Channel-Friendly Upstarts Dangle Better Profits

By Craig Zarley, Steven Burke, CRN
October 27, 2006 10:30 AM ET

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They may not be household names, but their importance to solution providers is immeasurable. They are the wave of emerging technology vendors fast flooding the market and hungry to use solution providers as their primary sales route.

The cast of upstart companies covers a gamut of technologies, including storage, security and open-source products. Many are startups, often only a few years old, but they're well-financed and run by technology veterans who have carved out unique but strategic niches in the IT tapestry. As larger vendors keep tighter reins on budgets, these new vendors collectively represent the IT industry's cutting-edge R&D.

Not since the dot-com phenomenon at the turn of the century has there been such an infusion of new companies with new technologies bent on disrupting the way that old-guard IT vendors and their channel partners conduct business. But unlike the dot-com mirage, these new emerging vendors are real companies with real technologies, and solution providers that join forces with them are making real money.

"When I have [a Hewlett-Packard] deal where I make two to three points of margin and then I add CommVault [Systems' data management tools, that] makes 40 points of margin," said John DeRocker, senior vice president of sales and marketing at Nexus Information Systems, a Plymouth, Minn., solution provider. "That's why it's imperative that you add these emerging technologies on top of a deal."

More than half the companies included in CRN's new database of 75 emerging vendors so far have bypassed distributors and are working directly with solution providers to carve out their niches in the market. In a world that is rapidly migrating from point products to solution sales, solution providers report that these emerging vendors with their cutting-edge technologies have become their secret profit elixirs. Indeed, so valuable and so strategic are their relationships with lesser-known vendors that some solution providers closely guard their partner rosters. DeRocker said he will incorporate a new data encryption vendor into his business next year. When asked the vendor's name, DeRocker said, "I'd rather keep them quiet."

Another solution provider, who requested anonymity, said: "I don't want to reveal who my emerging vendor partners are because they are giving us a competitive edge in the marketplace, and we don't want our competitors to know who we are partnering with."

Margins And Momentum
While many solution providers are salting their storage, security and managed services solutions with a slew of new vendors offering product margins that are routinely three times those they see with brand-name vendors, most continue their relationships with their longtime tier-one vendor partners, such as Cisco Systems, EMC, HP, IBM and Microsoft.

But some solution providers, weary of the over-distribution and low margins that are characteristic of relationships with most tier-one manufacturers, have abandoned their traditional partners and are casting their lots with emerging vendors.

The more lucrative payoff on both the reseller and customer side of the equation is what drove Chad Agate and his partner, Robert Weiss, to sell off their stake last year in Cipher Group, a Tinley Park, Ill.-based solution provider focused on Cisco and Microsoft, and open up a new business, SIPBox, to focus on the open-source PBX market as a Digium premier partner. The bottom line: 10 percent product margins for a Cisco-based solution vs. 50 percent product margins on the Digium Asterisk open-source telecom product line, said Agate, CEO of SIPBox. And that doesn't include services revenue that can be twice as high on the Digium solutions side. More important, customers are happier because they are paying less than half the cost of a comparable Cisco solution for a more customized, feature-rich Asterisk solution, Agate said.

"This is absolutely phenomenal," he said of the momentum behind Digium and the Asterisk open-source software product set. "It's a lot of fun and really exciting. We're giving people a solution that doesn't cost an arm and a leg and is easily supportable. This makes technology extremely exciting again.

"Open-source software throws off the entire market," Agate added. "Our personal philosophy is we really enjoy working with disruptive technologies. Digium and Asterisk really shake up the playing field.

One example: a SIPBox win in the summer against Cisco and Mitel resellers on a contract for the ECHO Joint Agreement Project, a Chicago-area school district organization contract. On that deal, SIPBox's bid of $79,010 was less than half the $177,503 bid put forth by the Mitel reseller, nearly $55,000 below the $133,934 bid brought to the table by the Cisco reseller and $82,413 less than an AT&T direct bid of $161,423 using Cisco equipment, Agate said. He said Cisco deals tend to be licensing- and maintenance-heavy, whereas working with Digium provides him with twice as much services revenue and allows him to deliver more value to his customers.

"The numbers just don't make sense for a reseller to implement a Cisco solution," he said. "If you have the engineering staff, it makes absolute sense for any reseller to look at the Digium solution."

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