Richter Scale^® Articles

(First published in the CAD++ Newsletter in early 1994)

Or, A Lesson in the Proper Channels

It's often difficult, when first starting your own business venture, to come up with the necessary funds to get the equipment and other materials you frequently need (or just want). This includes magazine subscriptions, new PCs, software utilities, and countless dozens of other things. Now, if you could be assured of getting name brand products at wholesale prices, all for the cost of a few stamps or phone calls, wouldn't that be worthwhile?

At this point, you're probably wondering if I'm trying to sell you one of those Price Guarantee Club deals or something. Nope, nothing that obnoxious. What I'm going to tell you about will be obvious once you think about how manufacturers sell products.

The Product Sales Food Chain

In order to get a product to consumers, manufacturers in the PC industry use several channels:

• Distributors, also known as wholesalers, get large discounts from manufacturers, ranging from 25% to 60% (hardware manufacturers usually offer smaller distributor discounts than software manufacturers). The reason distributors get such large product discounts is because they tend to buy in large volumes and then sell only to dealers and resellers, ranging from the mom-and-pop shop to the big retailers (Egghead, for example).
  
• Resellers/Dealers get smaller discounts from manufacturers because, in theory, their volumes are lower (usually ones and twos for most CAD dealers). If a product is available through distribution, this will frequently be the easiest way for a reseller/dealer to obtain the product, although nowadays manufacturers are offering lots of perks to resellers who buy direct. Figure that a reseller/dealer can usually get products at anywhere from 15% to 45% off.
  
• Mail Order companies. These guys are another form of reseller, but because they don't have to provide much support or offer a store front (or even a visitable office), their overhead is a lot lower, which is why they are able to pass much of their discount on to you.
  
• Direct. Most manufacturers these days offer products direct to consumers these days. All it takes is a phone call. Frequently they are running some type of special that might get a you better deal than you'd get at your local computer store.

Now, why is this important? Because, as a reader of this publication, you probably qualify as a consultant, and many consultants also resell other companies' products. So, this means, as a consultant, you could honestly promote yourself to distributors and manufacturers as a reseller (think of the price benefit you could provide your acquaintances with!), in most cases.

The reason you won't always qualify has to do with the various levels or types of reseller programs manufacturers offer, as follows:

• Authorized Reseller, Type 1. This tends to be the most stringent type of reseller program, requiring certain volume commitments, and certification that you have certain skills. Frequently, a business plan is required. Unless you intend to spend most of your time actually reselling these products. This is the type of program that most large CAD companies use for their mainstream packages.
  
• Authorized Reseller, Type 2. This one is a lot less painful, and easier to deal with, as it requires you to fill out a reseller application, and possibly a credit application, but the likelihood of not being approved is virtually non-existent. Most distributors require you to fill these out. Think of it as a great way to build a credit history for your business.
  
• "Hi, I'm a reseller/consultant/dealer". For many manufacturers, telling them this is good enough to get you dealer pricing, although you may have to buy more than a single product to kick off your reseller status with a given manufacturer. It also frequently gets you access to low-cost, not-for-resale versions of the manufacturers software. Microsoft had a program like this where you could get a not-for-resale copy of any program they offered for only about $50. It may still exist, but I haven't checked it out in the last couple of years.

Note that just about any company you try to buy product from as a consultant/reseller/dealer will also require you to supply a State Sales Tax Reseller's Exemption Certificate (or simply said, a Sales Tax ID), which is something you'll have to apply for in your own state (usually with the Secretary of State or State Department of Revenue). This certificate basically indicates to the companies that you are purchasing goods from that they should not charge you sales tax for the products you purchase from them, because you will be reselling or integrating the products in your offerings and charging your customers sales tax instead. Legally, if you keep the product you purchased for your or your company's personal use, you must pay your state the sales tax for the product, since the distributor or manufacturer didn't charge it. On the other hand, if you got the products via mail order from a different state, there's currently no real way to track the value of such transactions, so your conscience must be your guide. Several bills are floating around Congress to force mail order companies to collect sales taxes for all destinations because states feel cheated in their sales tax revenues. For those of you in Europe, some countries handle VAT (Mehrwertsteuer auf Deutsch) in somewhat the same way as U.S. states handle sales tax.

