Lessons we can learn from the DataBlitz vs. XPlay fiasco

The recent round of news stemming from the NBI raid of DataBlitz stores around the metro has given us quite an insight on how the machinations of distributorship comes into play.

A couple of months ago, we touched a little bit on the way distributorship works in the Philippines in our story ‘Why international gadgets don’t have local warranty‘.

X-Play has been aggressively mobilizing their PR machinery to get their side of the story and explain why they had to resort to going to the courts and had all of the branches of DataBlitz raided.

Whether the allegations that pirated copies of NBA 2K13 are being sold by DataBlitz are true or not, it was up to the local courts to determine probable cause so let’s leave it to the judge who signed the warrant to make the determination.

But here’s what we can make of this whole mess — that X-Play is running after DataBlitz because the latter was selling copies of NBA 2K13 that were not officially distributed by X-Play. This means that X-Play wasn’t making any money for every legit copy of NBA2K13 that DataBlitz has sold.

What DataBlitz could have done was made parallel imports of NBA 2K13 and shipped them in from other countries like HK (the statement from DataBlitz mentioned they bought some copies from X-Play though). The copies could have been original (although news sites are saying they were pirated copies) and licensed but it was thru another distributor from another country.

From the looks of it, DataBlitz was selling a combination of locally distributed copies and parallel import copies.

While X-Play made from money by selling DataBlitz some of their copies, the ones that were imported by DataBlitz themselves aren’t counted. From a consumer point of view, it seems fair and legit since it still came from the original the game developer and publisher, 2K Sports.

From a business stand-point, it could be a different picture altogether. Let me try and shed some light on why this is so:

* X-Play claims they are an exclusive Philippine distributor of NBA 2K13. This means that they deal directly with the developer/publisher, 2K Sports. No other Philippine entity was given the same authorization to distribute.

* In return, the exclusive distributor is given a quota on the number of sales they should deliver. This means they will have to ship in and pre-pay a minimum number of units or license (I heard it was 20,000 licenses but let’s just assume that was the quota).

* The local distributor will also be tasked by the publisher to spend for marketing the product and other campaigns in the country. This is on top of what they committed to pay for the quota.

* The exclusive distributor will take on all these additional costs because they are promised by the developer/publisher that all local sales will go thru them and not thru any channels.

From a business stand-point this looks like a good proposition right? And it’s a pretty common practice in the distributorship (take for example the iPhone 3G/iPhone 4 and Globe exclusivity back in 2010) industry.

* If another local seller makes a parallel import of the same product and sells it locally, the distributorship is taken out of the loop and does not make any money. Parallel import is the act of shipping in original products from another country without the expressed permission from the owner/manufacturer/publisher. This means you can go to Hong Kong and buy 1,000 units of the iPhone 5 and then sell them in the Philippines.

* From the bigger picture, that 1,000 sale of the iPhone 5 is credited to sales of the Hong Kong distributorship, not the Philippine distributorship. Apple might not be aware of this and these are considered grey products.

* So if the local distributor was tasked by the publisher/owner to meet a sales quota in the country, their sales projections are now skewed because of the parallel imports. This means that if they projected to sell 20,000 units per year but the grey market was able to take 5,000 units and sold it first, it means the distributor is left with 5,000 unsold units for the year. They can still sell it the following year but that’s already somewhat considered a loss in potential sales.

There are a few things a distributor can do from this point on:

* They suck it up and continue paying for the fees to be the exclusive distributor and ignore the parallel imports.

* They give up the distributorship if they cannot meet the quota because of competition from parallel imports.

* Fight back and chase after the folks who import the products directly from other countries.

In this case, X-Play sought the help of the courts which prompted the raid.

We’re not taking any sides here. We’re just trying to explain what could have happened that led this this fiasco.

In fact I know of a lot of local dealers/resellers that combine locally distributed units with parallel imports in their inventory. This gives them better margins (from parallel imports) and at the same time some form of legitimacy as a dealer/reseller (since they also buy from the local distributor).

The last biggest case I heard before was Canon Phils. filing a complaint against Kim Store for selling parallel imports of Canon products. That’s probably the reason why you won’t see any Canon cameras in Kim Store’s listing.

Distributorship is a tricky (and risky) business. You either win big by grabbing exclusive distributorship or you can suffer great losses by getting burned from parallel imports.