Arrow: More Data Center Complexity Means More VAR Opportunity

Solution providers will benefit from the increasing complexity of the data center market caused by intense competition, acquisitions, and new technologies, according to Andrew Bryant, president of Enterprise Computing Solutions at Arrow Electronics.

In an exclusive interview with CRN, Bryant said that he believes customers will rely on VARs for data center solutions and that multi-vendor stacks will remain prevalent despite vendors pushing for greater partner loyalty and exclusivity. He also said that distribution partners will be in a prime position to help VARs navigate the increasingly complex data center market as new technologies are introduced and more acquisitions and mergers occur. The following are excerpts from the conversation:

There's been a lot of upheaval at the enterprise data center level over the last year or so. What are you seeing this year from your big vendors this year, and how has it affected Arrow?

At a strategic level, I think the big five or six key suppliers out there are all really battling to get a bigger share of wallet in the data center. And they're doing it with M&A activity, product development and product innovation. And so what they're bringing to the channel I guess is in some ways good -- it's more complexity, and complexity is opportunity for VARs. And they're bringing more bundled solutions, so if you look at IBM, Oracle and others that are rich in hardware, software and services, they're starting to combine certain products to create bundles. And that's been especially good for our value model. It's given us an opportunity to create more programs around training and education for our VAR base.

I think the other thing that's interesting is during the downturn, many of the large suppliers looked at their distributor model and recognized that it was a really good model. Number one, it offered them a variable expense model during the downturn; we're a selling partner for them, and we're a variable expense. So much of their business remained profitable during that period. And now coming out of the downturn, our suppliers are very focused on continuing to use the value channel as a way of getting to the mid-market and in many cases large enterprises as well.

What about the move toward vendor exclusivity? Many suppliers are pushing their vendor loyalty programs, where the vendors want VARs to sell more of their product and shut out competing vendors, yet a lot of the solutions providers carry multi-vendor platforms and have expressed concern about that.

I think this goes back to the share of wallet issue. Of course, if a vendor offers servers, storage, and networking, then the vendor would like the reseller to pull all of that through and sell a complete solution from them. And I think they incent the reseller in a way that makes it attractive to do that. So where it's feasible, I think resellers will bundle those products and sell the best possible solution to customers while maximizing margin. But as we all know, certain end users are going to demand multi-vendor solutions. So I think that VARs will be in a position to do both. They'll have to choose a path that makes the most sense for the end users but also keeps the relationship with their vendor intact. VARs are pretty good at managing their role between the supplier, distributor and end user. [Vendor loyalty programs] are going to require more thought and negotiation, but I don't think it's going to cause a problem, long term, for VARs.

Next: Vendor Exclusivity And Market Consolidation Speaking of multi-vendor stacks, how are the numerous vendor acquisitions and mergers affecting the market from your perspective?

It's certainly, on the surface, a clear opportunity because you're filling out more solutions and opportunities from that vendor. And we've watched many vendors consolidate many other smaller companies over the last few years and fill out their total offering. On the other hand, a lot of products are still purchased at different times and places and by different people in a large enterprise customer. For example, storage for the most part is a stand-alone purchasing strategy for most companies these days, so there's still going to be a battle there. Every vendor product can't be pulled through, or dragged, every time. There are times when the opportunity will be there, and other times it won't.

Do you see more major acquisitions coming?

I suspect there will be more by the major suppliers with strong balance sheets and have strategies to become a bigger player in the data center. On the other hand, I don't think the consolidation will stop the startups and new companies that are innovating and bringing new technologies to market. We have a lot of those types of companies on our line card that have technologies that the top vendors do not have. We spend a lot of time at Arrow investing in these emerging technologies that become the next fast growing part of the market. A good example is three or four years ago, when we entered into the security and virtualization spaces, we were on the front end of building out our line card. And today, those are two of the biggest areas and fastest growing parts of our business.

What about distribution consolidation? What do you do you see happening with the market in general and specifically Arrow's strategy?

We'll continue to be very disciplined in our approach to acquiring companies. The first thing we look for in our value-added distribution model is a company that shares the same process and value-added mentality that we have a go-to-market model. And we have focused our efforts to be deeper in the AMEA market; we made a couple of acquisitions like Sphinx in the U.K., a primarily a security software distributor, and Diasa, which was the largest value-added distributor in Spain. In AMEA, not only are we acquiring companies but we're also showing the strength of our model in that region; we added 31 new contracts in our business there. And that's the supplier seeing Arrow as the best choice to expand in all of those regions. We're a leader in the European market right now and we certainly want to go deeper and extend that leadership.

Next: The Shared Technologies Acquisition and Mobile Growth

What about the Shared Technologies deal? You've added a managed service provider to your business, which is obviously different than other acquisitions you've made.

