Which Path Will You Take In 2007 As The Channel Further Consolidates?

This is not a column about predictions for 2007. It is a statement about how the high-tech indirect sales channel will morph, restructure and look over the next few years.

ROBERT FALETRA Can be reached at (781) 839-1202 or via e-mail at rfaletra@cmp.com.

We all know and agree that the channel has always adapted to the market quickly. It began with the premise that PCs would be sold in a retail environment. That model quickly shifted to favor franchises that targeted businesses. Then, that structure collapsed, followed by the rise and fall of large corporate resellers and the so-called aggregator model, and the later birth of direct marketers that are today evolving and growing.

A few things have remained constant. Distribution has held relatively steady and so, too, has the model for the smaller privately held solution provider.

But we are entering a new and very interesting stage of channel development that I believe will push us in a direction that brings us to a place that looks very much like the early 1990s. That period, in turn, will be followed by a cycle much like what we saw in the mid- to late 1990s.

It's clear that right now we are seeing lots of consolidation, roll-ups, acquisitions or whatever term you want to use.

Pick over crn.com on any given day, and you will see the trend unfolding. It isn't just high-profile big deals like the Berbee acquisition by CDW or the Software Spectrum buyout by Insight. There are dozens of private equity players in the market right now buying up smaller solution providers in an effort to create larger national players. And let's also be clear that solution providers in the $200-million-and-up range are also looking to grow through acquisition.

The result is there is a lot of competition right now for specialized, service-oriented solution providers looking to sell.

Now, competition is always a good thing if you are selling.

It's also always a bad thing if you are buying and don't have the discipline, expertise and, more importantly, the gut instinct to know when to walk away.

I'm not taking anything away from the private equity players that see an opportunity to roll up and flip these businesses. But unless you are able to predict the future or are just incredibly lucky, we all know that timing means everything on cash-out. What you think will happen in terms of market valuation isn't always what does happen.

So where are we headed? Clearly, consolidation will continue.

	'Bigger isn't always better, and over time, solution providers will find that price performance and the ability to be a trusted advisor are still priority No. 1 for the customer.'

I think we will see more multimillion-dollar and, quite frankly, multibillion-dollar-size solution providers than the market needs. Vendor programs including back-end rebates and other incentives that are designed to drive profitability will be used more aggressively by the larger player to win business through lower pricing.

The most poorly run big players will get into trouble quickly, and others will follow. If the economy doesn't cooperate, the fallout will be even worse.

We will also see the emergence of some very solid new solution provider brands in the market that will survive, thrive and make a long-term stand.

But bigger isn't always better, and over time solution providers will find that price performance and the ability to be a trusted adviser are still priority No. 1 for the customer.

The market has lacked larger players for a number of years, and as usually happens in a free market that hole is about to be filled. It will be fun to watch the ups and the downs of all this. What will remain constant is there will be plenty of solution providers that remain in the $5 million to $50 million range and the $50 to $150 million range, as well as a slew of new ones who will enter the market as the sands continue to shift.

Make something happen, I can be reached at (781) 839-1202 or via e-mail at rfaletra@cmp.com.