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The wrong way to build a CD-ROM channel.

Like a growing number of hardware companies and resellers, Apple Computer is about to jump onto the CD-ROM software distribution bandwagon. But Apple's Software Solutions program, currently due for an October debut, comes with a few twists that suggest just how knuckle-headed Apple can be about the software business.

The basic concept is innocuous enough: Apple will preload encrypted copies of third-party applications on disks that accompany machines with CD-ROM drives. Consumers can preview these titles and place an order with Apple over the phone; when Apple supplies an unlocking code, the application automatically installs itself on the user's hard disk.

That's essentially the same proposition that other CD-ROM resellers have been selling to software developers and hardware OEMs, most of whom like the idea. (A very high percentage of new machines now ship with built-in CD-ROM drives.) But Apple's version has managed to antagonize a remarkable number of developers, especially Microsoft and Claris, both of whom refuse to have anything to do with Apple's program. The objections suggest why CD-ROM distribution isn't always as simple as it sounds:

* Skimpy margins: Apple offers third-party participants a royalty of just 20% of an application's list price. For developers with very limited distribution, Apple's payment probably represents extra revenue at very little cost (no COGs or market development funds). But developers who are more broadly distributed--not a difficult problem in the Mac market--almost certainly will find that Apple's CD-ROM sales cannibalize revenues from conventional retail packages. If developers currently net 40%-50% of list price from the retail channel, CD-ROM distribution has to produce at least two new sales for every regular unit lost to cannibalization--a pretty farfetched possibility. (To minimize this kind of lost revenue, other CD-ROM resellers typically pay developers 45%-55% of list price.)

* Obsolete inventory: To help reduce its own CPU manufacturing bottlenecks, Apple plans to manufacture several months worth of CD-ROM disk inventory at a time. With a few more months in the distribution pipeline, Apple's CD-ROM disks are likely to be at least six months old by the time they reach consumers. Consumers aren't going to be happy when they unlock what turns out to be an obsolete version, and they'll probably demand that the software vendor--not Apple--mail out a current version (for free).

* Dealer antipathy: Apple proposes to sell most of its CD-ROM titles at aggressive discounts, inevitably putting Apple's own dealers at a substantial cost disadvantage. Rather than get into a price war with Apple, dealers will probably return titles that show up on the Apple CD-ROM. The likely result: Less distribution for participating developers. (Another plausible scenario is that dealers will simply throw away Apple's disks, replacing them with CD-ROMs that encourage customers to call the dealer's own order-processing hot line.)
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Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:analysis of Apple Computer Inc.'s Software Solutions software distribution plan
Date:Aug 29, 1993
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