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Date: Mon, 15 Jan 2007 13:02:41 -0500
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From: "Hamid A. Wasti" <hwasti@starband.net>
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Subject: Re: [LML] Re: Pinpoint
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John Schroeder wrote:
> Has anyone here seen a three tiered system like this in the business 
> world lately? On the contrary, the trend is toward easing out the 
> middle man-distributor. (informed hypothesis, not an assertion of fact)

John,

Let me answer some of your question from a purely business perspective, 
not specific to the Chelton/D2A situation.

Company A makes product X and Y.  Product X is bringing in good revenue, 
but they really want to concentrate on product Y because it has much 
greater potential in the long run.  Producing and supporting product X 
is really taking away from concentrating on product Y and hindering 
their long term goals.  What are their options? 

1) Company A can discontinue product X, and suffer the consequences of 
loss of revenue/profit in the short term.  They also surrender the 
market, which has negative consequences in the long term, especially if 
products X and Y are in related industries.  In short, a very 
undesirable option -- worse than the status quo.

2) Company A can sell that part of the business, but now they loose 
control of the name.  If they do not sell the rights to the name, that 
diminishes the value of the business to the buyer and lowers the selling 
price.  Plus, in the long run, it has most of the same effects of 
discontinuing the product, because the new owners would want product X 
to take on the identity of their product Z.  If there is intellectual 
property tied to the product that Company A wants to keep a tight grip 
on, then this is a non-option.

3) Company A can enter an exclusive agreement with an independent 
company, Company B, to produce, market and support the product.  Company 
B handles all the headache for marketing and support, while company A 
gets some form of a royalty/licensing fees and retains all intellectual 
property rights.  Company A is doing significantly less work, earning 
significantly less revenue, but making just as much profit.  Company B 
is providing the capital, doing most of the work, earing most of the 
revenue and hopefully at least some profit.  From the customer's point 
of view, their cost may stay the same, go up or go down.  If small and 
nimble company B is better suited to provide support (lower overhead, 
better environment for the type of employee), can produce things at a 
lower cost (less regulatory burden) and is better able to respond to the 
market, the customer may well end up with better value and maybe even 
lower price (note: price is not the same as value, higher price may 
indeed be higher value).  While this may look like "adding a middle man" 
at the first glance, the "middle man" for the most part becomes the new OEM.

Regards,

Hamid