Current threats impacting IT channel in EMEA. Text.

1. An IT business
community
with you in mind
Paris, Nov 21st, 2008
Channel Fragility
Since this is the first ChannelTune event, we have selected a relatively generic topic in the light of the
financial crisis.
Channel fragiity is increasing and this is not only due to the credit crunch.
Purpose
Hence we propose to share the five top threats that we believe currently impact the IT channel in EMEA (and
around the world) and then describe the attitude that we have observed among IT vendors.
Channel Threat
The five threats are: the margins, the hybrid models, the credit risk, the changed revenue streams and last
but not least the channel transformation that we have called the re-distribution.
Business Landscape
Before getting through each threat, let us review what is the current business landscape. Depending
whether we look at GFK, IDC or Gartner we obtain very different numbers. Although each analyst does not
really measure the same thing, there is an obvious discrepancy in the outcome. GFK points a 17% decline
whilst Gartner highlights a 18% growth. We are not questioning GFK, Gartner and IDCʼ integrity and it
would not be the first time that such gaps exist. Yet, the magnitude of these speaks by itself. Nobody really
knows what is going on now and consequently the future is hard to predict. IDC has conservatively
dropped its worldwide forecast from 5,9% to 2,6% and 1% in Western Europe.
Margins
Even though the complain about the margin has been endemic in any kind of distribution, we have to
acknowledge that the current situation makes it more threatening than ever. The current IT market tends to
shrink, not only because of the credit crunch but also because there is no major technology breakthrough.
Those of us who are renewing their pc or printers will not find great benefits compare to the ones they have
purchased 3 years ago. Hence, why renewing when the current uncertainty is urging us to wait?
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The market shrink encourages vendors to drop their price (and consequently channel margin) and channel
partners do the same at their level.
On top, a number of vendors that wish to streamline their go-to-market are currently reviewing the
allocation of collateral discount such as MDF, growth funds, and other cash discount. There was a
perception that this parallel funding would rather contribute to the channel margin than to what they were
originally designed for. And indeed the new established rules prevent channel partners from using this little
air to restore their profitability.
As the vast majority of channel partners struggle to shift their business model to a more profitable service
focus, this is weakening an already precarious situation.
Hybrid models
The 80s have been the years of a radical shift from direct to indirect, the 90s internet has brought back the
idea of selling direct and the 00s is definitely a time of “creative” models.
On the left side, the multi-channels Companies that donʼt care much about conflicting channel but, based
on a solid brand, they care about making sure customers can buy wherever they want to. Apple is a good
example and should you buy a Mac you would be able to obtain a lower price in their Apple Store by
showing a quote from FNAC or any other retailer... This is a risky game but if you have a strong brand this
may work!
On the right side, the mono-channel Companies deal either fullty direct or fully indirect. Autodesk, the CAD
software leader as well as a number of IT Companies that are highly dependent on their channel have
been quite reluctant to get directly to their customers so far.
In between, an increased number of Companies that are testing these “creative models”. Until recently, you
would not have been able to buy MS Office from the Company website. You could have bought
accessories, books, add-ons, or downloaded updates and patches but not the core product. Although you
could have done it by getting to the HP store website... And this complex model is different by country and
by products. It certainly reflects the number of internal battles between the direct and indirect schools of
thoughts...
As a channel partner this is increasing the already-fierce competition.
Credit risk
IT channels are deeply impacted by the credit crunch and its damages on the “real” economy, and many of
them disappear from the market. Wholesalers have observed that the number of credit closure has raised
by 300% from 3-4 to 10-14 a day...
Compubase, the leading channel database in EMEA, is pointing that the number of Companies that have
left the market recently has increased by 50% from 10 to 15% of all existing channel partners.
This is telling us that these threats are real and are significantly impacting the jobs of many people.
Changed Revenue Streams
There is a massive hype around new usage models of IT infrastructure and applications: virtualization,
cloud computing, SaaS (Software as a Service). In principle, these new trends carry good news for the
channel as they provide recurring and predictable revenues on top of an opportunity to sell some service
around. But selling a service for 20$ a Month is different than selling an application that brings 1000$
immediately on the table...Where to find the cash to cover a 3 years revenue shortage? how to
compensate the sales teams? how to convince your shareholders? are as many challenges that this shift
generates.
Man might say that this is opening incremental business, and encouraging a more profitable business
model, however this is hard to absorb when channel partners struggle with their immediate future.
