Ring Leaders: The Convergence Of VARs, Carriers And The Telco Channel4:00 PM EST Mon. Jul. 25, 2011
This time it’s different.
The idea of VARs selling carrier services or business connectivity services is nothing new, but it’s definitely gaining steam. Today’s mobility craze, the widespread adoption of services-based IT, and the desire to lock up recurring revenue streams have led more VARs to adopt carrier services, with the goals of fattening their margins and increasing their stickiness with customers.
And it’s a two-way street. Many carriers, from telecom service providers to cable companies, are champing at the bit to partner with VARs, seeing VARs’ close-knit relationships with regional customers as the key to touching those customers themselves.
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Vince Bradley, CEO of master agent World Telecom Group, Malibu, Calif., said VARs are now the No. 1 profile of new agents. Like Foster, he sees the truer convergence of hardware, software and telecom network services as driving much of the shift.
It isn’t yet a widespread phenomenon, but both movements -- VAR to carrier, carrier to VAR -- are eliminating the traditional boundaries between IT VAR, telecom agent and other solution provider labels that were a lot more easily defined even a few years ago. The ITtelco channel convergence is on.
Show Them The Money
One of the most prominent examples of what traditional VARs and integrators can do with a thriving carrier services business is Presidio Networked Solutions. Presidio’s telecom services business is housed in its Presidio Managed Networks unit, which has 18 direct reps focused on telecom, with plans to add up to four more every year. Presidio, Greenbelt, Md., has more than 35 telecom partners, and about 10 percent of telecom services sold by Presidio have a professional services component.
Presidio Managed Networks as a whole is growing 40 percent year over year, faster than all of its other businesses, according to the company.
Kevin Mulloy, president of Presidio Managed Networks, said Presidio began to focus on telecom services following its 2007 acquisition of Solarcom, which had a small, but profitable carrier services arm.
“It was a beautiful little business with very high growth,” Mulloy said. “We thought if we could grow it to sufficient scale it’d be really significant from a value creation side.”
Strategic Products and Services (SPS), a Parsippany, N.J.-based solution provider, is another networking powerhouse with a thriving carrier sales practice -- growing 20 percent year over year, with MPLS and SIP sales at the top of the pile.
“It’s a component of the total solution,” said Jim Maynard, vice president of sales. “We would really prefer to sell a total solution so we can integrate the applications we’re selling. It’s good to have relationships with the network providers.”
SPS began a formal focus on carrier sales about five years ago, said John Franconere, director of sales operations. In many cases, he said, the real motivation lies in customer stickiness, not in the commissions SPS receives.
“We take a look at their current network environment and can potentially optimize the network and manage carrier relationships for that client,” he said. “Often, we’re able to forget the commissions we receive. It’s significant compensation but not in comparison to the rest of the deal.”
NEXT: Can The Carriers Commit?
Both Presidio and SPS highlighted carrier sales as a great way to add recurring revenue and margins, while driving yet one more selling point with customers. Representatives from both solution providers admitted, however, that most carriers don’t have a good track record when it comes to the IT channel.
“Carriers tend to reach out every three or so years and tend to change their programs,” Mulloy said. “There’s always a confrontation or competition on who’s going to drive the hardware or services.”
Partnering with Verizon and AT&T is often a “nonstarter,” Mulloy said, because both are Cisco Gold partners that also sell hardware to customers. That, according to VARs, leads to conflicts.
“Some of the larger LECs [local exchange carriers] just aren’t channel-friendly,” Franconere said. “The way they manage certain types of accounts sometimes makes it difficult to work together.”
If carriers are to be true partners with VARs, VARs need to know those carriers aren’t going to compete with them, said Nigel Williams, senior vice president, sales and strategic alliances, at service provider Level 3 Communications, Broomfield, Colo.
Level 3 is unique among service providers of its size, Williams said, because it doesn’t embrace those reseller deals itself, preferring to let partners lead.
“We could do that -- we could become resellers, too -- but that gives us a ‘me too’ value proposition,” Williams said. “And then, I’m competing with Dimension Data, or BlueWater or Presidio. I believe I get better value by partnering with them. Why it works is I’m not competing with them.”
