Solution providers, start your engines. Get revved up by the products, margins--and profit potential--of today's emerging vendors
Emerging Tech Dynamos
VARs realize they must play in emerging technology to stay fresh and stand out.
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Sizing Up Emerging Vendors
CRN research gives a snapshot of the emerging technology arena.
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The Big Boys Fight Back
Tech giants are fighting back with their own emerging technology.
They have far superior technology, more robust margins and uncompromising technical support. They are the CRN Emerging Tech Dynamos and they're reshaping the information technology industry, solution providers say, by handily beating established vendors in head-to-head product, margin, technical support and field engagement comparisons.
It's not even close. Solution providers say the Emerging Tech Dynamos are blowing away the big boys on all those fronts and more. And they are doing it in greater numbers. This year's class is made up of 163 players, up from only 75 last year. And the percentage of solution providers adding emerging vendors is on the rise, with 72 percent of solution providers polled by CRN adding an emerging vendor this year, up from 57 percent last year. To top it off, solution providers see these Emerging Tech Dynamos delivering a greater share of their profits as they look out over the next five years.
The popularity of emerging vendors highlights a growing trend in the SMB market: It is the solution provider's brand that carries the most weight. The emerging vendors recognize that power and are battling hard to win solution providers' hearts, minds—and selling power.
Emerging Vendors Are The True Innovators
Tim Hebert, CEO of Atrion Networking, a unified communications solution provider based in Warwick, R.I., said he expects the percentage of his net income coming from emerging vendors to grow to as high as 40 percent in 2012, up from about 25 percent today. That's because Atrion is pushing the unified communications envelope to deliver products and services in the innovation and early adopter stages.
"We push that edge," said Hebert. "Emerging companies love us because we take the time to develop that market because we know that is where the product margin and service revenue is at an all-time high."
Herbert said emerging vendors are becoming more important because of their ability to be on the cutting edge. "The big companies have a lot of money and are pulled in a lot of directions. It is very hard for the big companies to be true innovators," he said.
One of Atrion's brightest emerging vendor stars is Bradford Networks, which beat Cisco Systems to the punch in the network access control (NAC) market. Hebert said he makes double the net profit on the Bradford product (22 percent to 24 percent) vs. Cisco's Clean Access offering (12 percent). He said Bradford, Concord, N.H., owns 90 percent of his NAC business because of its outstanding technology, superior technical support and tight field engagement with his team.
Herbert began partnering with Bradford in 2001, well before Cisco entered the NAC market by buying Perfigo in October 2004.
Bradford still has an 18-month lead over Cisco, according to Hebert. The Bradford solution is more scalable and has a deeper feature set, he said. "That is where Bradford shines hands down. Bradford has been very good at coming out with new releases, moving the product forward."
The emerging vendors' products are aiming to get as close to 100 percent of what a client needs in a best-of-breed product, whereas the bigger vendors often are shooting for an 80 percent mark, said Hebert. "The emerging vendors have their fingers on the pulse of what the clients really, really want. It is not only just a good engineering idea. They understand what the client wants and they are very good at building that into the product."
Next: When It Comes To Tech Support, Let's Get Personal
When It Comes To Tech Support, Let's Get Personal
Solution providers say the technical support they get from emerging vendors vs. the larger, more established vendors is like night and day—it's definitely more personal and hands-on. Solution providers get instant access to top-notch technical talent. In addition, they have the cell phone numbers to not only the top technical talent but to top company executives as well. Compare that to established vendors where it is not uncommon to get shuffled from one technical support person to another in far-flung places.
Scott Charles, a security engineer and technology architect at Roeing, a Lafayette, La., solution provider and Premier Astaro partner, said larger players simply cannot match Astaro's unified threat management appliance technical support prowess.
"There is no competition," said Charles. "I know every one of the people in the Astaro support organization by name and can call them.
They know me. But if I call one of the larger vendors, depending on the time of day it is, I get New York, Chicago, Los Angeles, China, India, England. Those companies are so big, you are a number."
What's more, the larger vendors have technical support reps who are very narrowly focused, said Charles. They demand a support ticket for each particular problem. And those calls often can wind up in "finger-pointing" between multiple support or product organizations, he said.
