Prices and market conditions changed little in 2006 for the major enterprise IT distributors, but significant acquisitions, a trend to convergence and a dipping Dell set up 2007 to be a positive year for the industry, said analysts at Raymond James and Associates.
IT spending through distributors grew about 7 percent in North America, 4 to 6 percent worldwide, in line with the broader IT industry. But the events of 2006 including “blockbuster” acquisitions and Dell’s drop in market share mark a shift in momentum to distribution channels, according to a report entitled “Technology Distribution: 2006 Review and 2007 Outlook—The Times They Are A-Changin’,” by RJA analysts Brian G. Alexander an Robert P. Anastasi.
Check Raymond James’ 2006 outlook from last December. Click here to read more.
Consolidation is likely to continue at all levels of the supply chain, “as healthy free cash flow generation and dramatically improved balance sheets” collide with “limited organic growth opportunities and fragmented competitive landscapes,” the pair wrote.
Down on Dell
Alexander and Anastasi called Dell’s drop in market share, from number one to number two behind Hewlett-Packard (a first since 2002), “perhaps the biggest story of 2006.”
Distributor growth outpaced Dell in 2006 for the first time in several years “and perhaps ever,” the report stated.
“For those that argue that direct is the key to success, we say, ‘Your old road is rapidly agin’… ‘and ‘the times they are a-changin’,” Alexander and Anastasi said.
“While not a major erosion in market share, the trend is symbolically significant in that it reflects that the direct model is not necessarily a panacea,” Alexander and Anastasi said.
“We have long argued that Dell’s success was more a product of superior execution of the direct model and not due to the model itself…Gaining market share in 2006 are a host of channel-centric companies, most notably HP and Acer.
CDW/Insight changing the game.
“Their success proves that indirect channels can be more cost effective than direct channels in certain markets and customer segments.”
CDW/Insight changing the game
Alexander and Anastasi called the acquisitions made this year by direct market resellers CDW and Insight Enterprise “blockbuster” and game changing.
In September, CDW purchased Berbee Information Networks, a Midwest VAR, for $175 million and Insight, in July, acquired Software Spectrum, a business software and mobility services reseller, from Level 3 Communications, boosting the value proposition of both organizations with new capabilities, products, services and customer reach.
Analysts and industry watchers have said the market is ripe for CDW, Insight and other direct market resellers such as PCCC to consolidate a “large and highly fragmented market.” CDW officials said Berbee is only the first of several solution-minded acquisitions it intends to make, with a special eye to Cisco, IBM and Microsoft competencies.
Who’s Afraid of CDW? Click here to read more.
These companies realize “that in this industry, ‘you better start swimmin’ or you’ll sink like a stone…for the times they are a-changin’,” Alexander and Anastasi wrote.
“The traditional direct marketer competitive advantages versus other resellers (namely VARs), which include price, product availability and rapid delivery, are not as relevant in today’s environment,” they said.
As IT has become more complex and procurement decisions more influenced by return on investment, “it has become imperative that IT resellers have comprehensive solution capabilities [beyond] product sales and fulfillment to include advanced software tracking and delivery as well as IT infrastructure design, installation and integration services.”
This group outperformed other distributor segments (CDW up 40 percent, PCCC up 156 percent and Insight up four percent since July), leading RJA to speculate that “as the reseller industry consolidates, distributors could be forced to pursue some form of direct customer contact or risk major customer concentration.”
Direct marketers, CDW, PCCC and others, have outpaced two-tier distributors in profitability, leading some to speculate the industry leaders will develop more direct models as convergence and consolidation continues.
Consolidation and Convergence
Among two-tier distributors, Alexander and Anastasi write “we are not just witnessing acquisitions of like companies that lead to critical mass and greater scale, but rather seeing companies expand their core business models into adjacent technology markets and new geographies.”
Arrow’s purchase in October of Alternative Technologies, a specialty distributor focusing on infrastructure, networking and security, expands Arrow’s software offerings and its purchase of DNS brought it a European Presence.
Avnet Technology Solutions’ purchase in November of GE Access brings a large practice of Sun Microsystems VARs.
“What has not yet occurred on a broad scale,” they write, “is the merging of one-step and two-step distribution.”
Avnet, this year, divested itself of its end-user facing business, Avnet Enterprise Solutions, which it spun off to merge with Calence, a VAR that it backed largely by Avnet funding.
Bell Micro acquired ProSys, a single-tier reseller, like Total Tec, which it also owns. Agilysys continues to operate a hybrid business model, RJA said, but continues to invest in the single-tier business, which is more profitable.
“The dilemma for two-step distributors moving more aggressively into the reseller business is that they would be competing with their customers,” the report reads.
“Longer term, as the reseller industry consolidates, distributors could be forced to pursue some form of direct customer contact or risk major customer concentration.”