Redistribution
When we started IT distribution in the 80s the channel landscape was relatively clear. There were IT
vendors, Telecom vendors and software vendors. They addressed a 2 tiers distribution channel that was
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organized about the same way with some overlap between the categories. And closer you would get to the
customer wider the overlap would be.
In the 90s, led by some technology innovations including the internet, vendors have been extensively using
the expression of “convergence”: convergence printer/copier, convergence telephone/internet,
convergence fax/mail,...causing distribution to converge accordingly.
Nowadays, “convergence” is being replaced with “full overlap”. Amazon sells hosting capabilities, Dell
provides applications, Metro sells their computers, Microsoft sells storage, Techdata sells Sotware as a
Service,...and even a Company like Lemon Operations (that does not recognize itself as an IT channel)
sells applications to allow vendors managing their channel in a better way.
All is mixed up and this is reflected in the recent channel landscape description done by Compubase that
highlights the proliferation of new players at all levels.
Is this a threat or an opportunity? It is certainly an opportunity for the new players but a dramatic challenge
for the older ones that need to reinvent themselves in order to find a healthy way in a very dense web.
Demographics
To complete the picture, Compubase has also pointed some interesting statistics that compare EMEA
channel Companies by their creation date. It highlights notably that many Companies were born in the 80s
when IT got democratized and has required an important number of Companies to cover an extended
market.
Given that the average age of the founder is 39, it means that tremendous owners of these Companies
should be around 67 today and about to retire. This is an indication that we can expect more consolidations
through merges and acquisitions and a signal for the vendors to be cautious about who will stay and who
will leave...
Highlights
To highlight this rather dark description of the IT Channel Fragility some positive facts are rather
encouraging.
The first one is that most analysts havenʼt changed their long term forecasts, and IDC is predicting a 6%
steady after-the-crisis growth that is healthier than most other industries.
The second ones is coming from new technologies that should hit the market in 09 and 10 with a set of
compelling reasons to buy that should shake up the IT market.
The third and last one is the committed intent from an increased number of IT Companies to reinforce their
channel presence as it is still the most powerful leverage to generate sustainable growth.
Vendor attitudes
In response to this comprehensive description, we have categorized three vendor attitudes: “We donʼt care”, “we
protect ourselves”, and “we heartily care”.
We donʼt care
To some vendors, it is not the first time in the IT history that such a situation occurs. The internet bubble
has also severely impacted the channel with similar consequences. The best ones have survived and may
even have come out stronger than before. It is like an “invisible hand” that cleans the market from time to
time and even if this may be painful in the short run, this is rather healthy overtime.
These vendors that are mostly selling through distributors believe they are somewhat protected by their 1st
tier partners that absorb the credit risk.
What counts is to maintain a constant presence at the end-users level to secure strong market share and
favour expansion.
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We protect ourselves
To some other vendors, it is critical to identify the weakest point of the channel and derive an ad-hoc help-
or-leave strategy. This rather cynical scenario is also calling a more proactive approach: predict by
extrapolation from these accidents where there is a potential danger and take the appropriate actions to
prevent them.
Obviously this is not that easy and requires a solid ability to monitor its channel that cannot be acquired
overnight. But according to these vendors, this is a number one duty to the Company shareholders to
protect their assets and prevent potential damages.
We heartily care
The last category of vendors consider their resellers being a true extension of their Company. They build a
very cooperative business plan that includes a long term vision and some coaching for the partners to
succeed in the long run. They believe this is the best way to ensure a great loyalty and an indisputable
motivation. It does not mean that partners of these vendors will never fail but if they do, they would have
been repeatedly warned to be driving out of the way.
Undoubtedly, this last attitude is certainly the most demanding one and requires a sound channel
management. It supports the vendors who rely on their partners to build a sustainable growth away from an
opportunistic agreement.
Two additional comments
One, for the sake of simplification, we have categorized vendor attitudes in three blocks. Yet, most vendors will
recognize their behaviour in a mix of two or the three of them. In this case, it is important to acknowledge what is
the dominant one.
Two, our intent is not to express any kind of rating among these attitudes. This is an objective description and the
matter is too complex to assess that one size fits all. We believe that the self awareness of this attitude as well as a
high level benchmark can help vendors consciously choosing the one that suits their business.
Laurent Glaenzer
Laurent.Glaenzer@Lemon-operations.com
Jack Mandard
jmandard@compubase.net
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