Costco Case Analysis: "A bold ask in the world of golf ball patents, especially where Acushnet is concerned."

Mike Stachura and Mike Johnson try to consider what Costco aims to achieve in filing a lawsuit against Acushnet over patents, especially since they note the effort is to invalidate the works of a company known to vigorously defend their patents.

Reading the reporting by Stachura and Johnson, it's hard not to wonder if the case was started in part as a publicity plot, especially with a new version of the ball likely coming soon. However, the risks and costs in such a legal battle would suggest such a move merely to sell some golf balls could backfire for Costco.

Acushnet was asked for comment in an analysts call an declined.

"You know based on past experience that we never comment on the competition, and as you would expect, we don't comment on any outstanding litigation," he answered to one analyst's specific question about the impact of the Kirkland Signature ball. "We do respect the fact that you're going to ask questions of a competitive nature and of a litigious nature and hopefully catch us at a weak moment, but we'll take a pass on both of those."

This analysis from a legal expert suggests Costco made a bold and shrewd move in the approach to its filing.

“It’s a problem for the alleged infringer if the patent holder doesn’t sue them, so this does two things,” said Rochelle C. Dreyfuss, the Pauline Newman Professor of Law at New York University School of Law. “It accelerates the lawsuit, which sometimes the alleged infringer wants, and it also gives the alleged infringer a choice of court.”

Johnson and Stachura draw this conclusion that I'd agree with, except for the buzz and store traffic likely increased by the Costco ball craze.

For all the media hype and the cult-like status afforded the Kirkland Signature ball, fact is its contribution to Costco’s bottom line is likely no more than an accounting rounding error due to its inability to produce more than limited quantities of the ball.

Comments

[Pasaplayer]

The best defense is a good offense. Shrewd, indeed. And, one suspects, meritorious.

[Gutta Percha]

Methinks I read a Freudian slip in Acushnet's statement : "and hopefully catch us at a weak moment " Did Costco rattle their cage by responding to their nasty lawyer patent infringement letter by suing for motion to dismiss? Seems to me that Costco should know a thing or two about patent law and patent infringement.

[Center Cut]

I once sat next to a guy who was involved in product cost analysis - he told me that a Rolex Oyster Perpetual cost around $350 to manufacture at the lowest spec, but Rolex controlled their brand identity, rights and market-point so well, they could afford to add another $150 per watch and still make an enormous profit.

I date say that a dozen Pro V1's that retails for £34.00 (approx $42) in the UK is probably making Wally 100;s% margin.

Chico, do tell.

[digsouth]

It would seem marketing could come up with (a) more popular item(s) to get recognition as a result of. This seems like attornys attempting to justify their retainer, just hoping the upper mgmt is too busy knocking ProV's around to realize the con.

Pffft on it all. Much ado about ?

All Acushnet is worried about is several topless stuffers per ball. IMO

dig

[Press Agent]

Costco dared to enter the high-performance golf ball market without joining in the collusion (price fixing) the other manufacturers had quietly been partaking in for so so long. For their efforts they were sent a threatening letter. My guess is, if the Costco ball was at the same fixed price range the other top-of-the-line balls were, there would have been no letter.

Everyone loves this new 'disruption' model. They love the way Uber and Lift have decimated Taxis, Netflix and streaming decimated Blockbuster etc. etc. Well, disruption is coming to the golf ball industry: high performance balls without the huge, price fixed, mark-up. Too bad, so sad. The timing of this along with Acushnet's IPO is unfortunate, but that's life. Hopefully the gravy-train of the Pro-v1 is coming to a crashing end.

[digsouth]

True PA, and what about the drivers that are profit and advertising, with some engineering and actual manufacturing and raw goods cost, with profit and ads comprising 80% of the cost and re rest devoted to the actual constructing the product. Will these be the next products to go the disruption path.

With all of that blue sky, they are a natural....


dig

[Gutta Percha]

Rolex and others want buyers to believe that a high-end watch is worth up to a thousand more just for having a sapphire crystal face. A Rolex salesman slipped one day and told me such only costs $100 retail to replace.

