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Channel Relationship: How Long Can It Last?

The value of emerging vendors can be short-lived, as many are acquired by larger vendors or soon become overdistributed.

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Solution providers acknowledge that despite their enthusiasm for emerging vendors, their value to the channel often has a short shelf life, as many are acquired by larger vendors or grow to the point where they become overdistributed.

Because of this, solution providers say their search for emerging vendors with robust margins and cutting-edge technology is a never-ending process.

"I'd say the shelf life is no more than 24 months," said John DeRocker, senior vice president of Nexus Information Systems, a Plymouth, Minn., solution provider. "If they get bought, it may take 18 months for the parent company to mess things up, so maybe you can [get] four years out of them. If the parent company doesn't screw things up, you may get a lifetime out of them."

DeRocker said that larger manufacturers are gobbling up emerging technology vendors at an alarming rate. "The R&D money from the major manufacturers now goes instead to buying companies," he said.

After seeing several of his emerging vendor partners acquired in the past few months, including XOsoft, a Waltham, Mass.-based disaster recovery and business continuity software vendor purchased in July by CA, and Advanced Digital Information, a Redmond, Wash.-based data backup and archiving vendor bought by Quantum in August, DeRocker only half jokingly likes to keep his new vendor partners quiet for fear they might be acquired.

One of the reasons these emerging vendors only seem to last in the market a short while before being acquired by one of the big vendors, he said, is that they do a better job at developing new technologies that solve customers' specific needs. "Most of the tier-one vendors don't seem to listen to end users, but these emerging technology companies seem to do a better job of it," he said.

Because of the short shelf life of emerging companies, Tobi Evangelisti, vice president of solutions at GreenPages, a solution provider in Kittery, Maine, said she continually seeks out new partners. GreenPages has worked with several emerging vendors that either bypassed distributors and worked with the company directly or partnered with only one value-added distributor, she said. But because the companies reached a point where they were ready to go to an IPO, they felt compelled to broaden their market presence by adding mainstream distributors. "That changes things," she said. "Margins definitely go down."

CommVault Systems, a data management software vendor in Oceanport, N.J., for example, just announced its IPO in late September.

"At one point, we were pretty much the only [CommVault] reseller in town, and we were doing gangbuster business," said Scott Pelletier, vice president of enterprise sales and engineering at Lewan & Associates, a solution provider in Denver. "But now they are growing and have announced an IPO, and everybody in town is selling their stuff. We still sell CommVault, but we are a little less excited because we are not the only shop in town that sells it."

Evangelisti said that GreenPages has learned to live with the high turnover phenomenon associated with emerging vendors. "We are riding a wave of technology," she said. "A year and a half ago, we were able to get substantial margins in the iSCSI SAN market, but we knew it was just a matter of time before all of the other Fibre Channel players came out with an iSCSI SAN play. That is what happened with Hitachi and Hewlett-Packard, and it automatically drives margins down."

Rob Wolfe, president and CEO of AvcomEast, a solution provider in Vienna, Va., agreed. "Today's value-add is tomorrow's commodity," he said. "But we hope getting in early gets us an advantage. But if a product is destined for commoditization, what are you going to do?"

Wolfe said that if an emerging vendor gets acquired or decides to expand its business by going through distribution instead of dealing directly with solution providers, it might not be all bad. "It extends the brand reach," he said, noting that with wider market recognition, sales cycles shorten.

But DeRocker has a different approach when emerging vendors lose their luster either because they are acquired or decide to grow by over distributing their products. "When that happens, we find another vendor," he said.

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