Distributors Expected To Get a 'Haircut' From HP

"In the PC space, it appears that HP will pass along some costs to distributors," said Mike Grainger, president and COO of Ingram Micro. "We're not in a position to absorb those costs. We will need to work with our customers in a way that the increased costs get pushed down the channel. Eventually, it shows up at the end-user level, and the market will decide the impact of those changes."

HP's enterprise distributors also say they're bracing for a fee reduction.

"We are preparing for a haircut," said one HP enterprise distribution executive, who asked not to be identified. The executive said he didn't know the size of the cuts but added that they wouldn't be implemented until the current distribution contracts expire on Jan. 31, 2003.

Kevin Gilroy, HP's vice president, North America commercial channels, acknowledged that HP has made changes to its distribution terms and conditions. "We have to be profitable," he said.

Gilroy declined to specify the size of the fee cuts but said they would come from back-end and up-front fees paid to HP's commercial distributors. Some cost reductions realized from distributors would be directed at VARs, he added.

Salina, Kan.-based ISG Technologies is one partner trying to determine how to do business with HP.

"We still love HP, we love Compaq servers and we have so many of our customers that we've moved into [HP and Compaq. It will be hard to move into anything else," said John Gunn, president of ISG. "Our preference is still to sell HP, but we're going to do what we have to do to stay in business."

Under HP's new PartnerOne channel program, slated to launch Nov. 1, solution providers can nearly double gross margins if they hit incentives and performance goals.

Commercial distributors were in a similar position about three years ago, when vendors passed along costs. At the time, many distributors absorbed the costs to win business on price. The resulting price war led to the demise of several broadline distributors, including Merisel and Pinacor. "A lesson we learned a few years ago was that we can't subsidize the manufacturers that way," Grainger said.

Meanwhile, some distribution sources say HP plans to keep its two HP-Unix enterprise distributors,Arrow Electronics' SBM division and Avnet Hall-Mark,until April 30, 2003, without expanding the program to include former Compaq enterprise distributors such as Bell Microproducts and Pioneer-Standard Electronics.

However, the sources said HP plans to keep only two HP-Unix distributors after May 1 and refuses to guarantee that SBM or Avnet Hall-Mark would remain as its two distributors for the platform. At that time, other distributors can apply for HP enterprise distribution authorization, but the vendor expects to keep only two distributors, said one distribution source.

"I don't think you'll see a disruption in their current channel. Over the last two years, the channel has gotten solid again, and I don't think that HP will make any rash decisions that would leave the channel insolvent," said Mike Long, president of Arrow Electronics' North American Computer Products Group, Englewood, Colo.

Industry observers have speculated that former Compaq enterprise distributors would automatically be named as Partner Development Managers (PDMs) for HP-Unix servers and workstations. PDMs work with HP on a fee-for-service basis, taking and managing orders, with HP direct-shipping products to solution providers or customers.

Jeff O'Heir contributed to this story.