From Disk To Digital

SmoothWall, a Leeds, England-based security software maker, started out as an open-source GPL project nearly seven years ago, so it's no surprise that the company is using an electronic software delivery (ESD) system to get its products to channel partners. After all, you can't find free open-source applications on the shelves of retail stores--you download them off the Web. That's the essence of ESD; instead of shipping boxes full of plastic disks, some vendors find it easier to use the Internet to allow customers and channel partners to simply download their software.

George Lungley, CEO of SmoothWall, says ESD offers VARs quicker service than traditional, nondigital delivery.

"Partners don't have to go to us or a distributor and order a bunch of boxes," Lungley says. "The software-delivery system satisfies the need for VARs to have the products now."

Riding on the coattails of successful B2C e-commerce models, ESD could be lucrative for channel partners, vendors and distributors, though the movement is still in its infancy. According to IDC research, for example, the ESD market, which reached $2 billion in 2004, will experience a compound annual growth rate of 34 percent through 2009.

Similarly, a recent Gartner report entitled "Electronic Software Delivery Services Still Not Thriving Despite Benefits" forecasts that by the year 2008, 80 percent of all consumer software and 50 percent of all enterprise software will be delivered via ESD.

Here's what you need to know about a growing trend that may change how solution providers receive and deliver software.

High Hopes

Digital River, one of the largest purveyors of e-commerce solutions, believes that in just two years, the digital software-delivery market will represent $6.4 billion--approximately the same as today's boxed-software market. Digital River itself has also experienced strong growth, doubling its revenue to $154.1 million from 2003 to 2004, and posting quarterly growth in 2005 as high as 71 percent. That growth is mostly attributed to its e-commerce solutions and e-marketing services for clients such as Symantec, H&R Block, Staples, Novell, McAfee and 3M. But it's also due to strategic acquisitions in recent years, including Element 5 and Metatec's ESD business.

Yet, Digital River's primary focus is consumer software as opposed to enterprise-level applications, the former being the force that has been driving the majority of growth in this market. When it comes to enterprise-level software applications, Dave Alampi, vice president of product marketing and management at Digital River, says there is a key difference between offering enterprise-level software distribution and similar services for SMB clients. Whereas the SMB market views ESD as a way to grow revenue, enterprises view it as a way to save money instead of making money; therefore, Alampi says, most enterprises don't have their eyes on the ESD prize.

But that's about to change. One of the biggest concerns for distributors and software makers, according to Alampi, is "the shift from physical to digital." With consumer behavior changing rapidly, end users becoming more adept at downloading files online and increasing adoption of broadband technologies, the shift could come faster than anticipated.

Roman Reznicek, vice president of finance and corporate planning at Intraware, an ASP that provides a litany of IT services, says he's scratching his head over why ESD hasn't fully exploded on the scene. Reznicek says ESD helps companies cut costs, get better customer service and stay on the cutting edge of technology with upgrades, patches and fixes. Convention, he concludes, is holding some potential clients back.

But that won't last long. Reznicek believes the pendulum will shift this year to digital delivery, and he's already hearing mumblings about software giants like Microsoft offering digital delivery of their products.

"By 2006, there will be a shift from an arcane, clunky, costly way of doing something to a way that is much cleaner and organized," he says. That shift also will be propelled internally at Intraware by growing its customer base and increasing its adoption of digital-software delivery.

As for distributors, Intraware has signed a deal with the industry's largest IT distributor, Ingram Micro. Brian Wiser, senior vice president of sales at Ingram Micro North America, says his company's partnership with Intraware gives Ingram Micro a leg up.

"The outsourcing of ESD functions has allowed Ingram Micro to better focus on our core competencies, while enhancing our ESD services via our partner's superior technical capabilities," Wiser says. "As we build our catalog of applications and bring in more vendor partners, we expect to expand this offering."

Channel Concerns

For solution providers, the question is clear: Will ESD cut out the channel? After all, if a vendor can simply transmit a product directly to a customer, why send it to a solution provider first? Evidently, Ingram Micro has jumped on the ESD bandwagon with no fears of channel conflict.

"Distribution's value has always been the aggregation of this great volume of technology products into one place," Wiser says. "ESD is an extension of this value, and the model Ingram Micro has built ensures that the channel remains the conduit for software fulfillment."

Wiser also echoes Alampi when referring to customer adoption of ESD.

"As security, bandwidth and licensing concerns diminish, I envision consumer, SMB and enterprise applications safely distributed by ESD," Wiser says.

Not all distributors, however, are taking the bait just yet. Their ESD concerns center on bandwidth and security. A big driver for the success of certain ESD platforms may be the perceived "instant gratification vs. a box arriving the next day," says John Tonnison, vice president of worldwide e-business at Tech Data. But if downloading cumbersome enterprise software takes longer than receiving it, then instant gratification for enterprise-level software may be further down the line.

"The channel is so effective at putting product into the right place that there won't be a need to have software in 10 minutes," he says.

There are issues for vendors like SmoothWall, too. Lungley says the company not only encounters basic security problems, but has also been stiffed on payments after delivering the digital content.

"It happens sometimes," Lungley says. "We're very cautious with having customers download the products, but resellers are another story. They're our partners, so we trust them."

Laurie Wurster, a Gartner analyst and author of the consultancy's ESD report, doesn't believe the traditional channel distribution model will be affected by ESD.

"The distribution mode shouldn't matter," she says. "VARs will still be necessary. It's not simply handing over a disk." Also, many software titles shipped via ESD will offer CDs and printed user guides that will need to be shipped at an extra cost, Wurster adds.

Regardless of whether ESD takes off this year, Tech Data's Tonnison doesn't see it as a threat to traditional channel distribution. Instead, he deems it "a mechanism for technology delivery that won't change the need for expert support and attention."

"The change would never be revolutionary, but evolutionary [as] an alternative way to acquire product," Tonnison says.

Rob Wright contributed to this story.