Apple Grows, But So Does Channel Conflict

The Cupertino, Calif.-based computer and cell-phone maker said it now has 185 retail stores open throughout the U.S., which account for $915 million in sales and $184 million in "segment margin." Overall, Apple executives said, Apple retail stores are growing at a 33 percent, year-over-year clip, and serve almost 22 million customers a quarter.

"The stores offer customers a great experience for buying Macs, iPods and now iPhones," Peter Oppenheimer, Apple's chief financial officer, told analysts during a conference call to discuss the company's earnings.

And, for some of Apple's channel partners, therein lies the problem.

"It's adversarial," said George Blakely, owner and manager of MacHeads, a Lancaster, Pa.-based solution provider and Apple channel partner. "Apple would like to sell everything themselves. They keep opening more and more retail locations. They want to drive business to their own stores. They offer deals there that they don't extend to (the channel.)

"Every time they open another store, they are potentially putting a solution provider out of business," Blakely said.

Some Apple solution providers have accepted the company's strategy, maintaining a loyal customer base of their own in spite of competition from Apple's retail locations. But several interviewed in recent weeks have voiced annoyance with the company's decision to sell iPhones only through Apple retail stores, online, or via AT&T stores.

Beyond the retail element of Apple's business, the computer maker is seeing substantial growth in another area of conflict with the channel: the education space. Several years ago, Apple opted to take much of its education sales direct to education customers and bypass the channel. When its sales in that segment were relatively low, conflict was not a huge issue. But now Apple education sales are growing at a significant clip--Oppenheimer said Apple saw record sales of Macs into education accounts during its most recent quarter.

"Obviously, it's harder than it used to be," said Bob Young Jr., president of ComputerTree, a Winston-Salem, N.C.-based solution provider and Apple channel partner. However, he said his company maintains a position as an Apple service provider to education accounts and, while his company does not have the opportunity for hardware sales into the accounts it is able to keep its foot in the door.

"We have relationships with the schools," Young said. "We do services for them, training, on site technical support. It was nicer when we got that hardware sale through Apple, but (going direct) is their decision." Young said his company is "lucky in that the closest Apple store is about an hour and a half away."

An Apple spokeswoman could not immediately provide a response by the company to channel concerns about growing conflict. For now, though, solution providers say they are seeing growth and are benefitting indirectly from the success of iPhone sales and the Mac platform--the so-called "halo effect."

"We have seen a renewed strength in the product," Young said. "We're definitely seeing Windows users come in and talk to us about Macintosh, and they are switching over from Windows to Mac."

To take advantage of the growth potential, Young said, his company has opened kiosks in some local malls to expand its sales.

"We've had several customers come in to upgrade their computers because they had the iPhone, and needed a little more juice on their computer to work with it," Young said. "Again, it is disappointing for us not to be involved in (iPhone sales.)"

Tommy Turner, president of AIS Computers, a Fayetteville, Georgia-based solution provider and Apple channel partner, said sales of Mac notebooks were especially strong during the last quarter, that the delay of Apple's Leopard operating system from the spring until October likely didn't have a great impact on sales, and that the PC maker does provide regular direct contact with the solution provider. He said he believes "Apple has been pretty good" and accessible, its notebook products are "elegantly designed" and that he believes interest is building toward Leopard in the fall.