A solution provider like Presidio, Williams said, can layer its professional services on top of customer engagements as it brings Level 3 services into the deal. With Level 3, VARs can earn 15 to 18 points of commission on the total contract value of the deal for the life of the contract, which, as the deal sizes expand, can mean some pretty healthy returns, Williams said.
He estimated that more than 80 percent of VARs are missing out on significant revenue by ignoring carrier services such as Level 3’s.
“This is additive, and a lot of them are leaving money on the table by not bundling telecom into that value proposition,” Williams said. “At Level 3, I’m not a Microsoft, or an Avaya or a Cisco reseller. That’s the beauty of it.”
NEXT: Residual Reluctance
Why have so few VARs embraced telecom carrier sales in the past? Compensation isn’t the only reason, but it’s certainly a big one. With more VARs turning to services models -- managed or otherwise -- recurring revenue schemes are easier to swallow. But the model that dominates the carrier agent world -- a residual fee that’s paid out months after the sale, with bounties, spifs and other incentives as sweeteners -- is a tough pill to swallow for VARs used to making more of their money up front.
“VARs usually get it best when I compare it to maintenance contracts,” said Ken Mercer, senior vice president for master agent Telecom Brokerage Inc., Chicago. “It’s just gravy. It’s, ‘I can’t give you $500 today, but I will give you $50 for the next three years, every month. If you sell another order, it becomes $100 a month, and then it becomes $150 a month.’ It adds up.”
Mercer says he’s heard every excuse in the book for why more VARs don’t want to sell carrier services: They don’t want to be “phone companies,” perhaps, or they don’t want to get their sales teams up to speed on cumbersome carrier compensation schemes.
But with the changing nature of who sells what in the channel—and the cloud services model the dominant discussion point—many of those VARs won’t have a choice in the future, Mercer said.
“This is no longer a break-fix model. That’s not relevant,” he said. “You want to be the consultant, the champion, the trusted adviser. You want to be a solutions-selling person and build a long-term residual stream, which gives you more control over what’s presented to the customer. That’s a long-term goal, instead of just cramming one product down their throat.”
Some do get it. VAR powerhouse Carousel Industries, Exeter, R.I., partners with more than 30 carriers and has seen its carrier services business double over the past year. By offering everything from SIP, session management and VoIP to routing, switching, WAN optimization, data center design, virtualization and other technologies, Carousel owns that much more of the sale, said Stephen Forest, director of carrier solutions.
“Our biggest growth is going to come from guiding our clients from traditional TDM network architecture to a fully converged SIP-enabled architecture. We are uniquely positioned to deliver all of the elements required to realize the TCO benefits of the next generation of networking technologies,” Forest said. “Our expertise … brings a lot of valuable elements to our clients that they would traditionally need to source from many providers.”
Solution providers interviewed by CRN agreed that the carrier community lacks strong, VAR-centric channel programs but said the best of them often have IT channel veterans at the helm. Level 3’s Williams, a former Linksys channel chief and Cisco vice president, is one such executive.
Craig Schlagbaum, vice president of indirect channel sales, Business Class Services, at Philadelphia-based Comcast, is another. It’s Schlagbaum who in recent months has emerged as a champion for ITtelecom channel convergence and what it can do for channel business opportunities.
Comcast Business Services does about $1 billion in revenue and in March launched an aggressive channel program aimed at attracting VARs. According to Schlagbaum, it’s a natural extension for VARs who have built services business, understand annuity revenue streams and want to fatten their sales with residual compensation.
“The IT channel has always known the LAN side, not the WAN side, and that’s really where they thrive,” Schlagbaum said. “The advent of cloud has meant that a convergence of the two arenas is starting to be more prolific. We see it as critical to bridge the gap between the two. Customers are moving to cloud-based services, the price of bandwidth has gone down substantially from what it was 10 years ago, and concerns over security have also diminished.
“This all made sense 10 years ago,” he added, “but the stars just didn’t align.”
VARs can partner with Comcast in three ways. They can be a basic referral partner, meaning they throw a lead over the fence to Comcast’s direct-sales force and receive a one-time payment, or referral fee. One level up, they work with one of Comcast’s master agents -- Intellisys Communications, Telecom Brokerage Inc. or Telarus -- and secure a recurring fee under terms they negotiate with that master agent.
