CRN's Monthly Channel Research Report: March

Executive Summary

CRN surveys a variety of solution providers and corporate IT executives to compile three reports that detail near-term trends in sales expectations, best-selling technologies and market segments, and satisfaction with vendor channel programs. Below is a summary of our findings. The contents of the full reports start on page 2.

Solution Provider Outlook Survey

Solution providers overall near-term sales expectations decreased in February for the second straight month, but remain strong by historical standards. Notebooks continue to be the category with the highest sales expectations, while the volatile Unix sever category saw a particularly large decline in expectations. Given the recent spate of positive economic data, however, CRN believes the downward trends in sales expectations is only temporary.

Networking and security lead the way when it comes to the top 10 products and technologies that solution providers plan to sell or recommend to their business clients over the next three months. VPNs joined the list in February, along with branded notebooks. Anti-spam, wireless LANs and storage hardware all moved up the list in February compared to January. In contrast, branded desktops and servers fell out of the top 10, consistent with other CRN research data showing a surge in the percentage of solution providers citing custom systems as their overall best selling desktops and servers.

Security tightened its hold on the list of the 10 categories with the highest near-term sales expectations, with VPNs joining the list last month. The VoIP technology category, which holds second place on the top 10 list, deserves special mention because solution providers' sales expectations have soared in recent months. In both January and February, 64 percent of those surveyed expected sales growth of six percent or more in this category over the following three months. This was up from 53 percent as recently as November and well above the 47 percent figure in March 2004, the first month for which data is available.

Business Technology Spending Survey

Other CRN research data show that midsize companies (those with between 100 and 999 employees) are likely to boost spending moving into the second quarter of this year, with both Internet-related, hardware and software categories seeing a higher level of spending priority. Internet categories that should offer strong and growing opportunities for solution providers over the next three months include security, Intranet development, wireless, Web services and supply chain management. Hardware and software categories showing increased interest among midsize companies include desktops and notebooks, PC and Unix servers, and storage.

Channel Satisfaction Survey

Despite an uptick in February, there continues to be a longer-term downward trend in the overall level of satisfaction among channel partners with both vendor and distributor channel programs. Vendor such as Oracle, Symantec, Lexmark, AMD, Cisco and IBM (for both hardware and software programs) have seen their channel satisfaction ratings decline between November and February. Seven vendors have seen improvement, including Viewsonic, 3Com, Hewlett Packard, Sun Microsystems, Microsoft and Samsung.

The data continue to show that changes in channel loyalty generally mirror changes in channel satisfaction. Five of the top six vendors in terms of satisfaction are also among the top six in terms of partner loyalty. And four of the bottom six vendors in terms of partner satisfaction are also in the bottom six in terms of channel loyalty.

SOLUTION PROVIDER OUTLOOK SURVEY

A. Solution Provider Sales Expectations

For the second straight month, solution providers’ trimmed their overall near-term sales expectations. Data from CRN’s Monthly Solution Provider Survey show the overall spending expectations index was 91 in February (with May 2000=100) compared to 117 in January. The February figure was higher, however, than the reading of 86 in the August survey, taken six months earlier.

All seven hardware and software categories surveyed showed declines in sales expectations in February, with the volatile Unix server category seeing a particularly sharp drop. Longer-term data, however, show that for the most part sales expectations continue to trend higher. With the exception of Unix servers and peripherals, sales expectations in February were above those seen six months earlier.

Moreover, CRN believes that the recent decline in sales expectations is only temporary. At the time the February survey was being compiled, economists were expecting tepid economic growth for the first quarter of this year, and this was reflected in weaker solution provider sales expectations. As the chart shows, all seven basic hardware and software categories saw declines in their index numbers compared to January, with the volatile Unix server category showing a particularly sharp drop.

A raft of economic reports released since early March, however, have put a much more upbeat tone on the economy, with economists now raising their forecast for GDP growth in the January to March period. Critically, it also appears that business investment spending is finally becoming a major driver for economic growth, at a time when consumer spending growth shows signs of slowing.

As a result, CRN has raised its forecast for business technology spending growth for all 2005 from the mid single digits to the upper single digits in percentage terms. CRN also believes the recent decline in solution provider sales expectations is only temporary and that expectations will rebound once the channel has had time to assess the recent improvement in business conditions.

