Pros and cons of distribution models (dealer vs. internet direct)

I just finished reading up on the LCD4-thread where zerodeefex and Steve Eddy got into a pissing contest that ultimately led to the thread getting closed. While I feel that Marv's reasons for closing said thread are absolutely valid, I also believe its a discussion worth having - In a hopefully civilized manners relative to lax pirate standards.

I feel there is truth but also falsehood in this. Having worked in hifi retail I believe I can shed some light on this. Let's take a concrete example of a product that costs precisely what zerodeefex talks about (4000$ retail): The Martin Logan Motion 60XT as sold in Switzerland (all prices converted to USD) [Note: I only know half those prices for a fact, the other half are guesstimates]:



Now this is not in principle different from any other product you buy: be it a coconut or a car. You may feel that certain parties in this whole calculation charge too much for their respective services, but dont be fooled into thinking that using Internet/Manufacturer direct would magically allow you to purchase the product at 30-40% of retail value in a dealer-system. Lets take the example of Schiit Audio: The Ragnarok retails for 1700$. Want that shipped to Switzerland? Add another 190$. Want it to get through customs? Add another 340$. Total: 2230$. Have a technical issue? Need it repaired? - Have fun sending it back and forth with a manufacturer in another country! Want to listen before buying? - Good luck finding one at a local Canjam or somewhere!
And you know what those 1700$ Schiit charges pay for? - Advertising, customer & product support: All things that would to varying degrees be performed by the distributors and retailers in a dealer-system.

A potential customer is looking for a new stereo speaker. He walks into a hifi store where he sees a ML Motion 60XT. He inquires about the product, gets advice from the salesperson, is able to listen to it for as long as he wants (if need be even in his own home), gets a 10% discount after a big of haggling and walks away with a brand new pair of speakers for 3700$. Perhaps the dealer even delivers them to his home free of charge. Now he's got an issue with the speakers. One of the AMTs is broken. He calls his dealer who takes a look at the product and handles the rest. (Pickup at the customers home if need be; ordering and installation of the spare part wherever possible; international shipping to the manufacturer etc.). All this does not concern the manufacturer who is only dealing with 1. party: the distributor. The distributor pays a fixed price and gives an adress. The manufacturer doesnt have to deal directly with customers, doesnt have to finance the whole of advertising (good dealers and distributors will pay for localized advertisements themselves) and he doesnt have to manage a customer database of every purchase ever made with thousands of different shipping adresses and issues.

Now if ML switched to internet direct you better believe they would charge their customers for ALL of that. All the new employees needed to deal with shipping and customers, all the complications that come with international shipping, every single product defect, every single advertisement around the world => all of that would go on top of those 1350$. I wont dare to guess how expensive the speaker would get for customers. Somewhere between 4090 $ and 1350 $. I can guarantee you that it wouldnt be 1500$. Not even close.

PS: I like internet direct, I do. My first speakers were bought manufacturer direct and I would certainly look into buying from Schiit if I lived in the USA. But lets be honest and realistic here: Its not some magic bullet; and the retail price of a lot of products is not because of greedy middlemen. Those middlemen do something, and if they werent there, the manufacturer would have to find new employees and systems to do what they did.

 

I look forward to reading from you. Take your time!

PS: I'm well aware that the Schiit or Martin Logan examples are both poor examples for Americans, since import duty and international distribution costs dont factor into the equation when buying from a national manufacturer. Obviously the greatest number of headphone manufacturers is not from the US though, therefore the examples do apply to Hifiman, Stax, Sennheiser, Philips, Beyerdynamic, AKG, Final, Pioneer, Sony, Audio Technica, Fischer Audio, Focal, Ultrasone etc.

 

I wouldn't mind paying more for dealers who provide great service, especially if they let you listen for hours, offer fair advice and discounts AND take care of shipping and warranty. The one I frequent offers a one-for-one exchange for defective products within the year and if they don't have a piece on hand during the period they'd ship it back for a new one for free. Of course, I understand that not every dealer does business like that and seeing as how some of them just try to squeeze money out of their customers, a few even hiring staff with little knowledge (I met a salesman who didn't even know what the Magni was), and so with such service and prices we might sometimes be better off ordering stuff online, since those deals might more than make up for shipping.

 

In your chart does manufacturing include raw material cost?

A big mystery for me when it comes to pricing is comparing a lot of these products with computers. I think most people can compare a motherboard and a solid state amp and see that the motherboard is way more complex and wonder why a much simpler looking solid state amp can cost so much. DACs are an even bigger mystery since they are essentially computers and yet can cost several times the price of a computer. Both computers and audio have dealer/distribution models as well.

