Apple revisiting failed strategy

Apple Computer has embarked upon a new distribution strategy that will allow more computer resellers to buy computers directly from the company, thereby cutting out the markup added by distributors.

If the past is any indication, it could be a disaster.

Apple tried a similar direct buying scheme in 1995. Rather than increasing sales, the program led to acrimonious fights with distributors and sales declines for those resellers who participated. The problem, resellers said at the time, was that the company did not have the systems in place to handle direct sales operations.

The company announced that it would cancel the program less than a year later. This time, Apple indicates it will provide more personnel and new systems to the effort.

The new Apple distribution strategy, which will take effect on December 15, allows any computer dealer who buys more than $2 million worth of Apple product a year to buy equipment directly from Apple, rather than through a distributor. Currently, resellers who sell to business customers have to purchase $20 million a year to buy equipment directly. In addition, retailers who buy $5 million worth of product annually can buy directly.

Under the old program, finally abandoned in 1996, Apple allowed any business reseller who bought $5 million or more worth of Apple product a year to buy directly from the company. Approximately 20 business resellers joined the program. By buying direct, these dealers were able to get product for close to 3 percent less than they could if they bought through distribution.

Although the program started with great fanfare, it suddenly ran into roadblocks. Resellers complained that they could not get product from Apple. While many were favored customers with distributors, these resellers became a low priority for Apple because they were buying less than the large superstores or the distributors themselves.

At the time, a number of participating resellers said Apple sales were plummeting because they could not get product. A few dropped out early. Others said they resorted to buying products from large superstores to fill customer orders. That method chased out any cost savings.

Meanwhile, distributors were losing millions in Apple revenue and any incentive to promote the platform.

The problem, according to these sources, lay in the fact that Apple did not have the logistics systems or personnel to track the increased number of direct customers. Apple executives later admitted the same when canceling the program. The company also never built up its field sales force to negotiate conflicts, resellers said at the time.

Jeff McKeever, chairman and chief executive officer at MicroAge, one of Apple's biggest distributors, said Apple's problems actually began when the company started to sell more of its products directly to dealers rather than through distribution systems.

"It destroyed their channel. Apple couldn't handle the complexity of distribution," he said. "By 1996, they were down 75 percent with us of what they were in 1994," he said. In 1994, Apple was 25 percent of MicroAge's product mix. By 1996, it was down to 3 percent. Recently, it climbed back up to 4.3 percent.

McKeever made his comments to NEWS.COM in July when Gilbert Amelio stepped down. He was not contacted again for this article.

So far, Apple has at least prepared for some of these contingencies. The company has said it will hire close to 100 field sales personnel. During the last quarterly report, Fred Anderson, who was then acting as CEO, said that the company was setting up a ordering and logistics system to handle more direct sales. Anderson, in fact, pointed out that Dell uses a logistics system based on Next technology, which Apple acquired when it bought Next.

Apple also recently acquired assets from Power Computing for $100 million, but whether and to what degree Apple will be able to take advantage of Power's direct marketing prowess are open questions.

Apple did not acquire Power's order tracking and distribution system as part of the deal, nor did the company acquire any of Power's direct marketing or technical employees. Instead, Apple only acquired the right to talk to these employees.