Business-Model Overhaul

Within the past three months, two of Microsoft's largest resellers,Corporate Software and Software Spectrum,agreed to be acquired by Level 3 Communications, Broomfield, Colo. The two will merge to form a Level 3 services subsidiary chaired by Corporate Software CEO Howard Diamond.

And in April, a key Microsoft online licensing partner, License Online, declared bankruptcy. Its assets were acquired by Synnex Information Technologies.

While the economic downturn and slowdown in IT spending are the chief factors behind the wave of consolidation, Microsoft's enterprise licensing strategy shift and emerging software-as-a-service model are also changing the market, industry analysts and solution providers said.

"More consolidation is likely as corporate resellers search for the investments they need to stay viable in a market where vendors are more determined to talk directly to the enterprise," said Steve McHale, an analyst at research firm IDC. "Corporate software resellers need to find alternative sources of revenue fast. To get upstream, they need to invest in new skills and business models."

Executives at Corporate Software and Software Spectrum said that's exactly what they're doing, and that the merger under Level 3 is a tactical move toward subscription-based services.

Microsoft LAR ASAP Software expects continued consolidation because of market conditions, not a demise of the business model. "ASAP is not looking to merge with another reseller, but we are looking to acquire additional assets, especially outside the U.S.," said Paul Jarvie, president of ASAP, Buffalo Grove, Ill. "Granted, the new [Microsoft Enterprise Agreement model will have a negative impact on the growth of our top line in the future."

As a result, large software resellers will increasingly look to the SMB sector for business, industry observers said. "It's another signal. Microsoft is squeezing the LARs," said Alan Weinberger, president and chairman of the ASCII Group, Washington, which represents more than 2,000 smaller resellers. "The VARs are doing better than LARs right now, but the smaller dealers are concerned about Microsoft taking more of the business direct."

Others disagree. "Microsoft has an interest in maintaining a healthy reseller channel," said Paul DeGroot, an analyst at Directions on Microsoft, Kirkland, Wash.