That's not the case with the emerging vendor support personnel, he said. When Astaro, Burlington, Mass., came out with version 7.0 earlier this year and Roeing was doing a new install, Charles was able to quickly get a support engineer on the phone who walked him and his engineer through the setup and then spent three and a half hours talking about different scenarios for the new installs given Roeing's client base.
"We had every one of our questions answered," said Charles. "It had nothing to do with being a Premier partner. That was the way their support works. I didn't have to make four or five different phone calls."
Ultimately, Roeing finds a personal touch with Astaro that bigger vendors cannot even begin to match. Roeing is able to quickly get to all the top technical and channel talent and even to Astaro co-founder Gert Hansen. "It's like you've known them all your life," said Charles. "They are very focused on their product and making sure the customer is protected."
That technical support—combined with Astaro's technical superiority and margin domination over the big competitors—has resulted in Roeing moving as much as 90 percent of its firewall sales to Astaro in the past three years. Charles said he learned about Astaro after a no-holds-barred bake-off he and his Roeing team conducted in the firewall market. Astaro won the contest hands down, and it was only then that Charles found that the margins on the Astaro product—at 35 percent to 40 percent—were a whopping 10 times more than the larger rivals whose margins had been beaten down to 3.5 percent by the likes of CDW and PC Connection.
And those margins come on a product that is technically superior and many times is $4,000 less than a comparable larger vendor solution, he said. That's one reason why Charles sees more and more of his net income coming from emerging vendors over the next five years. In fact, he is now looking at doing the same type of drill-down on e-mail retention solutions.
"We're always looking to fill the void you can't get from the larger vendors," said Charles. "That is our competitive edge. Everyone can sell HP, IBM and Microsoft. It is how you take those and add to it to come up with a good, cost-effective solution that differentiates you."
Next: Priced Right For SMBs, And Not Overdistributed
Priced Right For SMBs, And Not Overdistributed
It's not only filling a technology gap that has a lot of emerging vendors making their mark with solution providers. It's also a sharp focus on designing, building and pricing products specifically for small- and midsize-business customers.
When an emerging vendor develops products for the small-business slice of the market, for example, they mostly are focusing on 50 users and less. Those products are built and priced for that segment and are priced thousands of dollars less than comparable solutions from the larger vendors. Larger established vendors often have a daffy definition for the small- and midsize-business segment because of their enterprise-centric view of the world, solution providers say. For example, many large vendors define small businesses as 250 seats or less and then price those products out of the reach of true small-business customers.
Solution providers say another defining characteristic of emerging vendors is that they make sure their products are not overdistributed. That way, they guarantee that those solution provider partners pushing the cutting-edge technology envelope are rewarded with high margins rather than watching those margins be cut to shreds by e-tailer behemoths.
Of course, the product has to pass the high bar of technical superiority before a solution provider will look at the channel characteristics.
Jeff Donelson, president of Atlanta Network Technology Group, Roswell, Ga., decided to resell the Allworx fully integrated IP phone system and communication platform, designed for businesses with up to 100 employees, after evaluating phone systems for his own company.
"I was so impressed after we started using it internally that I decided to become a reseller," said Donelson. Communications giants Cisco and Nortel Networks simply have "no comparable offerings at the lower end," he said. "I don't consider either one of those players as addressing or competing head-to-head with Allworx."
East Rochester, N.Y.-based Allworx, in fact, was founded by two veteran Eastman Kodak and Xerox engineers who were frustrated by the complexity and cost of putting together a phone system for their own small business. Donelson said he loves the product simply because it works and it's affordable for small businesses. "I couldn't find another company out there that was offering a complete turnkey product combined with a complete service and channel setup that is easy to do business with," he said.
The Allworx solution has, on average, 30 percent to 40 percent margins, according to Donelson. One reason Allworx partners say they can command those margins is because the vendor has not overdistributed the product.
Thomas Roy, president of Spaulding Hill Networks, a Nashua, N.H.-based Allworx partner, said he is able to maintain 40 percent to 45 percent margins vs. 10 percent to 12 percent margins selling a 3Com solution because he does not have pricing pressure from the likes of CDW when selling Allworx.
