A porting shot
October 25, 2006 // 9:21 a.m.
Okay guys (and girls), I'm going to start this off with a disclaimer. I want to be full of piss and vinegar. I want to rail against Sony and all of its pseudo-monopolistic might. I want to rant, to scream, and to weep for Lik-Sang like a dead sibling.
But let's be honest: Sony isn't stupid (despite what we as the press sometimes insinuate). And one of the world's largest producers of electronics doesn't just say, "I want to squash a bug today. Lik-Sang looks fun. London? Sure!" So it's time to put this business school brain to use, and get into the business of imports, exports, and grey markets.
Are they really as bad as Sony makes them out to be? More importantly, are they as healthy as we'd like to make them out to be?
So let's look at the business that Lik-Sang is in (Err, was in, shurely? - Ed). The basic premise of being an importer/exporter (I/E) is simple enough - buy from a country that has the product, sell in a country that doesn't for a small profit over your expenses. Rinse, repeat. For the technology market, these products can be parts, full consumer devices, and media. I'm sure I'm missing something or another, but you get the idea. The key here is that most of these are new, final goods - and the I/E becomes the retailer. Sort of... maybe?
"The I/E becomes the retailer. Sort of... maybe?"
In order to understand why there is even a question here, it’s important to understand the basic flow of goods. Though this sounds rudimentary, humour me. Normally, a manufacturer sells their goods to an authorized distributor in the country of destination. This distributor then sells the goods to retailers. The retailers, of course, hand those little bundles of joy over to you and me.
Herein lies the first problem with grey-market merchandise – warranty. A retailer is selling to a consumer, and is liable to that consumer if the product doesn’t work. After all, the retailer took the cash. The retailer can go back on the distributor. The distributor has a contract with the manufacturer. There is a chain of command here, and that chain is protected by law in most countries.
But when the I/E buys the product from a retailer, it also just bought the warranty – which 99.999% of the time is 100% non-transferable. So when the device gets to you, there’s nothing covering it. A really good I/E (like Lik-Sang) might offer a few days worth (10, in fact) for a DOA part. But why just a few days?
"Herein lies the first problem with grey-market merchandise – warranty."
Odds are, it has a 90 day warranty in the country of purchase. When your I/E bought it, the clock started ticking. Shipping to you took a few more days... then you had to find out it’s broken, then you ship it back. That way, the I/E can claim a warranty repair on the unit it bought at an authorized reseller.
If the I/E offered any longer of a warranty, there's a good chance it would eat the cost. And with the potential failure rate for electronics, believe me – if they start offering prices to account for losses due to defects, you’d rather wait until you can just buy it from Scan.
But why wouldn't the manufacturer fix it... It made the product, right? Well, warranties are a huge part of what affects the price of things. No matter what free-trade advocates would have you believe, all markets are not created equal. Have you ever wondered how Ripoff Britain got to be called that? It's because there is a mandatory two-year warranty on all electronics products. That's longer than the US and Japan's warranty requirements combined. Times four.
Now, if you’re left holding a £200 paperweight, who are you going to blame… your I/E, or the manufacturer who won’t fix your product that was DOA?
I understand you never would have needed that I/E if the company had just done a worldwide launch instead of sticking the EU last in line. Many of us geeks don't buy overseas just because it's cheaper, but because a product is only available elsewhere for a time. And here, I agree - it would be nice if every company could do a successful worldwide launch with plenty of units.
Of course, in reality, there are production flow issues, shipping issues, import regulations (just think of what Microsoft is having to do for Vista with the EU), tarriffs, duties, liability protection, intellectual property protection, and a host of other international issues that make doing business in other countries just plain difficult. Even if we just take the first two of these (often related), there's plenty of reasons for staggered launches.
"Now, if you’re left holding a £200 paperweight, who are you going to blame?"
If a manufacturer gets behind on production for whatever reason, that means launch day is going to be less profitable - there are simply less units to ship. So, in order to maximize your short-term profits (to resolve whatever issue held up production), you need to ship the most units to the place with the lowest cost for delivery. If you're in Japan, that isn't Europe... it's Japan.
In fact, Europe would be the last place you want to go on launch day - all the expenses of getting your units there and keeping them warrantied will eat up a lot of the profits, and you'll be left with a trickle of income to fund your next run instead of a river of cash flow.
Now, most of this is just the perils of international business. And to be honest, I can't justify Sony choosing to put little Lik-Sang out of business. But I can relate to a company that needs to make the best out of an already bad launch day, millions of units behind schedule and already up to its eyeballs in bad press over other flawed products. It can't really afford to have DOA units and customers who have no recourse.
"In fact, Europe would be the last place you want to go on launch day..."
Sony is between a rock and a hard place. If it fails to make this launch semi-profitable, it could bleed out. Tick off many more gamers, and there may be nobody in line to buy it. Whether we like it or not, the PS3 is a product and we are consumers, and Sony needs to make sure its product is successful. This launch is already turning into the Titanic for the company; and if the boat sinks, we might have a lot less to drool over the next time around.
If that does happen, it would almost be poetic justice. We'll cheer as consumers, waving our still-full wallets proudly, but as next year's big titles come out, we'll mourn as gamers. As much as we all love the service Lik-Sang provided, is it worth stifling one of the three biggest competitors in the video game industry? Are you really ready to hand Microsoft all of your money? How's that for a parting shot?
Maybe Sony isn't the only one between a rock and a hard place...