I know when we bought Shared, there were a lot of questions. From my perspective, it was an opportunity for Arrow to enter the unified communications market in a way that, long term, would allow us to have intellectual property and help our VAR base. And we have not seen any conflict at all in our VAR base. Shared is mostly about voice, and most of our resellers don't play a big role in that area. With Shared, we see the opportunity to be a process benchmark for doing more cloud services, in particular VoIP in the cloud, which we think will be an interesting play. So we have the data center piece, but what's going to be the opportunity for the VAR long term is to connect all of that from the cloud to all the connected devices, whether its telephony or mobile phones or tablets.

In addition, Shared has a tremendous maintenance business (for PBX telephony systems). It's not a sexy, new business; it's a very old business but nonetheless it's a process that we can use. And it's also something that over time our VARs could sell as a SKU. And Shared is obviously very strong in managed services, and they managed many of these Fortune 100 companies' voice environments remotely, so this will be an opportunity to see how much more can we bring to a managed services environment so we can package it and resell it through our VAR base. South that's our thinking. Our VARs will always be the lead.

You mentioned the growth in mobile devices like smartphones and tablet, which have obviously contributed to data center growth on the back end. Those are products that Arrow hasn't traditionally carried, but in the future will Arrow be involved in those areas as a way to offer a complete solution?

Only if we see an opportunity that creates enough profit for our resellers and ourselves. I'm guessing probably not. We do play in some thin client products around virtualization, but we're going to be more interested in the cloud piece that enables those devices. It's the reason, in one sense, that our storage business has been so incredibly strong over the last two years -- you have the private cloud being built out in many companies today. There's a lot of talk about the public cloud, but the big opportunity to me is in the private cloud, and eventually a hybrid model where companies will integrate other applications in a software-as-as-service model.

Next: European Growth and Supply Chain Concerns in Japan

What are your thoughts about the competitive landscape in distribution, specifically the encroachment of broadline distributors in the European VAD market?

The fact is, we don't measure things in size and volume. We measure things in value. The value model that Arrow has built isn't just based on our line card and sales of those lines -- although I'll say that we have the most robust line card for the enterprise data center of any of the distributors in the countries we serve. And so the piece that we still provide is something that is hard to replicate, which is this: we engage with our supplier partners and become an intricate strategic partner to our VARs and get them involved in a pipeline of opportunities that allow them to grow faster than the market and make their businesses more profitable. You saw our fourth quarter results. If you're really involved in enterprise data center pipelines, then you're in long sales cycles and the fourth quarter becomes the big spending period on data center solutions.

And Arrow ECS sequentially jumped 55 percent in revenue that quarter. I don't think there were too many other distributors that had that kind of performance. And I would say some of our resellers doubled their business from the summer quarter to the December quarter. We like to stick to our strategy. We're the clear leader in storage. It's hard to say you're in the data center business without having the premier leaders in storage, which we have. I mentioned the 31 new contracts in Europe; we also were awarded through Oracle more than 10 countries to distribute Sun and Oracle products. So we're on the bleeding edge, and I think we have the leading middleware infrastructure line card out there.

You mentioned Oracle, which made some news recently when it dropped support for Intel's Itanium platform. What do you see happening at the high-end Unix server market? Will more of this market go direct?

The estimate of that market is between $9 billion and $11 billion globally, and it has been declining for the last two years. And the bet is that it will flatten out this year around $10 [billion]. The thing that has occurred is some movement to Linux, and Intel can run on Linux very effectively. With our VARS, they still use that Unix server almost as a Trojan horse to get into the data center, and what they do is drag along quite a bit of industry standard servers along with those big Unix servers. So it's really good leverage for our VARs. When you talk about mid-range servers, you're still talking about machines at the high end of that range that go for $250,000. As for going direct, we haven't seen that so far other than when Oracle bought Sun, they had some stated objectives to sell more of those high-end systems direct above a certain hard deck of their customer base. All three of the suppliers that are still in this space still rely heavily on the VAD channel and our VAR partners to take this product to market. And I think they're more focused on the future of their storage and networking offerings and building those out for the full data center solution.

What type of effect has the Japan earthquake had on the supply chain from your perspective?

I'll start by saying that even prior to the earthquake and tsunami, which were terrible tragedies, certain parts of the OEM supply chain were already challenged. There have by certain parts that have been very hard to get in order to get finished server and storage products out to market. I suspect there will be some sort of ripple effect from this, and sitting here today, I don't think we know how much it will be. That said, I think it's more of disruption rather than a major effect. And hopefully it will be a minor disruption. I think the two areas of concern are DRAM and flash technologies. We'll have to wait and see how those products affect the supply chains of our OEMs.