Closed Disty Model Changing?

That's a question top distribution executives and solution providers are asking themselves these days given Melville, N.Y.-based Arrow Electronics Inc.'s $485 million acquisition last year of enterprise distributor KeyLink Systems Group. That big deal made Arrow the leading distributor for IBM Corp.'s and Hewlett-Packard Co.'s enterprise products. But it also reduced the number of enterprise distributors from three to only two for many partners.

That's no small change given that under the closed distribution model, some vendors force solution providers to choose an exclusive distribution partner for specific enterprise products. Solution providers typically must sign a contract with a distributor on a yearly basis with limited opportunities to change distributors outside the yearly contract time.

Tempe, Ariz.-based Avnet Technology Solutions President John Paget, a highly respected distribution veteran, for one, is predicting changes in the closed distribution model as it exists today. He says it will be replaced with a hybrid model that emphasizes partnering with solution providers to market to customers.

Paget said that the closed distribution model is peculiar to the United States. "In Europe, by law, it's an open-source distribution model," he said. "The closed distribution model is in the past. It's merging into what we call the solutions distribution model."

That solutions distribution model includes a mix of intellectual property, product sets, financing and application marketing, Paget said. "With solutions marketing, we market to the end-user community to generate pull for vendor partners for you," he said. "I don't think it's really important for us to market to you. You know who we are."

Pete Peterson, senior vice president and general manager, AIS, at Tech Data Corp., a Clearwater, Fla.-based broadline distributor with some closed sourcing distribution relationships, said he has seen the move toward the hybrid solutions model for some time now.

Like Paget, Peterson said the new model doesn't mean the end of closed distribution."For distributors, the expectation from our vendors, whether their product has historically been through open or closed distribution, is to provide value to our resellers," he said. "They have been helping us work to help resellers grow their business."

Don James, CEO of Bear Data Systems Inc., a San Francisco-based Sun Microsystems Inc. and Cisco Systems Inc. solution provider, said he likes the idea of a distributor talking about moving away from the closed distribution model. "Open-source distribution creates competition," James said. "It makes distributors work harder for our business."

Don Richie, the CEO of Sequel Data Systems Inc., an HP-exclusive enterprise partner based in Austin, Texas, said he isn't for a totally open distribution model in the enterprise market, but he would certainly like to have another choice beyond Arrow or Avnet. Sequel was a KeyLink partner for many years, but automatically made the move to Arrow when KeyLink was acquired by Arrow last year.

"It's not as simple as open or closed distribution," Richie said. "If you are focused on the high end, there's value you need to get from an enterprise distributor. The problem that we have today is that we're seeing less and less of that value and now we have only two choices. It is almost like a monopoly when you have only one or two choices. Those distributors know they are going to get the business. There is no other option for enterprise products for HP other than Arrow or Avnet. You need at least three choices."

No matter how the open or closed enterprise distribution debate is resolved, it's sure to have far-reaching implications on both enterprise product margins and the presales and postsales support services offered to VARs by enterprise distributors. For that reason, enterprise solution providers are going to be watching closely to see whether Paget's prediction of how closed distribution will change is indeed on the horizon.