Solution providers’ expectations for sales to the large company market cooled in February compared to January, though the figure is still quite strong when compared to recent trends, as the chart shows.

Sales expectations to the midsize company market showed little change in February. Last month’s figure was considerably higher than it was six months earlier (In August) demonstrating that in the longer term, sales expectations for this market segment continue trending higher.

Channel sales expectations to the small business market increased significantly in February to one of its highest levels since CRN began compiling data three years ago. This is consistent with data from CRN’s Business Spending Survey, which show an increasing percentage of small businesses likely to boost technology spending (particularly for Internet-related categories) over the next 12 months.

B. Solution Provider Recommendations To Business Customers

The list of the top 10 products and technologies that solution providers plan to sell or recommend to their business clients over the next three months showed VPNs joining the list in February, along with branded notebooks. Branded desktops and branded servers fell out of the top 10, consistent with the sizeable increase in the percentage of solution providers citing custom systems as their best selling desktops, notebooks and servers.

The percentage of solution providers planning to sell or recommend increased in February in all 10 categories, reversing the sharp declines seen in January. Security and networking continue to dominate the top 10 list, with a total of six categories represented.

Anti-virus remains the top category in terms of the percentage of solution providers planning to sell or recommend. Wireless LANs, however, moved up the list in February compared to January, going from fourth place to second place. Anti-spam also moved higher, from seventh place to fifth place, along with storage hardware, which jumped from tenth position to seventh. In contrast, networking hardware, networking software, and firewalls each dropped one position on the list.

The VPN category deserves special mention in this month’s Report, as it was the only category to break into both the top 10 list in terms of solution providers’ plans to sell or recommend as well as the top 10 list in terms of solution providers near-term sales expectations. This result is not surprising, given the increasing trend toward mobile computing and the increasing need to secure mobile systems.

C. Hot Growth Categories

Along with the hardware and software categories listed in Section 1 above, CRN asks solution providers to rate their near-term sales expectations for a much wider range of product and service areas as part of its Monthly Solution Provider Survey. From this data, the list of the 10 categories with the highest near-term sales expectations can be derived.

Security continues to dominate the list, with five different product categories represented. In February, VPNs entered the top 10, joining anti-spam, anti-virus, firewalls and intrusion detection. Networking is also well represented, with wireless LANs and networking software also on the list.

The VoIP technology category again deserves mention because solution providers’ sales expectations have soared in recent months. In both January and February, 64 percent of those surveyed expected sales growth of 6 percent or more in this category over the following three months. This was up from 53 percent as recently as November and well above the 47 percent figure in March 2004, the first month for which data is available. This trend is not surprising; voice-over IP has now entered the mainstream as a technology solution and can offer a quick and sizeable rate of return to businesses of all sizes.

Each month, CRN randomly surveys its readership on a wide range of topics, including (but not limited to) near-term trends in sales expectations, best-selling technologies and market segments, and how solution providers are incorporating custom systems into their business models. Several hundred responses are received from solution providers on a monthly basis.

BUSINESS TECHNOLOGY SPENDING SURVEY: MIDSIZE COMPANIES

Midsize companies are likely to show additional strength in technology spending going into the second quarter of this year, with both Internet-related, hardware and software categories seeing a higher level of spending priority, according to data from the February CRN Business Spending Survey.

Fifty percent of midsize companies (those with between 100 and 999 employees) surveyed expected to increase their technology budgets over the next 12 months. This is up four percentage points from November, the last time these businesses were surveyed. Only 12 percent of midsize companies surveyed said they expected to reduce technology spending in the coming year, compared to 16 percent that said the same in the November survey.

In addition, midsize companies that are planning to boost spending are likely to make significant new technology investments. More than half of these companies plan to increase spending by more than 15 percent over the next 12 months, as the chart shows. And 81 percent of these firms are either "extremely" or "strongly" committed to actually carrying out these planned increases in spending. This is slightly higher than the 79 percent figure in the November survey, and is a sign that these companies remain strongly committed to spending growth.