Partners that do a high volume of sales with Comcast—Schlagbaum pegs the likely solution providers as $400-million-plus VARs—work with the cable company directly. Currently the program is about 25 percent VARs and 75 percent more traditional telephony agents, he said.
NEXT: Service Providers Seeking VARs
Time Warner Cable, New York, is another cable company that’s seen a dramatic uptick in VARs looking to sell carrier services.
“There’s always been some interest, but now we’re seeing much more interest,” said Greg Iuzzolino, director of channel sales, Time Warner Cable, Business Class, which launched its channel program three years ago and whose channel community is now about 25 percent VARs.
“Traditionally, they would sell their equipment and move on to the next customer. But there’s a lot more excitement and a better understanding of how they can drive business to be much more sticky with their customer.”
Another provider, Charter Business, launched its program in 2010, and the motivation was simple, said David Neely, director of channel sales and national accounts. There are some 5,000 telecom agents available as potential channel partners for Charter, but there are more than 150,000 potential VARs, he estimated. That doesn’t mean Charter is looking to add thousands of VARs, he said, but it does mean the potential partner base for Charter is vast.
“The VARs have reached out to me and exposed us to the opportunity because they’re interested in broadening their product base,” Neely said. “That means anything from managed services to cloud. The data pipe is a key component there.”
Charter’s compensation is primarily residual- based, though Charter does spif its VARs and offer promotions to augment those residuals. It handles VAR compensation the same way it does agent compensation.
If Charter is an example of a cable company newer to engagement with traditional VARs and integrators, others, such as Cablevision, are practiced hands. Cablevision, Bethpage, N.Y., began formally embracing channel partners with a referral program in 2007 and launched an official agent program later that year.
It compensates its VARs with an up-front bounty plus a residual and, like many of its peers, doesn’t delineate “agent” vs. “VAR,” said Joseph Magliulo, director of strategic sales and alternate sales channels for the company.
The pickup among VARs selling Cablevision services has been significant in recent years, he said, and it makes sense—the VAR, more than the carrier agent, is often the one closest to the business customer Cablevision is trying to reach.
“I think that a VAR has such a tight relationship with their customer and there’s so much at stake they want to make sure they can be the single source solution,” Magliulo said. “And they want to make sure that it’s a reputable company. [Cablevision] will be here tomorrow vs. how many CLECs are no longer here.”
Magliulo acknowledged that it takes some VARs a while to get used to the compensation -- that is, getting a check several months down the line. But Cablevision is seeking those partners who want to strategically ally with the cable company to please customers -- not those just looking for an extra buck, he said.
“The kind of guy I want is the one most concerned about his customer,” he said. “He wants to make sure the customer is in the right hands. They don’t want to be the ones who get the call, then have to call the carrier agent, who then calls the carrier. In our program, they are the customers’ advocate.”
NEXT: More Of The Sale
More Of The Sale
To MegaPath’s Foster, cloud computing is the common thread driving a lot of the convergence and a lot of what’s driving VARs to seek out carrier services options. The lines between partners that traditionally would have done one type of implementation vs. another are blurring as more customers adopt as-a-service solutions.
“Let’s say you’re a Microsoft ISV,” Foster said. “If you’re doing applications, there’s absolutely a compelling [reason] to say, ‘As we’re putting this in the cloud, let’s talk about VoIP.’ Five years ago that wasn’t the case. A normal customer wasn’t saying then, ‘I’ll just put everything in the cloud.’ The technology specialist in the form of a VAR is ideally suited to support that customer, as opposed to folks who might have a single focus around a voice system.”
Foster advises first-time carrier services VARs to partner with master agents, who have the experience with carrier agreements, payment structures and customer relationships. It’s not a glove-fit model for every VAR, he said, but the incremental opportunities for solution providers who do make the residual compensation model work for them can see some big paydays.
“If you’re racking and stacking stuff in a data center, this can be very compelling from a financial perspective,” Foster said.
“You’re looking at midteens margins on a recurring basis for the life of a contract. I mean, look at it: You put in a WAN op solution up front, you get a nice kicker up front. But if you’re able to put that box in a data center and wrap an MPLS network around it, you’re ‘a,’ minimizing the customer’s need to shop for that; ‘b,’ a trusted adviser; and ‘c,’ going to see years of residual compensation for the life of the contract.”