[Original AG]

Consumerism is all about choices. So, Costco ball or Pro V X-out?

[Steven T.]

For the most part, golf OEMs control retail prices of club,bags, balls, shoes, etc. Now, an outlier with clout has come in and exposed their claims. Spending more money on equipment of all kind does not necessarily mean better. I hope Costco introduces high quality Kirkland drivers and irons at much lower cost than the golf OEMs.

[Stevie]

Golf ball tomfoolery. It's nothing but marketing fluff and means nothing unless you have a +1 handicap or better.

[North Texas Golfer]

So after Costco gets through "disrupting" Titleist and the ball market, will they dare go after PXG?

[TTB]

Whoa whoa whoa whoaa now wait a darn minute here I thought this top notch Kirkland ball was a one and done see ya later sayonara roasted and toasted core dump situation? Hmm, interesting, doesn't seem to be the case. Long Knocker?

[JS]

Seriously?

Does anyone really buy the Snell/Kirkland/whatever ball to become a better player?

You buy it hoping you can minimize the miss...

[munihack]

@JS
@Stevie
For years I have gone thru ball "auditions" as winter golf in AZ would come and go. The large temperature changes would really affect the way my summer golf ball would behave. I would not only audition urethane but surlyn balls. I would research as much as possible and then get some course time with each ball. As more patents expire more affordable alternatives emerged in the mix.
My current ball, the Top Flite gamer soft became the starter when in January '15 I used it in my men's club event for the first time. I tied my personal best on that course with a bogey free 64 and lowered my HC (the club only uses tourney scores) to +3. I score better with this ball consistently. The sites like Golfwrx have helped a great deal. So yes, the ball matters, and yes golfers do try and use off brands to get better. In fact, it is an added bonus to beat all the Titleist guys who are some how convinced Titleist is the only one who makes a proper golf ball.

[Brad Ford]

Since the ProV1 wasn't the first multi-layer "solid" ball made (See Top Flite Strata) and almost every golf ball maker offers a "Tour" level ball, Titlelist clearly doesn't "own" the entire IP space involving "tour" level balls. Furthermore, I wouldn't be surprised if some of the early golf ball patents had not expired by now.

Bottom Line: I would think that it would be relatively easy for Costco to purchase/license enough intellectual property to offer a "Tour" level ball at a very competitive price point. Dicks already does it with their Maxfli brand - they just haven't cut prices as much as Costco did.

[TLB]

Went to COSTCO today. No Kirkland Sigs yet. Were selling Callaway soft chromes, 2 doz. $29

[ChuckDietzenTNnotIN]

@ munihack +1 I find it hard to believe Titleist is so superior to all other brands, especially with pros trying to win each week playing with non-Titleist balls. (Accepted they are paid to do so, but doubt they would take the endorsement if it was significantly detrimental to their scoring.)

[Tony F.]

Every 4.7 days Costco generates revenues equal to what Acushnet generates in an entire year. If this turns into a long distance race it could get very painful for Acushnet.

[JS]

Munihack,

I'm not suggesting Titleist is far superior to any of the other premium balls...simply that your 64 was because of you, not the Top Flight...

[digsouth]

@ munihack
''Titleist guys who are some how convinced Titleist is the only one who makes a proper golf ball.''

The ''Merc Benz'' of golf balls-- stuck up and selling it, never mind any car will go 400,000 mi if you spend the pre/maintanance money MB demands. And I wonder if one is as careful cleaning their dollar a ball purchase as the ProV, it might offer some of the same results. A stretch maybe, but I see guys putting with mud balls....

Anyway Titleist is using one of the oldest salesman gimmicks of all time----sell the sizzle, not the steak..

Several great balls, and for my money- the Callaway Soft Chrome @ 2 doz for 29.50 is awesome.

