this case. (Despite several requests for an interview, Apple declined to comment on its relationship with resellers or its policies regarding them.)
But of all the complaints Apple resellers have, two stand out. They involve pricing and availability of product. Simply put, Apple resellers cannot consistently secure the products they need to compete with Apple stores, nor can they get them at reasonable prices when they do get allocation. "My chances of survival are slim to none," Gold says. "Not unless Apple is willing to change its ways when it comes to pricing and allocation."
For Elite Computers' Armes, the turn of events couldn't be more heart-breaking. In one sense, no Apple partner could claim to be as close to Apple as Armes' company was--it was situated directly across the street from Apple's worldwide headquarters in Cupertino. The one-time liquor store and deli in the heart of Silicon Valley turned out to be the perfect spot to base an Apple-oriented business. Ultimately, Armes' company grew to five stores and 75 employees. But he was especially proud of the store he had established in Cupertino, which served as his headquarters until he shut it down in May 2003. Shutting that store particularly irked him. Not only had he essentially lost his entire business, which three times made Inc. magazine's list of the 500 fastest-growing private enterprises in North America and topped out at $20 million in sales in 2002, but he also lost what amounted to a second home. Armes spent $15,000 on designer glass shelves to display Apple gear. He cultivated corporate accounts and developed a team of top technologists, he says. He also spent $25,000 on signage.
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| While Apple opens more stores, resellers including Thomas Armes close theirs. Armes once owned five stores that sold only Apple computers. They've since gone out of business. |
Like Gold, Armes never figured his years of Apple reselling would wind up this way. After all, he did much of what experts advise companies like his do. He emphasized value add, for example, and built a professional services business that was on track to account for 40 percent of sales. He also investing in marketing.
A self-starter, Armes began selling Macs out of the newspaper in the late 1980s when he noticed Apple products listed for sale by a small number of sellers with the same phone numbers. He quickly realized that some sellers were Apple employees who bought products with their discount and hoped to flip them for a quick buck. By tracking who sold what and for how much, Armes figured out the true market value of the goods. Eventually, he started a business on his mother's kitchen room table reselling used equipment. As the business expanded, he added leaves to the table. When he ran out of leaves, he added tables. When he got to five, he opened his first office in Cupertino in June 1989.
Armes' business thrived. One reason: creative marketing. When Apple unveiled the iMac in May 1998, for example, he hosted an event at midnight and kept his store open so shoppers could be the first on the block to buy one of the new breakthrough machines. The party attracted local media, whose coverage of Elite Computers helped put the company on the local retail map.
In March 2001, Armes thought he would try the same trick and threw another party for the arrival of the long-awaited Apple OS X. He secured 10 search lights and had the software driven to the store in a caravan of Hummer SUVs at the stroke of midnight. More than 800 people showed up. The highlight of the evening was when Apple co-founder Steve Wozniak himself showed up and posed for pictures. "It was one of the best days that I can remember," Armes says.
His joy, however, was short-lived. Less than two months later, Apple opened its first two retail stores, one in Glendale, Calif., and one in McLean, Va. The plan was to roll out 25 during the first wave and then fill in the white space in major cities and in key suburbs and secondary markets.
Thus far, the stores have been a success. In fiscal 2004 ended Sept. 25, 2004, Apple's retail stores racked up $1.2 billion in revenue, almost double what they did in the same period the year before. What's more, they posted $39 million in operating income compared with a loss of $5 million the year before. As of Sept. 25, 2004, the company had 86 stores, up from 65 one year before. Same-store sales are up on average 36 percent, year-over-year.
Today, retail accounts for 14.3 percent of Apple's overall revenue. And it's growing as a percentage of overall business. In contrast, the percent of business Apple does through third parties is shrinking, according to Apple. Notes Roger Kay, a PC market analyst at IDC: "I also see Apple shifting its mix of channels to more direct, both store and online."
For smaller, authorized resellers, the Apple stores have turned out to be the bane of their existence. One big reason: Apple stores always seem to have products when third parties don't. Armes, for example, immediately saw his fortunes decline after Apple opened its store in Emeryville, Calif. Before long, Armes found it impossible to secure products in any predictable manner. When Apple announced a new flat-panel display for the iMac, for example, more than 500 customers put their names on a waiting list with Armes' company. Many even prepaid with the hopes that their flat panels would soon come in. But the displays never reached Armes' stores. When word got out that Apple stores had inventory, 95 percent of his customers withdrew their orders.
It's the same story at L.A.-based Praxis Computing. Praxis, which did significant business in media and entertainment markets, enjoyed a number of years as an Apple authorized reseller. But when the Apple stores opened, support from the manufacturer waned, and Praxis wound up dropping the very first vendor partner it ever had. "[Apple is] not a channel-friendly company, never has been and, with that culture, they never will be," says Praxis sales vice president Jennifer Roback.
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| In three years, Apple has opened enough retail stores so that half of America lives within 15 minutes of one of them. |
Then and there, Armes knew his fate was sealed. With his margins down to as low as just 6 percent on certain hardware, and Apple offering goods for sale on certain products for 10 percent less than what he could buy products for, Armes realized, "There was no way to survive as a business, no matter what I did." With tears in their eyes, the duo drove home in near silence.
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