Dell Disty Play A 'Significant Change of Psychology'

"The announcement shows a significant change in psychology for Dell," wrote Brian Alexander, managing director of equity research, technology hardware, distribution and EMS, for Raymond James & Associates, in a report Wednesday. "Dell had been adamant about not using two-step distributors to reach SMB customers in non-fragmented markets, as it believed the direct model was more than adequate."

But all that changed Tuesday when Dell announced it would begin shipping Vostro desktops and notebooks this week through distributors Ingram Micro and Tech Data to U.S. solution providers. The Round Rock, Texas-based vendor plans to expand its distribution reach to other geographies and include more products shortly, executives said.

Dell recently estimated its channel run rate to be $12.2 billion and its total North American reseller base at 12,200 compared to $10.0 billion and 10,000, respectively, at the end of 2007, according to Alexander.

"While Dell has become increasingly 'channel friendly' over the past few years, both through retailers and resellers, its use of two-step distribution has been limited to select countries where it could not reach the reseller community on its own," Alexander wrote.

Dell joins other PC manufacturers including HP, Acer and Lenovo who have embraced the channel as a route to the SMB market, evidence that the channel is more cost effective, Alexander wrote.

"Dell's move primarily addresses reseller concerns over slow lead times, as purchases of Vostro PCs typically take 6-12 days, according to Dell's Web site. Using two-step distribution allows Dell to mitigate this concern, as distributors will have available inventory of standardized products and will be able to ship products overnight," Alexander wrote.

Dell could see about $1 billion in additional revenue, assuming that Dell can capture 15 percent of the market for PCs now sold through Ingram Micro and Tech Data, Alexander wrote. That would equate to about one to two cents more earnings per share, he wrote. But those figures could increase as more product lines are brought to distribution.

"Specifically, we believe Dell's storage (EqualLogic) and server portfolio would be well received by the channel," Alexander wrote.

If both distributors split the opportunity, Raymond James expects Tech Data to add 10 to 14 cents profit, while Ingram Micro would earn an additional three to five cents, according to Alexander.

"On the other hand, this move is strategically important because it adds a major vendor into what has been an increasingly concentrated line card. Moreover, it confirms the reach and efficiencies of the distribution model for commodity-like products and should forever put an end to the concern about disintermediation," he wrote.