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Opinion

Back To The Future With Channel Structure—Not Really

Robert Faletra, Executive Chairman of The Channel Company, says it’s important to gauge where the market is headed to react and capitalize on the future structure.

One ongoing question we get all the time here at The Channel Company is, “Where do you believe different segments of the channel are headed?” The questions vary from “Will distribution be disintermediated?” to “Will the smaller solution providers survive as consolidation accelerates?”

For the vendor and partner community alike, it’s important to gauge where the market is headed to react and capitalize on the future structure.

In the late 1980s through the early 1990s, the channel was dominated by a group of billion-dollar-plus resellers that mostly disappeared when the market shifted to an open distribution model.

Today we have more billion-dollar partners than we did back then, but remarkably they don’t dominate the market the way the big boys did. There’s good reason for that, and the channel structure today and for the future is and will always be unique as it adjusts to the capital markets and customer needs.

Today’s billion-dollar players have a large footprint, but the IT market is dramatically larger than in the early 1990s. Today’s market could support many more billion-dollar strategic service providers (SSPs) than we currently have, given the importance of technology in every business.

But getting to the billion-dollar mark is difficult because the market is so competitive and tens of thousands of multimillion-dollar SSPs do remarkable jobs servicing customers of all sizes.

There are no indications that would suggest we are in for any sort of major restructuring of the channel market such as we saw two decades ago. What we are seeing, however, is an acceleration of consolidation. Amsterdam-based Getronics’ acquisition of Pomeroy is just the latest example.

One trend is a larger group of multinational SSPs that are more capable than ever of servicing multinational customers. But even here IT is often a local issue with regional management making many of the decisions. No SSP is likely to garner all of any customer’s business, especially when it is spread across multiple continents.

There is lots of activity in the market with a great deal of new partner businesses being formed at the low end. There’s also rapid growth by those that have built solid strategic service models, many of which have built businesses with sales well north of $100 million. There is also a fair amount of expansion by SSPs in the number of vendors they are carrying. Despite the vendor consolidation that is always part of the market, many of the SSPs in the $50 million and larger range are adding vendors to either complement their current group, get them into new categories or, most importantly, be able to hedge their bets by not being too dependent on a single supplier.

In my opinion, it never makes sense to be 100 percent dedicated to a single supplier unless you are a niche business with an incredibly focused practice in a single category with a supplier that is dominant and flush with profits. I’ve seen too many partners over the years that fell on hard times when a vendor they were dedicated to collapsed.

So how do we expect things will shake out in a few years? We are going to see a larger group of multibillion-dollar players than we have today, fueled almost exclusively by mergers. The group of SSPs in the $100 million to $250 million range will also be larger, driven less by mergers and more by traditional growth. The only potential inhibitor here is access to human capital—employees with the right skill set.

And the number of $20 million to $50 million players will be roughly the same as it is today. All in all, a healthy market made up of SSPs of all sizes capable of servicing customers of all types.

BACKTALK: Make something happen. Robert Faletra is Executive Chairman of The Channel Company. You can contact him via email at rfaletra@thechannelcompany.com

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