If you have a Sales Tax ID, most distributors and manufacturers automatically assume you are a reseller. I should point out that if you live in a state with no sales taxes, like my current home of New Hampshire, you may have to argue with the distributor or manufacturer for a while to explain that no Sales Tax IDs can be had in your state.

A couple of the largest distributors you should be aware of: Ingram-Micro at 1-800-456-8000 and Merisel @ 1-800-MERISEL. Call them and ask for reseller applications and sample catalogs. You can also call Computer Reseller News at 516-562-5000 to get a sample issue and a subscription form, now that you're setting yourself up as a consultant who resells. Finally, to get yourself on all the proper lists to get mailings from people who think you're a reseller, attend a COMDEX tradeshow or two. It'll work wonders for getting on mailing lists.

Alternate Channels

I've spent a lot of space here on how to be considered a reseller to get lower pricing, but I wouldn't want you to overlook the obvious: buying generic and buying mail order, and developer programs.

While buying products from distributors is great for name-brand products, you can frequently get a better deal going with generic versions (i.e. a no-name local brand PC vs an AST PC) or by going mail-order (Gateway, for example). This is very likely to be a worthwhile bit of research when looking for systems, peripherals, and other hardware, but not for software, where distribution or the manufacturer are far better options.

Developer Programs

My company is a registered developer with a bunch of CAD software companies. When we started out 6 years ago, at several thousand dollars a package, there was no way we could have possibly afforded to pay for all the CAD packages we use for testing and developing. The CAD companies realized this was a problem, and came up with registered/authorized developer programs. By signing up with these programs, you can get free copies of pretty much any of the software a given CAD company offers, providing you sign an agreement to only use the software for testing and development purposes and not for any real commercial CAD use. If you're developing a CAD add-on, that's not a bad deal.

Registered developer programs are not only limited to CAD software companies. Most large software companies tend to have such programs, where they may offer their product at a discount to developers. Novell, Microsoft, and Lotus, among others, offer these types of programs.

Other Types of Soft-Goods

Before I close out this month's column, I'd like to mention two often overlooked computer related items: Books and magazines.

I've found two ways to save on books. The first is arranging an institutional discount at our local Barnes & Noble, where they whack off an additional 5% off the existing 10% they already provide on all books. They justify this because we buy hundreds, if not thousands, of dollars of books per month. It's a good thing to try to do if you have several avid readers in your community - pool your buying power.

The other way, which also involves buying in volume (10 books at a time), is to go direct to the publisher. For example, Random House, which has published my latest collaborative work, AutoCAD Power Tools, offers anyone who order 10 books at a time, a 50% discount. If you whine and wheedle, they may even let you mix and match.

Finally, we get to magazines. At Panacea, we get over 30 different magazines delivered to us a month. We pay for none of them. Some we get because we filled out a little qualification form for a free subscription, but many we get because we are "comp'd". A "comp" subscription is a complimentary one, given to you by the publisher either via a sales manager's request, or via an editorial request.

Getting the advertising manager to comp you on a subscription requires just a call to the magazine you want, asking for the sales department, and explaining to the sales manager why it is you are interested in his or her magazine as a potential venue for your advertising. The magazine should have some relation to what your business does, since it's unlikely that you'll convince a sales manager for a cycling magazine that your CAD product is a good match. If you have a reasonable match, ask to be put on the comp list. More times than not, a sales manager is not going to risk annoying you by refusing your request for a comp subscription in case you really will advertise with the magazine at some point in the future.

Getting an editor to comp you is much more difficult, and can generally only be done in one of two ways. The first is that you write for the magazine occasionally (more on this in a future column). The second way is if the editor in question is a friend or an acquaintance that needs your help every so often (for quotes, for example).

Conclusion

Many people in our industry often pay much more for products than they need to. All it takes is a little entrepreneurial spirit and some know-how, such as what I have provided, to be able to save a little bit of money for the future.

(This column first appeared in the February 15, 1994 issue of PC Graphics Report)

Lately it seems that I've been seeing and hearing more and more threats to the stability of the PC market, all as a result of something called Intellectual Property.

Intellectual property (IP) refers to a wide range of items, including copyrights, trademarks, patents, and trade secrets. Most of the news breaking legal actions of the PC industry in the last decade have been based on intellectual property issues, such as Intel's actions against AMD and Cyrix for alleged misuse of technology, patent infringement, etc.; Lotus suing Borland and Apple suing Microsoft and Hewlett-Packard for look and feel; the more recent Compton announcement of a universal patent covering accessing data on a CD-ROM; Dell threatening action against companies using VL-Bus designs because of patent infringement; and the list goes on...