 

I can only guess to this being the result of a few factors:

1.) Economies of scale: For every solid state hifi amp there are a hundred motherboards being sold. These are being produced by a few big companies using highly efficient manufacturing plants. Most hifi manufacturers are very small businesses that sometimes assemble their products in a garage. Of course Global Foundries or Asus can produce a motherboard much cheaper than that.

2.) Bulk purchases: I would guess that most mainboards are sold in bulk to computer manufacturers. The 'build your own pc' crowd is probably comparatively small, whereas a stereo amp is always sold to individuals. Dealing with a few corporate buyers vs. a lot of haggling private individuals is cheaper.

3.) There are comparatively few mainboard manufacturers on the global market vs a crapton of hifi manufacturers. A mainboard manufacturer has a big piece of a giant pie, whereas a hifi manufacturer has a small piece of a tiny pie. Therefore they have to make more of a profit per unit sold and have to increase prices.

4.) The computer business is ruthlessly competitive and unforgiving. Have a new product? - A dozend websites will immediately benchmark it using objective and transparent standards. If your product does badly nobody will buy it. Compare that to hifi with all the subjective reviews and no generally consented testing procedures: Even the shittiest product finds gullible buyers. Increased competition = lower prices. A culture of no standards = higher prices.

5.) Audiophiles are gullible and can be suckered out of their money comparatively easily.

 

Motherboards and amplifiers both use electricity and have PCBs. That's about the extent of their commonality. It's about as apples and oranges as you can get, so I don't really see how you can look at a $200 Asus Z170 board, the brains of which comes from a chipset that Asus doesn't actually produce, which allows the CPU, which Asus doesn't produce, and which comes at considerable extra cost, to communicate with the RAM, which Asus doesn't produce and comes at considerable extra cost, and with storage devices, which Asus doesn't produce, and comes at considerable extra cost. The Asus board also has a power conversion system to take the incoming power, regulate it, and send it where it needs to go, but it can't actually power itself without an external power supply, which Asus doesn't produce, and which comes at considerable extra cost. Asus also doesn't give you any kind of enclosure either. That's on you. For a lot more money. So yes, a motherboard doesn't cost that much. A motherboard on its own is also a paperweight. Make a functional computer with it, and it's not so cheap anymore.

Poweramp manufacturers don't have the luxury of leaving half of the components out for you to buy on your own. It's all self contained, in an oftentimes expensive enclosure (price exotic aluminum computer cases, they are $200+, and typically use metal that's 1/4 of the thickness of audio component cases). Depending on the design, they are also often not nearly as simple as you might think. This kind of engineering, and parts selection, costs real money.

 

In regards to the direct vs dealer debate, I think it depends on where you and the company are located, and the individual company itself. I'm a big fan Daedalus audio, which is a direct sale company that doesn't offer bargain basement prices. What you get though is absolutely incredible craftsmanship from a very passionate guy. What you don't get is easy access anywhere in the USA, and certainly less so in the ROTW. Lou welcomes people to come by his shop and listen to anything they like, but obviously you have to get out there. If you're thinking about dropping $10K+ on speakers, I don't think a plane ticket and a day or two hotel stay is a huge sacrifice. With a full dealer network, that $10K Argos would probably be $20K, so you are still getting some real value there.

At the other end of the scale, something like the $1500/pr BMR Philharmonitor simply could not be done by any speaker company that sells through a dealer network. Those drivers cost too much money, the margins would be impossible.

Having dealers also isn't always all it's cracked up to be. For a long time, buying Stax headphones in the US through a dealer was basically a crap shoot. If you had a problem, you were screwed. You'd get in touch with your dealer, who'd contact Stax's US distrubtor Yamas. Or try to contact them, but Yamas would never pick up the phone. So much for dealer service. In a lot of cases it was actually easier to import JDM Stax headphones and send them back to Japan for warranty service than try and deal with Yamas. Again, so much for traditional dealer service.

With other companies, warranty service can be very hit and miss. When Mark Levinson for example got bought out from under Madrigal and became part of H/K, it was a complete and utter debacle. Servicing (and ML 33x series products are notorious for being unreliable) was a total nightmare.

Have a problem with your Odyssey amp on the other hand? No problemo, just give Klaus a call.

 

@DaveBSC - You are making a straw man argument if its in response to my post. My only mention of motherboards was comparing the complexity but it was clear I was talking about the whole computer. Most audio companies don't make DAC chips, vacuum tubes or transformers either. If anything you are reinforcing my point because Asus can include all those additional items "at considerable expense" and still make something far less expensive then many DACs.

I have some of my own thoughts about why audio hardware can cost far more then computer hardware.

1. For whatever reason most audio gear uses linear power supplies instead of switchmode power supplies. This requires the use of expensive transformers and adds a lot of weight which is an additional shipping cost. Not only that but computer power is standardized at certain voltages whereas audio gear pretty much has a different voltage for each amp, which necessitates a custom design.

