The end of channel as we know it

The channel is going through a restructuring phase, as players seek to expand their offerings in a bid to fend off the negative impact of margin pressure, skills shortages, and a technology landscape that is becoming increasingly mobile.

Recent moves in the space bear testimony to this shift: MB Technologies has been gobbling up service-oriented companies, and promises more deals in the pipeline; while Pinnacle Holdings bought an almost 35% stake in Datacentrix and Westcon acquired Comztek.

Industry players see these moves as the start of changes that will sweep through the channel, leaving traditional box-droppers dead in favour of those that add more value for customers.

Perfect storm

Corex CEO Mark Lu says the sector is “without a doubt, going through a massive restructuring phase”. He can see a few different types of companies within the channel surviving: independent software vendors, value-added resellers and system integrators. “The traditional types of channel resellers, box-movers, retailers and online retailers will eventually vanish due to consumerisation and the power of the Internet.”

MB Technologies CEO Miles Crisp says all the players in the channel need to add value as there is increasing pressure from large enterprises to deal directly with original equipment manufacturers.

However, Irnest Kaplan, MD of Kaplan Equity Analysts, notes that while distributors need to reassess their role in the chain, they provide valuable services, such as holding stock, dealing with resellers, providing credit and handling logistics.

Crisp says there is a need for efficient logistics and technical services, yet the channel must reinvent itself because, in some cases, the traditional model is dead because of issues such as margin pressure, skills shortages, and the convergence of technologies. MB Technologies’ plan is to build in more related services in aspects such as cloud, application development and financial services, as well as insurance and warranty services.

Out of time

Lu says good channel players have been going through a reinvention, and for those that have not already moved, it may already be too late. He says the channel is facing margin pressure and competition. “It is a different ball game now and the channel is no longer required or needed as much with the new ways of doing business. It is a fundamental business model change.”

Vendors are losing too much money, so they are cutting the middle man’s margin, says Lu. He adds e-commerce has made pricing information transparent, which made it almost impossible for the channel to survive, while vendors are also going direct to corporate clients, and customers can find attractive prices from international portals.

“The market is saturated. The Internet has broken the trade boundary. The vendors are all under immense pressure. And consumer behaviour has changed too. All these factors have brought about the ‘perfect storm’ for the channel. If you can add value to your clients, you will survive, but if you cannot, you will die.”

Crisp notes structural changes in the channel include some companies integrating, even merging along the channel, while others are diversifying within the space of the distributor. Lu says after the restructuring process and consolidation, the channel will have fewer players and those that can weather the storm will survive well.

Kaplan is nervous around moves into service, because this is a totally different ball game unless it is a bolt-on product offering. “The jury is out as to how distribution companies will add services.”