Apple and the Gray Market

"The gray market harms IT companies, customers and investors," said Information Technology Association of America (ITAA) President Harris Miller. "Industry research shows that gray market activity accounts for over $20 billion in revenue each year."

Based on the blustering sounds emerging from the fledgling Anti-Gray Market Alliance (AGMA), you'd think the gray market was the worst thing since Napster and software piracy - and possibly responsible for the current slump in the PC market.

Nothing could be further from the truth. I know; I've bought gray market merchandise for years.

What Is the Gray Market?

I've been into photography since ninth grade and began buying gear from mail order dealers in college. Sometimes it was authorized imports. Sometimes it came through "parallel channels" - the gray market.

The gray market exists because of the various markets and exchange rates around the world. If a New York dealer can obtain a Nikon camera and offer it to his customers at a discount, he will do so if the customer is willing to buy it. At least in the back of the photo magazines, the ads clearly distinguish between gray market and authorized products and prices.

The nice thing is, if you're buying a reliable product, warranty may not be a big deal. Your big risk is receiving a defective product, and that's covered by laws on merchandisability. If it doesn't work, the dealer has to repair or replace it. And a lot of gray market camera dealers offer their own store warranty.

Another benefit of the gray market is capping prices on used equipment. For instance, I find something very right about an 85mm lens on a 35mm SLR. The perspective, balance, handling, and lens speed are wonderful for casual and low light snapshots. (In fact, the only reason I'm using a Nikon SLR today is that their 85mm f/1.8 lens is remarkably affordable. If that hadn't been the case, I might be using a Minolta or Canon today.)

Anyhow, I finally picked up a nice 85/1.8 on eBay earlier this year. The gray market prices in the back of Popular Photography let me set a ceiling on how high I would go for a used lens - and some buyers did end up paying more for a used lens that a new gray market one would have cost.

Gray Market Macs?

Now imagine if someone found a way to buy iBooks in bulk overseas at a very favorable price and with a very favorable exchange rate. Factoring in shipping, maybe they could sell these for $100-150 less than dealers buying directly from Apple.

Would you knowingly buy a gray market Mac?

Well, you definitely want to make an informed decision. Depending on the computer's original market, it may not ship with an English-language OS or the keyboard we're used to here in the States. With a desktop, the keyboard is a $59 replacement, but the OS will set you back $100 or so.

There go the savings.

With a laptop, things can be even worse, since you can't readily buy a replacement keyboard - something overseas buyers run into when trying to buy a German PowerBook in France, for instance. (Speaking of keyboards, I'd love it if Apple offered a light colored keyboard for the TiBook. In low light, the dark keyboard is so hard to read.)

In short, you don't want to buy a gray market Mac unless you know where it came from. Then you can weigh the reduced cost against the possible expense for a new keyboard and OS.

Does Gray Market Hurt Apple?

In the end, there's the question of harm. The music industry claims trading in MP3s deprives them of millions or billions of dollars in lost revenue. But Apple can't make such a claim about gray market Macs - only Apple builds them, so Apple has already made their money selling these computers to a distributor or dealer.

Under copyright law, once you buy a book, CD, or video, it's yours. You can't duplicate it for distribution, but you are allowed to sell the original. The same concept should apply here - once Apple or Compaq or Microsoft sells it, the dealer should be able to resell it.

And that's where dealer and distributor agreements come in. Apple may require that distributors only sell Apple product to authorized dealers. In turn, Apple may put certain requirement on authorized dealers. That's one way they try to prevent unauthorized mail order and online sales, allowing dealers to sell only in a local market.

But laws vary from country to country, some dealers are less scrupulous than others, and there's not a blessed thing Apple can do to prevent Joe Mac User from going abroad and negotiating purchase of 100 iBooks from an Apple dealer. Believe me, the dealer will cut him a good price to move that quantity. And once those Macs leave the store, they are no longer governed by Apple's dealer and distributor agreements.

Believe me when I say that Apple doesn't like that. In some respects, they care every bit about control as Microsoft does. For instance, some years ago a company wanted to "give away" 10,000 iMacs in exchange for a three-year ISP agreement. Apple wouldn't sell - and they prohibited their dealers from selling, despite the fact that this vendor was willing to pay full retail price to obtain the needed iMacs.

I wonder if things like that help explain why Apple seems stuck at 5% market share. Several businesses wanted to offer "free" iMacs in exchange for a three-year ISP contract, but Apple wasn't interested in growing the market that way.

Should You Buy Gray Market?

You have to wonder what would have happened if one of these companies had found a gray market source. Could Apple have prevented them from selling their iMac packages?

I don't know how big the gray market is for computers, but shipping costs have got to make it challenging to manage a big enough price advantage to attract people willing to buy a computer without a warranty. Adding in the possible cost of a keyboard and operating system for the local market along with a one-year store warranty, you can see why the gray market is probably quite small for items as large as iMacs and Power Macs.

Would I buy a gray market Mac? Probably not. First, even if it came with the right keyboard and US English OS, I'd want to save at least 10% compared with mail order prices to make up for the lost Apple warranty. And if it doesn't come with the right OS and keyboard, I'd want to see another $200 off the top to cover the cost of buying the right components. (Even more in the case of an iBook or PowerBook, since you'd have to obtain a replacement keyboard through Apple service.)

I somehow doubt that the gray market will ever be a big deal here in the States, although the situation in Canada, Latin America, Asia, Europe, Africa, and Australia may be very different.

Further Reading

• Apple's gray-market stand, Macworld UK, 9:06
• Leading IT companies join forces to tackle worldwide gray market issues, form Anti-Gray Market Alliance, Business Wire, 9:05.
• Anti-Gray Market Alliance