In what could be a sign of the times for Sun Microsystems, at least three of its top resellers recently have filed for Chapter 11 bankruptcy as they get caught in what sources describe as a perfect storm of the economic downturn.
Aztec Technology Partners, Stonebridge Technologies and GoBosh each have filed for Chapter 11 protection in an effort to reorganize their businesses. Earlier this month, Aztec ceased operations because the U.S Bankruptcy Court for the District of Massachusetts refused its request to use cash collateral to continue its business and pay employees.
"The channel is in major upheaval," says Brad Bishop, CEO of Sunnyvale, Calif.-based Avcom Technologies.
Braintree, Mass.-based Aztec closed shop on Oct. 12 and laid off more than 500 employees. But so far both Stonebridge and GoBosh have managed to keep their businesses going but with a vastly reduced workforce. Both are restructuring operations.
Bill Ames, GoBosh's CEO and president, and Mike Thompson, executive vice president, say the company was moved out of Chapter 11 protection as of this week. But they have cut their workforce by 50 percent as they saw revenues go from an annual sales high of $120 million to about $2.5 million in November of last year.
Stonebridge is in the midst of an employee-led buyout of its assets, executives say. It has closed four of its nationwide offices and reduced its workforce from about 700 to 200. In addition, the board of directors has replaced CEO Jim Sherriff, who had led Hewlett-Packard's worldwide consulting before joining Stonebridge, with founder James Ivy. On Oct. 23, the U.S. Bankruptcy Court in Dallas accepted the employee buyout and they expect to be out of Chapter 11 in a few days, with Ivy serving as the major stockholder of the new company.
The Dallas-based company has cut down its focus on e-business consulting and now plans to tightly integrate its product sales unit with its consulting arm. The plan is to become less of a reseller and more of a systems integrator by leveraging its architecture and configuration expertise.
In the middle of a booming time for Sun, resellers say they got caught in the middle of a sudden downturn that surfaced in December of January of 2000.
"We started to see a significant reduction in the scope of projects," says Hank Johnson, vice president of Enterprise Partner Services at Stonebridge. "Projects were being shut down or delayed or deferred. Things happened very quickly."
Resellers say they are using the analogy of a "perfect storm," where several negative forces came together to cripple some resellers. One of the problems is Sun may have issued too many reseller licenses when times were good and over-saturated the market. The Palo Alto, Calif.-based company, which this week started to lay off 9 percent of its workforce, has an estimated 600 to 800 resellers and partners, according to sources close to the company. To help remedy the situation, Sun has reduced the number of reseller licenses issued in the past year, sources say.
But resellers also are fighting against a tidal wave of Sun hardware flooding the gray market, most of which is coming from the many failed dot-coms that previously had worked as a hallmark to Sun's marketing and sales strategy
"A lot of this stuff is being sold 10 cents on the dollar and half the stuff is absolutely brand new," says Bishop.
As a result, in early summer Sun started to spend a "significant quantity" of money purchasing all this hardware and recertifying the equipment. That means customers can buy the devices, whether used or brand-new, with a full warranty. Resellers started to get wind of the gray market problem in April or May, when clients received calls from people selling Sun hardware at cheap prices.
"You would dig down and find out it was a broker selling used gear that is not certified by Sun,' Johnson says. "Sun saw the threat and bought back a lot of that gear to protect the channel."