[Long Knocker]

TTB- you keep bringing a knife to a gun fight. This is a legal situation and not about the actual manufacture of golf balls. Acushnet started it by sending a threatening letter to Costco and Costco is just reacting to that as a legal proceeding. Costco is just protecting their perceived rights to sell Kirkland golf balls.
Acushnet has a long history of litigation against their golf ball competitors having put several small operators out of business in the past few years. They may have stepped in it here though with Costco. Acushnet is a big fish in the small golf pond but is tiny compared to Costco.
The theory that Costco is doing this as a publicity stunt is ludicrous. First of all they don't need the publicity to sell golf balls. They have plenty and they aren't paying high dollar lawyers to file lawsuits for shits and giggles.
Costco may or may not ever sell golf balls again. I assume they will and they will be made wherever they choose to make them. Until then this is a legal proceeding.

[JS]

Long Knocker,

Costco has a lot more to gain by people thinking Titleist is scared of them than by the world thinking they sell cheap golf balls. This letter was a mistake by Acushnet unless there's something in Costco's claims that I don't know.

[Long Knocker]

JS- Costco isn't making a claim. They are asking for a declaratory ruling based on Acushnet's claims in the letter. One advantage that Costco has is they were the first ones to the courthouse so they picked the venue. I think Acushnet misplayed this one thinking they would intimidate Costco. Costco is just protecting their rights and reputation.

[JS]

Long Knocker - I was referring to Costco's claims of what's in the letter from Acushnet. To my knowledge that letter has not been made public.

[TTB]

Long Knocker you said Costco would never produce and sell the Kirkland ball again. Appears you are back tracking now...

[Long Knocker]

TTB/ obsessed much? When and where did I say Costco would never produce golf balls again? I said they may or may not. I assume they will but, like you, don't know that.

[Long Knocker]

JB- I believe the letter is public in the sense that it was included in Costco's motion to the court therefore is publicly accessible. I don't have it right here but believe the essence says Costco infringed on Acushnet patents and made false claims that it was a Tour quality ball or equal to the Pro V although Costco never cited any particular ball in their advertising.

[TTB]

In the meanwhile an existing customer of Nassau's bought up the capacity effectively shutting out Costco from meeting demand.

01.20.2017 | Long Knocker

Any manufacturing plant has a maximum capacity and when they contract all of their capacity then there is no more capacity for anyone else.

01.20.2017 | Long Knocker
--------------------------------

/\/\/\ That says Costco is shut out and all the capacity has been bought up, none left for Costco.

"The legal wrangling comes at a time when sources are telling us that Costco is ready to begin shipping K-Sig balls to its retail stores."

https://www.mygolfspy.com/costco-sues-acushnet-titleist-in-response-to-letter/

/\/\/\/\ That says, well, you can read it...

...balls on the way!

[Long Knocker]

TTB- again you bring a knife to a gun fight. You grab two month old quotes and attempt to shoehorn them into a contemporary discussion. Obviously Costco has not produced more golf balls since in the last two months. Why do you think that is? Maybe they had no supplier? Gee, do you think a $3 billion company might find a new supplier in the last three months? Some website hears and publishes a rumor and that is your proof? Even if Costco can produce golf balls now they may not sell them while litigation with Acushnet is going on so they wouldn't be liable for damages.

[TTB]

Quotes have an unlimited shelf life, which is bad for you.

The entire MyGolfSpy operation hinges on the trafficking of information, and the owner manages to support himself and several others doing just this. The odds are very high that their sources are better than yours.

"Obviously Costco has not produced more golf balls since in the last two months. Why do you think that is?"

LK, Costco have never produced a single golf ball, they buy them from others.

"Even if Costco can produce golf balls now they may not sell them while litigation with Acushnet is going on so they wouldn't be liable for damages."

Again, Costco do not produce golf balls, they buy and distribute them.

As for "damages", what are your expectations here? What are you predicting?

[TTB]

PS -- if "damages" do enter the picture seems like your buddies at Nassau would have a real problem. Costco do not have, and never have had, any expertise in the design and manufacturing of golf balls. If anyone ripped off any Titleist golf ball technology it was Nassau, Costco were simply an unwitting bystander. At this point Nassau are probably more loyal to Costco than Acushnet....think about it, let me know if you can figure out why.