Icahn And Deason To Investors: Xerox Channel Conflict Hurting Partner Margins, 'Diluting Differentiation'

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Xerox's two biggest individual shareholders continued their fierce criticism of the company this week in light of its intentions to grant Fujifilm Holdings Corporation a 50.1-percent controlling stake in the print and copier giant.

Carl Ichan and Darwin Deason, who together own more than 15 percent of Xerox, argued in a letter to fellow investors that the deal will be "the company’s final death knell" if ultimately approved by shareholders. Among their various complaints is a jab at Xerox's channel model.

"The current model creates channel conflict with competing sellers, thereby diluting their differentiation, incurring duplicative operating expenses and sacrificing margin," Icahn and Deason wrote.

[Related: Deason Sues To Block Fujifilm Deal, Alleging Fraud And Breach Of Fiduciary Duties]

Xerox CEO Jeff Jacobson, in a November interview with CRN, said that conflict between Xerox-exclusive agents, multi-brand resellers and IT resellers is an inevitable part of maintaining the right amount of channel coverage. The company leader, who would become CEO of the new Fuji Xerox if and when the Fujifilm deal closes, echoed the desire to continue the company's multi-brand reseller expansion strategy as part of Fuji Xerox last month.

"We don't want to put people in each other's backyards. But we want to make sure we have all the coverage we need," Jacobson said.

Icahn and Deason also suggest that Xerox should focus its channel on growing sales in the SMB space, although that has already been a stated priority of the vendor's channel strategy for the past year – particularly with respect to its managed print services push and the MPS Accreditation Program launched for partners.

Darren Cassidy, president of Xerox's U.S. Channels Unit, said the company accepts and manages the areas where partner overlap and conflicts do exist. But he added that the aggressive expansion of its channel partner base clearly demonstrates the current model's effectiveness.

"The end client is going to make the decision about the channel provider of their choice," Cassidy told CRN. "We certainly subscribe to that. One of the biggest advantages of our channel is we're still undercovered and underserved …  We manage the conflict carefully, accepting that there is some. To date, I can tell you we don't have too many problems that we don't resolve quickly."

Xerox also recently unveiled changes to its channel program designed to recruit more solution providers to sell print devices and services to small and midsized businesses. That would potentially put them in competition with certain Xerox partners who already sell to the SMB space. But Pete Peterson, senior vice president of global channel strategy, said that many Xerox print dealers rely much more on A3 and light production business coming from midmarket and enterprise companies than they focus on SMBs, which primarily consume A4 devices. Some Xerox partners echoed that outlook.

As the print industry continues to change, multiple Xerox partners have shared with CRN their focus on achieving differentiation through app development and strong managed print services delivery. One partner, who did not wish to be identified, expressed far more concern with commoditization of multifunction devices than potential channel conflict.

"That's what's going to differentiate us. We need people who can sell that and explain workflows," the partner said. "At some point, you get to where you have reduced costs to get them to upgrade their leases, and nobody's making money anymore. You're making a 5 percent margin on the hardware. You won, but did you really win? Xerox didn't."

Icahn and Deason only briefly mentioned Xerox's channel model in the letter, and went into much greater detail about their issues with the Fujifilm transaction as well as the existing Fuji Xerox joint venture. They point to the Fuji Xerox accounting scandal, Xerox's leadership history and the lack of a control premium passed on to Xerox stakeholders.

Xerox fired back with its own lengthy release, which pegged a number of Icahn's and Deason's assertions as false. Among them is the belief that Xerox would be better served by terminating its existing joint venture agreement with Fujifilm.

Xerox writes that this is "not a viable strategy," in part because Fuji Xerox is "the only potential (equipment) supplier that is not a direct competitor of Xerox. The company said it sources $1.6 billion worth of equipment, parts and consumables through the agreement.

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