Clear About Compensation
Other longtime carrier channel observers are more pragmatic.
“I think there’s a lot of talk about it, but I don’t know too many VARs who have built a program and made it successful and sustained it over a period of time,” said Shane McNamara, vice president of indirect sales at XO Communications, Herndon, Va.
McNamara, who recently joined XO after several years as general manager of carrier services for CDW, said more VARs will take up the mantle of carrier services now that they understand why recurring revenue streams are so important. The changing op-ex/cap-ex conversation around cloud computing is also forcing them to re-evaluate their businesses.
That said, it will be a slow take-up for many VARs because the residual compensation model just isn’t part of their DNA.
“It’s still a little bit foreign to them -- the carrier commissions are aggressive, but it takes a long time to build up that annuity even for a $100 million VAR,” he said. “To get the mind share, it has to be from top down in the organization, and it may take a few years to see the benefits. But the long-term benefits -- the way it supplements the core business -- eventually come in the bottom line of the P&L.”
The race among service providers may be to see who can hook VARs best with programs that appeal to the compensation they’re most used to. Cloud networking specialist 8x8, for example, earlier this year went live with a new channel program designed specifically to shepherd VARs uncomfortable with residual compensation.
VARs that sell 8x8’s suite of cloud networking services can make money with 8x8 in three ways: a one-time bounty paid as a fixed dollar amount per service sold, a residual revenue stream of 12 percent of total master resale rights (MRR) for 8x8 services sold under term contracts, and a commission of 5 percent on equipment sold at or above 8x8’s stated floor price for gear. Taken together, those three methods can bring a VAR’s margin up to 29 percent in the first year on a high-end deal, with 18 percent maintained in the third year based on ongoing residuals.
Offering an “up-front” return -- i.e., the bounty -- as well as residuals and commissions helps VARs get used to the more carrier agent-centric residual model while making some of their money in the format they’re used to, according to 8x8, Sunnyvale, Calif.
“The whole mentality of a VAR is getting something at the time of sale,” said Don Trimble, 8x8’s vice president of channel sales. “I wanted to make sure we baked that in because I think that’s how we’re going to hook them and get them to understand how to shift to a residual-based model going forward.”
NEXT: Distributors Make The Call
Distributors Make The Call
Familiarity can be a key selling point for VARs, channel observers agree, especially when the brokering of telecom services comes from a source VARs know. Distributor Ingram Micro, for example, has an established carrier services business, and Tech Data this past spring went live with a program called ActivateIT, a joint venture with Brightstar through which Tech Data essentially serves as a go-between -- filling the master agent role -- for VARs wanting to sell mobile devices and the telecom services to activate them.
Greg Parsonson, Tech Data vice president, corporate development, said ActivateIT leverages OTBT, a wireless solution provider acquired by Brightstar in 2010. What ActivateIT offers is access to TDMobility, a Platform-as-a-Service offering that enables VARs to buy carrier services as if they were buying a SKUed mobile device or other piece of hardware from the distributor -- letting them sell the “last mile” of connectivity from carriers like AT&T and Sprint from a distributor they already know.
The program has seen a phased rollout, Parsonson said, with about 20 solution providers so far -- varying in size from small VAR to direct market reseller, all U.S.-based --and Clearwater, Fla.-based Tech Data will be onboarding many more over the next few months. Recruiting carriers hasn’t been an issue, he said.
“They realize that this isn’t their traditional stomping grounds in accessing SMBs, so they are very anxious [to work] in conjunction with us,” he said.
It isn’t hard to explain the benefits to solution providers, he added, when it’s made clear how much they could fatten their sales and also leave the headaches of dealing with carrier compensation plans to the distributor.
“It’s part of the holy grail for resellers,” Parsonson said. “It’s all margin to them, and it’s a complete incremental profit pool that a lot of them haven’t been participating in.”
What’s important to note, VARs said, is that carrier services can be a key piece of a sale even if they aren’t big money-makers.
Dale Whitney, owner of NetImage, a Shelton, Conn.-based solution provider focused on SMB customers, said carrier services are often a logical add-on, even if the residual benefits to NetImage aren’t so lucrative with customers of that size.