Additional data indicate the level of spending priority, or the relative importance of spending, increased in the February survey compared to the November survey in 13 of the 19 product categories polled. Last month's figures were also at or above year-earlier levels in most product areas (particularly Internet-related categories), showing that midsize company technology spending should continue to have staying power as we move from the first quarter into the second quarter of this year.

Internet-related categories that should offer strong and growing opportunities for solution providers over the next three months include security, Intranet development, wireless, Web services, and supply chain management. Hardware and software categories showing increased interest among midsize companies include desktops and notebooks, PC and Unix servers, and storage.

Each month, <I>CRN</I> surveys between 125 and 200 business technology executives in a different market segment. The market segments are rotated on a monthly basis, so that each segment (small businesses, midsize companies, and larger firms) is surveyed once per quarter, or four times a year. <I>CRN</I> asks technology executives a wide range of questions, including sending priorities for hardware, software, and Internet-related categories, potential changes in technology budgets, and the factors that influence business technology spending plans.

Channel Satisfaction And Channel Loyalty Survey

Despite an uptick in February, there continues to be a longer-term downward trend in the overall level of satisfaction among channel partners with both vendor and distributor channel programs. (The overall satisfaction level is defined as the percentage of solution provider partners satisfied with channel programs minus the percentage that are dissatisfied).

In February, for example, the average figure for all 19 vendors surveyed was 46 percent, up two percentage points from January but down four percentage points from November 2004. The maximum possible reading is 100 percent.

Twelve of the 19 vendors surveyed have seen their overall channel satisfaction rating decline between November and February, including Oracle, Symantec, Lexmark, AMD, Cisco and IBM (for both hardware and software programs).

Seven vendors saw improvement in their channel satisfaction ratings in the same period, including Viewsonic, 3Com, Hewlett Packard, Sun Microsystems, Microsoft and Samsung. The latter three vendors now stand at the top of the list as far as partner satisfaction is concerned.

The results for distributors are hardly more encouraging. The overall satisfaction rating for the top four distributors as a group has sunk five percentage points since November, even with a slight uptick in February. Three of the four individual companies (especially Synnex) have seen their ratings decline, while Tech Data eked out a small increase. And it is still the case that solution providers still give markedly higher satisfaction ratings to their vendor partners compared to their distributor partners.

CRN is using three-month moving averages of the data in order to provide more reliable trends in channel satisfaction and channel loyalty. Three-month moving averages help eliminate some of month-to-month variations that can take place in these figures due to unique events unrelated to longer-term changes in satisfaction or loyalty.

In the case of vendors, channel loyalty is holding up better than channel satisfaction. The overall channel loyalty rating (defined as the percentage of solution providers citing a "high" level of loyalty minus the percentage citing a "low" level of loyalty) for all 19 vendors as a group edged up one percentage point in February, and has shown no change on average since November.

There has been significant movement in loyalty ratings among individual vendors, however. Ten of the 19 surveyed have seen their loyalty ratings drop since November, including Cisco, Oracle, IBM (for both hardware and software programs) Novell, Hewlett-Packard, Dell and AMD. Nine other managed to increase their loyalty ratings, including the top five vendors on the loyalty list-- Microsoft, Intel, Citrix, Sun Microsystems, and Samsung.

For distributors, however, the drop in channel satisfaction has been matched by a decline in channel loyalty. The overall loyalty rating for all four distributors as a group dropped five percentage points in February, and is down four percentage points since November. Three of the four individual companies have seen their loyalty ratings fall in the November to February period, with only D&H able to hold its rating steady.

The data continue to show that changes in channel loyalty generally mirror changes in channel satisfaction. Five of the top six vendors in terms of satisfaction are also among the top six in terms of partner loyalty. And four of the bottom six vendors in terms of partner satisfaction are also in the bottom six in terms of loyalty. Citrix is a glaring exception; this vendor maintains a high level of channel loyalty despite having a relatively low channel satisfaction score.

Each month, CRN randomly surveys its readership to ascertain their level of satisfaction with vendor and distributor channel programs, as well as their level of loyalty to their vendor and distributor partners. A total of 23 vendors and distributors are covered in the survey.

John Roberts is CRN's director of research. He can be reached at [email protected].