SMB Battleground

Direct marketers bolster services capabilities, posing threat to VARs

Direct marketers are building services capabilities, a trend that could alter the business model for the entire SMB channel, said channel executives and analysts.

Insight Enterprises in late April agreed to buy Comark, a $1.5 billion solution provider and distributor. A month earlier, PC Connection acquired MoreDirect, a $219 million company that gives corporate and government customers the ability to compare and buy IT products. CDW Computer Centers, the largest direct marketer, also has talked to potential acquisition targets in services, according to channel executives.

"Insight is now a full-fledged service provider. That's a huge threat [to SMB VARs, and it isn't going to go away," said Frank Vitagliano, vice president of distribution channels management at IBM. "The combination of a world-class telesales organization like Insight with a world-class enterprise VAR like Comark will be very formidable," he added.

Direct marketers have always sold low-end products to small businesses, but the acquisitions put them in more direct competition with solution providers, said Brian Alexander, an analyst at Raymond James and Associates.

"Direct marketers have had a competitive price advantage with respect to hardware sales for a number of years because they buy in large volumes. Now they're looking to get into services as businesses look for a one-stop shop,not just hardware but total solutions," Alexander said. "Direct marketers are trying to evolve their businesses to offer that, and they are competing more with what a VAR is."

At Ingram Micro's VentureTech Invitational in San Antonio last week, some solution providers said vendors should help small VARs compete with direct marketers on price. But VARs must ensure they bring value to the transaction, IBM's Vitagliano said.

"Our customers want an end-to-end solution that includes service and integration, along with hardware. Those VARs that do it most effectively will be successful," he said.

VentureTech members said direct marketers can't offer a local, personal touch in services. "[Direct marketers can't understand a client as well as a solution provider can," said Brian Okun, vice president of marketing at Computer Professionals USA, New York.

Said Jane Cage, owner of Joplin, Mo.-based Connecting Point: "A lot of it still has to do with account control. The closer you tie a customer to your chest, the more [business you can do."

If direct marketers win market share from VARs by offering services, distributor sales could fall because VARs buy more from distributors than direct marketers do, industry observers said.