VARBusiness 500 Keynote: Think Beyond Hardware, Market Analyst Says

"Apple has always been a lousy channel partner; I imagine they'll continue to be." That was one takeaway message from the VARBusiness 500 event in New York City yesterday, courtesy of Bob Anastasi, director of equity research at Raymond James & Associates, during a luncheon keynote.

The comment was in reference to Apple's new partnership with Intel -- and fit right in with the rest of the presentation, which emphasized the need for VARs to be diligent in selecting partners, markets and niches in a more frugal era of spending. Between 1995 and 2000, services, software and hardware saw growth of 9.3 percent, 14.2 percent and 12.2 percent respectively; growth for the same three segments between 2003 and 2008 is expected to reach 6.3 percent, 7.1 percent and 4.9 percent, according to IDC. Such leveling, however, simply reflects smarter corporate spending.

"It has become a more economically sensitive industry," Anastasi said. "In the late 1990s, companies were spending a lot more than they were making. That's bad. We're back in sync. There may not be high growth, but spending is sustainable."

Even with slower growth, IT is still a $690 million market that accounts for half of business fixed investment. More specifically, small and medium businesses offer the greatest opportunity for the channel. "The SMB market is very large and fragmented," Anastasi said. "That makes it very hard for manufacturers to go direct. I imagine HP found that out quickly."

And just as manufacturers are again recognizing the importance of the channel, VARs are recognizing the need to offer more than product. IDC actually predicts comparable growth for services, software, and hardware come 2008 -- 6.5 percent, 6.7 percent, and 6.3 percent respectively. But while growth for services and software is consistent across the different areas (planning, implementation, support, operations, and training in the case of services; system infrastructure, application development, and application in the case of software), hardware growth has mainly smart handheld devices and to a lesser degree networking equipment to thank. Growth in other areas is far more modest. That said, VARs shouldn't underestimate the influence that hardware still maintains in winning opportunities, Anastasi said.

"No one gets excited about selling hardware, but if you have hardware to offer, it makes it easier to get your foot in the door for offering services," he said.

Not surprisingly, what customers are not buying from the channel are PCs. Thanks largely to Dell's market domination, nearly all alternative suppliers -- from retailers to specialty dealers, corporate resellers, VARs and integrators -- are expected to experience negative growth in PC shipments by 2008. In fact, with Dell removed from the tally, market growth is close to nil, Anastasi said.

"The good news, is that's only true for PCs," he said. "The bad news is Dell is going into more than PCs -- they have a consorted effort to penetrate services and storage."

In general, the consensus seems to be that to win against any dominant players, VARs need to think in terms of solutions -- not just vendor and not just product. That's a difficult transition to make for some.

"For a lot of people, the biggest problem is identifying an appropriate niche and getting the resources to deliver," said John Sheaffer, CEO of Downers Grove, Il.-based Sysix, which ranked 359 on the 2005 VARBusiness 500 list. The company was forced to rethink its own strategy when its primary vendor, HP, canceled its contract. In 30 days, 60 percent of the company's revenue disappeared.

"Our focus had to shift," Sheaffer said, with services taking center stage, and a customer focus winning over vendor neutrality. "The loss set us back two years in business, but catapulted us forward two years in vision."