So far, the PC graphics industry has been very lucky. Only a few IP disputes have arisen in our industry in the last few years, and fortunately none of them very crippling. But, this should also be seen as a sign of trouble ahead. With the rest of American society being so ridiculously litigious, can the PC graphics industry be far behind?

I don't think so. I think that our industry has avoided litigious behavior because it knows how unreasonable such behavior can be. Anyone remember the CAD Track patent on XOR cursors? This company got a patent on something everyone knew how to use and do, but that no one actually publicly documented to create "prior art" (more on this in the next column). The result is that virtually every graphics hardware company has had to pay a sizable fee to license this patent to avoid being taken to court for patent infringement.

Unfortunately, the lack of IP disputes in our industry has created something of a lackadaisical attitude towards the whole issue of intellectual property. Witness, for example, Diamond's Viper graphics board family, and Tseng's VIPER technology - both share the same name and both are PC graphics products, key components for a legitimate trademark dispute. And, what about the handful of competing graphics boards that all have "Ultra" as part of their name? And, doesn't someone out there have a patent on high-speed, interleaved DRAM access for graphics boards?

While I'm thrilled that the PC graphics industry is currently not even remotely as litigious as the rest of our society, I can't help feeling a little nervous that something will change our state of near-serenity sometime real soon. Things like the Compton patent, and Microsoft's patent acquisitions are just some of the warning flags I see.

Ignorance is NOT Bliss

After discussing the whole topic of IP with a number of people in our industry, it appears that at least one contributing factor to our carefree nature regarding IP is the result of plain old ignorance. However, ignorance of IP matters won't help anyone avoid IP disputes.

It should be noted that lowering the level of IP ignorance in our industry is also fraught with peril. While IP education may raise awareness about how to protect one's own interests, it also provides the tools for companies to go on the offensive once they realize the value of their own IP holdings. Realizing that I may be opening a major can of worms, and even creating a self-fulfilling prophecy, I nevertheless think it's important that everyone understand the basics of intellectual property, benefits and pitfalls alike. Therefore, in my next column (to appear in a week or two) I'll tell you more than you ever thought you'd want to know about copyrights, trademarks, and patents.

In closing, let me present a scenario to further drive home the importance of understanding IP issues, and whet your appetite for my next column.

Scenario 1:

Premise:

Company A invents a new technology/process that it uses in its new FrabbleStam(tm) product, but keeps the technology under tight wrap, not telling anyone how it works and also not patenting it (after all, they say, who needs patents?).

Variants:

Company B sees the FrabbleStam product, figures out what Company A's new technology is, maybe tweaks it a little here and there, and applies for and is subsequently granted a patent on the technology. The patent grant is given because no prior art was ever published or patented by Company A.

Or:

Company B develops a product similar to the FrabbleStam totally independently of Company A or the actual FrabbleStam product, also inventing a technology similar to Company A's technology, but after Company A has done so. Company B applies for and is subsequently granted a patent on the technology because of a lack of prior art.

Climax:

Company B then approaches Company A accusing them of patent infringement, demanding either:

Variants:

Company A immediately cease shipping its FrabbleStam product and any products using Company B's patent, and pay Company B some sum of money to pay for damages Company B has incurred from Company A's pre-existing sales of FrabbleStam.

Or:

Company A may continue to sell its FrabbleStam product providing it pays Company B a royalty on each sale, as well as some sum of money to pay for damages Company B has incurred from Company A's pre-existing sales of FrabbleStam.

Result:

Variants:

Company A may attempt to prove that Company B's patent is invalid, which would cost at least $100,000 in legal fees, and take years.

Or:

Company A may try to get Company B's patent reexamined by the U.S. Patent and Trademark Office (PTO). To use this approach Company A must procure sizeable amounts of relevant data to back up the request. This may cost less than invalidating the patent, but is also being less likely to produce results favorable to Company A since no published prior art exists.

Or:

Company A may just throw in the towel and agree to Company B's demands, since it can't afford to fight the patent.

So, which company would you rather own or be part of?

Until next week (or the week after that)...