“We’re not interested in going out and doing just carrier services, but it helps as an additional line item,” he said. “The residuals are a great-add on -- maybe that adds a couple of points to the overall sale -- but for most SMB deals, it would be a stretch to add one full point. We leverage it to close deals: It’s a value-add to the client, and if we can demystify the lines they have and educate them on what they should have, that’s good.”
NetImage has had a carrier services business for 10 years, Whitney said. Its vendor partners include Paetec, Optimum and Comcast, and the business covers everything from traditional voice services and analog lines to data T1 connections and broadband connectivity.
Whitney said telecom resellers with which NetImage competes often bundle carrier services with what they’re pitching, but traditional data networking VARs that do it are rare.
“They haven’t established those relationships,” Whitney pointed out.
NEXT: The Great Consolidation
The Great Consolidation
One byproduct of the convergence is that the telecom service provider space is in the midst of a massive M&A wave, from blockbuster deals -- AT&T’s proposed ac-quisition of T-Mobile USA, CenturyLink’s Qwest buy, Verizon’s nabbing of Terremark, last year’s three-way combo of MegaPath, Covad and Speakeasy -- to smaller, but hardly insignificant acquisitions.
And it isn’t just service-provider-to-service provider deals: Various players up and down the telecom channel food chain, from master agents to regional service providers to VARs, are also acquiring each other with greater frequency.
Master agent Micro Corp.’s late June acquisition of New Smyrna Beach, Fla.-based Five Star Communications, a top Qwest VAR in the Southeast, is one example. Tokyobased Nippon Telegraph and Telephone Corp. (NTT) buying integrator giant Dimension Data last year for $3.2 billion is another.
Another active M&A participant is Fairport, N.Y.-based service provider Paetec, which has acquired several solution providers in the past decade and in the past year made two big investments that raised a few eyebrows among its channel partners: a June 2010 acquisition of Folsom, Calif.-based Quagga, which gave it a broader footprint on the West Coast, and this past February’s $61 million buy of Broken Arrow, Okla.-based Xeta Technologies, which upped its stake in the Midwest.
Both Quagga and Xeta were Avaya Platinum partners, and both had themselves been acquiring smaller VARs before becoming part of Paetec. Donna Wenk, senior vice president of sales operations at Paetec, said she does understand that Paetec owning those VARs means it also competes with its VAR partners, but said the rules of engagement for the Paetec channel are pretty clearly defined.
“We definitely get some complaints,” she said. “Little alarms ring out and they want noncompetes and there’s a lot of worry. The answer’s been simple: As long as you’re bringing us in for the network, we promise not to compete against you for the equipment. We bought VARs in 1999 and 2000, and I wrote the letters to the VARs then. Many of them are still with us.”
Even as it acquires, Paetec has also been growing its stable of data networking-centric VARs. Solution providers can be referral partners for Paetec or full-blown services resellers, the latter of which earn higher residuals, as high as 20 percent in some cases, she said.
“We need more data-savvy partners helping us push our products,” Wenk said. “It’s a tough knowledge set to find out on the street. We’re definitely recruiting.”
Committing To The Cloud
At the end of the day, channel observers agree, the driver for carrier services among VARs is about being able to say, “Yes, we can do that,” and offering what the VAR down the street can’t. According to channel observers, that means having a clearly defined services strategy that addresses the cloud. Telecom agents, too, are going to need to adapt their businesses to better compete against VARs taking more of their business.
“I do think they need to have a broader book of business. Longer term, they will need to bridge out,” MegaPath’s Foster said of carrier agents. “I think near term, what they do is continue to enable those integrators and VARs. If you’re a large master agent and the VARs you’re attracting do $300 million and $1 billion, you’re talking about the future of the distribution channel.”
The great VAR migration into carrier sales is still very much in its infancy, however.
“Everyone, especially in the agent world, looks at the VAR [channel] as the next best thing and in most cases it is,” said XO’s McNamara. “But VARs are used to the P.O. being written, the customer signing it, the product being shipped out, and moving on to the next sale. They’re not used to a T1 order than can take six months to install and another two months to receive commissions.
“If you grow up on the hardware side, it’s harder to understand telecom,” McNamara added. “If you don’t commit to it, you’re not going to be successful. You can’t be half-pregnant.”