Software Licensing Offers VARs Opportunities

In recent months, major distributors, including Ingram Micro, D&H Distributing, Merisel, Synnex Information Technologies and Tech Data, have been saying the future looks bright for software. Their numbers bear that out. For example, at Tech Data's fiscal Q3 2002 earnings announcement, software was the lone highlight, increasing 11 percent over the previous quarter, while other segments, such as systems and peripherals, posted declines. In addition, Merisel, which sold off its hardware and logistics operations and is now almost completely focused on software,

posted sales of $20.7 million in Q3, reflecting an 83 percent increase in software-licensing sales from $11.3 million for the same period in 2001.

Distributors are anxious to keep that ball rolling, and they won't have to wait long. This March, Microsoft plans to take the wraps off a volume-licensing discount program called Open Value, which, unlike its other licensing programs, aims to create a sustainable revenue opportunity for SMB VARs that serve that market.

"Microsoft's new multiyear payment option will appeal to SMBs that plan on upgrading more than every three-point-five years or that want to standardize on Microsoft software," states a recent report by industry analyst GartnerGroup.

Microsoft began training VARs on the details of its new program late last year. Under Open Value, VARs will sell companywide licenses to SMBs that can save them up to 25 percent. Payments can be spread over a three-year term, plus there's a three-year renewal option. Much like an agent model, VARs receive a referral fee from the distributor, typically between 5 and 10 percent, industry observers say. Most distributors wouldn't comment publicly about their referral fees, though D&H says it pays VARs who use its Rite2U online storefront 12 percent commissions for all Microsoft sales.

Open Value is available for five or more license and software assurance packages. The program includes an option that gives SMBs the same upgrade protection offered in the perpetual Enterprise Agreement. Companies that buy upgrade protection for Windows OS, Microsoft Office Professional and Core licenses and make a companywide commitment can choose any combination of the three products and get additional discounts.

Making the software license sale smoother isn't only a vendor's role, however. For their part, distributors have been building or buying online sales tools, training VARs, creating additional finance options and retooling their internal systems to handle the back-end functions for VARs. Online tools, such as Ingram Micro's Click2License, Merisel's SELline license configurator and Tech Data's LION, make it easier for VARs to make purchases 24 hours a day and manage the licenses for their accounts. Tech Data executives say 25 percent of its customers use LION every day, and the online tool accounts for roughly 65 percent of the distributor's total software transactions.

Ingram Micro executives see Open Value as an opportunity for VARs to take on more of an influencer role in their customer relationships. A distributor can manage the back end of a relationship, such as billing, financing and fulfillment, while a VAR can focus on performing software assessments and recommending the appropriate software applications, licenses and related hardware.

"It allows VARs and distributors to leverage their core competencies," says Jodi Honore, vice president of vendor management at Ingram Micro. "What Microsoft is trying to do is lower the cost of doing business."

On the whole, distributors see software licensing as a hot market, and some see Microsoft's Open Value as the next evolution. There's a lower cost of entry for customers, and VARs can buy only what they need. "They just see this as the natural next step," says Andy Magsarili, director of vendor management at Ingram Micro.

What's more, selling software

licenses, in general, could lead to bigger hardware and solution sales down the road, distribution execs say. As VARs perform assessments to determine their customers' needs and the best license configurations, for example, they could quite possibly uncover the needs for newer and faster systems, more network protection or more data storage space.