The UK arm of Enta, the Taiwanese OEM distie, has provoked a furious response from rivals for selling Microsoft OEM licences at two per cent below cost. For cash, presumably upfront, of course.

'Commercial suicide', says Ideal Hardware: "...shooting themselves in the foot," says Bytes Technology Group.

Enta denies it's selling at a loss. It's not doing this for cashflow purposes, the company is cash-rich, it says. Enta is merely passing on the benefits to customers gained because the managing director had been "prudent to get a good dollar rate [Enta buys in dollars] and was able to pass on the savings".

(The quotes are from these two Microscope stories:
Enta criticised over cut price licences and Debate over Enta price cut.)

Let's accept for a moment that Enta is exploiting currency fluctuations to pass on the benefits to the trade (you could have made 10% on the euro/$US exchange in the last three months - if you had a crystal ball - reader James Bramich from Ireland points out).

But in this case it's robbing Peter (Enta) to pay Paul (customer). This does not seem a particularly clever thing to do, considering the rock-bottom margins for component distribution at the best of times. And this is not the best of times.

Now let's assume for a second that the accusations of rival Microsoft Delivery Service Partners (DSPs) that Enta is selling below cost are true. This again is a case of robbing Peter (Enta) to pay Paul (suppliers). Unless the deal makes commercial sense.

There are two ways of assessing if the two per cent below cost deal stacks up. First: the cost of money. Assuming that Microsoft operates 30 days payment terms, the cost of money for this deal is 2 per cent x 12 months = 24 per cent. That's a best case scenario - Enta could be offering a 2% discount with, say, only 15 days before payment is due to Microsoft.

Now that looks like a bad deal, even for credit card debt. With the Bank of England base rate currently standing at four per cent, a reasonably well-organised company should be able to get credit at 6-8 per cent.

Enta pays Microsoft after it is paid by its customers. But how long can it extend payment terms? Unless it can secure terms for a minimum of three or, more likely, four, months, selling at two per cent below cost is a commercially unsound financing method.

The second and more interesting matter to consider is the return on investment.

The Reg financial advisor writes:

Let's say I have a payment due to Microsoft
in 30 days for £100 and I get £98 cash upfront today. Can I do something with the £98 and turn that into more than £100 within 30 days. If that something turns the £98 into (say) £110 within 30 days. Who cares what the cost of borrowing is.

Yes, but how many legal investment opportunities deliver such a quick return?

Enta's offer is not something we would contemplate running at Reg Merchandise. But while the deal runs who can blame system builders for shaving a few quid off their unit costs?

Update Reader Adam Nelson from the US thinks we should have considered the currency option more fully. He writes:

If Enta were to have hedged their purchases, for at least a month, last month at the lower rate, £0.63 for one US Dollar, they could easily sell below either the current cost of £0.65/$1.00, or the roughly £0.70/$1.00. Both of these would allow them to sell at 2% below the Pound Sterling cost, while maintaining profit margins margins. The size of the margins would depend on the exchange rate used to calculate British price that Microsoft charges. As an example lets say that an OEM copy of WinXP is $100. If their rivals were paying £65, using spot rates, but Enta got it, due to their hedging at £63, they could sell it for £64 make £1 and still be 1.5% (rounded to 2%)below cost. ®