"The CDWs of the world kill us," said Roy. "They really do. They are selling this stuff at what it costs us from distribution. So margins are extremely slim when we go into a deal with a large vendor like 3Com. Users go up to CDW or Google and come back with some ridiculous price. We tell them to go buy it there. Allworx isn't sold at CDW. It's great that they have protected us and we can maintain our margin."
In addition, Roy said if he ends up proposing a 3Com solution he finds himself competing against three other 3Com dealers, all of them driving down the price on the deal.
"That has happened to us multiple times," he said. "Now we are all battling it out for 10 percent, and somebody might cut it down to 9 percent, someone else might cut it down to 8.5 percent. Not once has that happened to me with Allworx."
The larger vendors "have dealers everywhere," Roy continued. "They tell all their dealers about these opportunities and they put all of them into a ring to fight it out against one another. You walk out of a deal beat up and bruised and you make 8 percent. That does not happen with Allworx. I really like that."
As for the superior technical support of emerging vendors, Roy points to a situation he encountered last year involving a glitch in Allworx's new 24x and the carrier connection.
Roy and his team worked on the issue for four days with technical support from both Allworx and the carrier. Allworx Chairman, CEO and President George Daddis and an engineer flew from Rochester, N.Y., to the customer site on a Friday morning, isolated the problem within several hours and had it fixed with a patch in no time. To top it off, Daddis put together a pizza lunch for the entire client company and apologized for the inconvenience.
"That's what I love about this company," Roy said. "They are awesome. The bottom line is, George wants to make sure he has happy customers. He wants to make sure people come away with a great taste with Allworx."
It's that kind of personal attention that has Roy looking at adding more emerging vendors, which he said currently account for about 55 percent to 60 percent of his net income. He would like to drive that to 80 percent over the next five years.
"We are on the hunt and searching for new emerging vendors," said Roy. "It really is the way to go. I am so sick of the same old, same old [with larger vendors]. With Allworx, our success is their success. I'd love to find more emerging vendors like them to work with."
For Some Solution Providers, It's All Emerging Vendors, All The Time Fueled by that kind of feeling, some VARs are moving to an an almost all-emerging-vendor model.
Jeffrey Main, CEO of Questeq, a Pittsburgh-based solution provider, said he decided four years ago to flip his business model and "ditch" most of his tier-one vendors primarily in favor of emerging vendors. "Everything we do is on the emerging side now," he said. "We turned our whole strategy upside down. We absolutely are not interested in commoditized channel products and vendors. We just don't want them. We want fresh startups."
Among the vendors that Questeq brings to the table now are N-Computing, AppStream, Cymphonix, Sendio and NetOp. Main said the key to playing in the emerging vendor space is taking on products in the early adopter stage before the CDWs of the world commoditize them. He points to CDW buying Berbee as evidence of the commoditization of the VoIP market. That is in sharp contrast to a company like Redwood City, Calif.-based N-Computing, whose technology prowess is unmatched by any and all comers, according to Main.
The N-Computing technology allows a PC's processing power to be shared by as many as 30 users and has proved to be extremely popular in lowering the cost of deploying technology in school systems, according to Main. The N-Computing product can reduce the acquisition cost for a school system's PCs by as much as 60 percent, Main said, adding that the Questeq team looked at five other PC-sharing technologies and all of them "failed miserably."
"This is the first product out there that was stable enough to introduce to our customer base," Main said. "There were a bunch of other products out there before this came out. But this the first real viable alternative we saw to split a Windows PC into multiple sessions."
With products like those from N-Computing, Main said the emerging vendor business is robust, outpacing even Questeq's thriving managed services business. The bottom line is, there is more opportunity for increased margin with emerging vendors, he said.
Of course, he points out that there is a bigger investment that solution providers have to make to drive emerging vendor solutions.
"We are always looking for companies in the first four years of their technology cycle," he said. "Before it gets to Dell, CDW or TigerDirect."
Commodity-product-oriented vendors usually want to leverage a broad customer base, he said. "With a commodity product, all the vendors want to do is leverage your customer base. With an emerging technology, it is very hard because you are only going to get early adopters as a customer base. You have to go wide and put a lot of time into the sale. You need the higher margins to offset the operating expense to sell an emerging technology."
JENNIFER HAGENDORF FOLLETT contributed to this story.