2. Heat management for computers is typically a fan. HiFi gear tries to minimize noise and goes for passive cooling instead. This requires large heatsinks which don't come cheap and add weight. Especially for class A designs where the chassis is made up of heatsinks.

3. Enclosures - I believe I read something by Jason Stoddard on HF that the internals themselves actually don't cost that much and its the enclosures themselves that actually make a significant part of the cost. In my experience making DIY gear I also notice that the enclosure that make up a significant amount of the cost. This certainly true for speakers where the enclosure cost far more then the drivers.

4. A lot of audio gear is designed with through hole components or even point to point wiring. This means you can't automate production and adds a significant amount of labor cost. While the other points are pretty much nonnegotiable, I believe this is something that can be applied with minimal affect on the sound and I encourage more companies to go for SMD design. Schiit happens to be one of those companies and I believe that this is a big reason why their products are such a good value.

All these points are purely hardware arguments. You can see how low prices can reach when it comes to class D gear which actually does most of the points I made.

 

Don't take this the wrong way, but one reason Daedalus Audio is factory direct is that it would probably be difficult for them to get an effective dealer network. There are so many products chasing the remaining brick and mortar stores that the stores have to be circumspect, investing in yet another speaker line that would probably only take sales from things they already sell is usually not a good idea. It only makes sense where the dealer believes the product would generate new sales he would not have gotten without that product. Daedalus has basically no profile in the scheme of things, so it's unlikely to generate new sales. You would basically be "educating" people to the brand in cost to other lines you already sell.

Of course, Daedalus may actually WANT things this way, preferring to sell a few pairs of speakers done his way to a small client base and keeping in complete control. BTW, I have heard Daedalus at shows and they seem like nice folks.

The BMR Philharmonitor was off-the-grid enough that I had to google it, I had never heard of it! But I had heard of Dennis Murphy through his involvement with Salk Audio. These guys are basically what I call "hobbyist" manufacturers along with companies like Vapor Audio, etc., and I don't say this to be pejorative.

What you say is probably true about costs, and, on a quick scan, the BMR Philharmonitor may be priced too low to really justify it's sale in terms of profit to Philharmonic Audio! So buy it now, before they come to their senses, like Mad Man Muntz (a reference that will only be familiar to the oldest and/or most demented reader). All seriousness aside, these may be great deals, but you generally can't hear them before you buy, you have to rely on knowing and believing in Dennis Murphy's or Salk's or Ryan Scott's (Vapor) talents. In fact, I see that Vapor now sells other manufactures products on their website, making for a delicious irony that Vapor's speakers are factory direct but they are actually dealers for other's products!

In your example, it's really the distributor that was a crap shoot. The dealer was probably no happier than you about the situation, since they are the one actually on the "firing line". In fact, one dealer in my experience had been very successful with a particular line but because the manufacturer (in this case) became so lax over time with things like product supply and customer warranty and non-warranty repairs he stopped selling their stuff. Which, in my view, is the right thing to do and a way a dealer can look out for their customers.

For many manufacturers, distributor and dealer networks can indeed be all they are cracked up to be. They provide a place to hear the product, offer service and consultation to the customer (ideally) and act as an "advocate" for the product. In addition, they give the manufacturer more time to er... manufact rather than deal with customers, shipping etc. Vandersteen and Magnepan (and really most now big hi-end audio companies) started basically as small garage products but developed a dealer network that believed in them and, along with advertising and product reviews, promoted their products to their eventual success.

In fact, losing that good dealer network through neglect or whatever can break a once viable company and can even turn tragic as the Merlin Audio saga attests.

Again, this is a manufacturer that was really the problem.

And here is why some companies SHOULD be factory direct. Klaus seems to be a real personable guy who enjoys interacting directly with his customers, so he is happy to kvetch on the phone and even personalize stuff for the customer. He must enjoy it, because with his low prices he is essentially not getting paid for all those hours. And God love 'im. There surely is more to life than money, and that's the real payoff.

Kevin

 

Majority of electronic dealers are useless. I have had several bad experiences with some local hardware dealers. I might just buy directly. I have had better experiences with Ebay and direct purchases. I also prefere to use online stores like thomann.de(its more lika a warehouse, prices are 20-30% cheaper) .

Fortunately i have 2 great local Hi-Fi stores that let you audition different gear and headphones.

 

Sooooo... you listen to the gear in store, leave to 'sleep on it' and order online?

 

No it wasn't. You said "I think most people can compare a motherboard and a solid state amp and see that the motherboard is way more complex and wonder why a much simpler looking solid state amp can cost so much." You didn't say computer, you said motherboard. Asus can make a fully functioning computer for less than which DAC? You're being more than a little general here. You can buy a DAC for less than the cost of a NUC box. Or you can spend $30K+ on a DAC. Obviously there's a wide range of products available at all conceivable price points. Better sounding DACs tend to cost more. Some very expensive DACs are poor values. This shouldn't come as a shock.

Then you spent the next 5 points answering your own question. So...

Most Class D amps sound like shit. Also, I use two TeddyPardo linears, a 12V and a 5V, to power my VortexBox because switchmode ATX power supplies sound like shit. Getting good sound out of a linear is MUCH easier than a switcher, which is why most companies don't use them. Steve Nugent has figured out how to get them to work for him, most of the other guys haven't.

 

Actually you can find the lowest end Win8/10 Laptops/Tablets ARE under 200$. And the most retardedly expensive consumer computers still dont top 5000$. A sizeable portion of the hifi DAC-market is ABOVE that pricepoint.
Do you REALLY think a DAC is a more complex and more difficult to engineer product than a goddamn computer? (If you do, welcome to 'Logical Fallacy-Land': Every computer includes a DAC as one of many components, so it cannot in principle be less complex than a DAC alone.) OF COURSE hifi equipment is retardedly expensive when compared to the technical complexity and pricing of computer products. There is NOTHING about the technology inside ANY DAC that justifies the price it commands.

I just ordered a Skylake Core-i7 6700T CPU. This thing runs circles around everything older than two years with a TDP of 35W, so you can cool it passively! A freaking quadcore with 2.8 Ghz (non turbo) that can be cooled without any fans and runs everything, from 20 year old legacy software to brand new triple-A games. How much does this marvel of technology cost? 330$.
You know what 330$ gets you in DAC-land? Not very f'ing far.

Now you say: 'Oh but you need a mainboard, a power supply, RAM, a case etc etc, before that CPU of yours actually does anything.' - Well thats true, but what does your DAC do on your own? It certainly doesnt produce any music on its own. For that you need sources, cables, amplifiers, speakers or headphones. Do you really want to do this comparison regarding cost?

 

If i rember correctly Yggdrasil DAC chip costs 100$. But these are not mainstream chips, so cost is higher due to lower production volumes.

Computers and external DACs have completely different objectives. High-end DACs are arguably quite complex also. Precision is expensive.

 

The point is simply this: There is nothing inherently complex or expensive in DACs or other hifi equipment for that matter. If the hifi market sold the very same technologies as it does today but had the number of buyers and competitors that the PC market has, prices would drop MASSIVELY. As it is, its a niche business with no economies of scale to speak of and few generally accepted standards of excellence and correspondingly inflated prices.

 

This seems like the single biggest issue to me. I looked into expanding and using dealers at one point, and it would have meant a lot more work with about the same take away. I decided to focus instead on very small batch handmade products instead. And indeed I am moving further into that territory with mostly bespoke projects anymore.

But here are the numbers for one project. A few years ago I released the L2. I charged $2600 initially, and the first post I saw about it anywhere was on headfi claiming the price to be "highway robbery". To make an L2, I needed input transformers ($250), output transformers ($250), power transformer ($100), parafeed caps ($110), pcb ($30) ps pcb ($30) ps case + machining ($100) umbilical cord ($60) case machining + finishing ($350) woodwork ($100) assorted amp and ps parts ($250).

This does not include development time or costs, manufacturing time and costs, the fact that the PS was redone 3 times to make it quiet enough, etc. It also does not include free help I got from a lot of people, or the time to match all of the components in the amp. Realistically, that amp should sell for at least double what I sold it for (and Bottlehead sold a similar amp for about 3x what I sold it for). It was priced where it was as the cost of getting known. To some extent that was what happened as I receive requests every week or two to make more. You can see why I always say no. If I made 100, or 1000, the cost per amp would drop considerably, but I'd have to sell them which seems unlikely. Whatever you think about manufacturing amps versus motherboards, making audio gear is expensive. The fit and finish is what matters, and doing it right costs a lot.

 

Sure, but it doesn't, so I don't really understand your point. What are you trying to say? Amps and DACs aren't PCs. They don't run Windows or play games. They are specialized tools. Why does an Audio Precision analyzer cost $25K? There can't be anything more complex in there than a $200 Chromebook right? I mean it can't even play Crysis! WTF!

Why does a Canon EOS 5DSR cost $3500, when all it does is take pictures? My phone takes pictures! And it's WAY more complex with WAY more computing power than that Canon has. The Canon can't even run Android! Why would anyone pay that much money for it? That's the reasoning your are offering here.

 

I think just basic economics (supply vs demand) explains this.

A lot of complex technologies have really high demand, so can sell each at a lower cost. For things like dac or amps, very low demand, so requires more mark-up per product in order to keep the business alive.