GTDC: Behind The Scenes, In Front Of The Distributors

The annual meeting of the Global Technology Distribution Council, held Sept. 22 and 23, brought together the largest IT distributors in North America and from other countries as well to discuss the economy, IT drivers and business in general. was there to not only look at how IT distribution is faring during the economic downturn, but to visit with many of the top distributors to learn about their particular plans.

Global IT distribution is a $100 billion-plus industry, and vendors increasingly recognize the value of distribution as the best way to reach customers, said Tim Curran, CEO of the GTDC (left, talking with Dan Schwab, co-president of D&H).

The GTDC recently surveyed top vendors such as Hewlett-Packard, Cisco and Avaya about their costs of distribution under NDA via a third-party analyst and found that of all the ways vendors reach customers -- via distribution, direct to VAR, direct to customers, over the Internet -- their costs were lowest through two-tier distribution.

The key is scale, Curran said. "Distribution has extraordinary scale," he said. "The vendors can create brilliant software and products. That's their specialty. They don't specialize in going to market."

The other reason is people, Curran said. "Vendors are cutting workers," he said. But they can continue to reach customers by leveraging the power of distributors."

After a brief introduction from Curran, Tom Dolan, chairman of both Westcon and the GTDC, took the stage with opening remarks before introducing the main speaker, Dominic Orr, president and CEO of Aruba Networks.

Dominic Orr, Aruba Networks president and CEO, said one of the key drivers of technology is change in the workplace as employees become more and more mobile.

For instance, he said Aruba, like several other companies, has found that by abolishing vacation policies, they can experience an increase in employee productivity. Instead, such companies let employees take any time off as long as they get their jobs done, Orr said. "This helps employees alleviate the struggle between work and life," he said.

Three megatrends are leading to what Orr called a "virtual work force," including the geographical dispersal of employees, the increasing use of personal devices by employees to do their work away from the office and the increasing availability of virtualization technologies.

These trends are forcing companies to look at better ways to accommodate their increasingly mobile employees, Orr said.

One way to accommodate mobile employees is to configure wireless LANs with the new 802.11n standard, which Orr said will help customers adopt new ways to improve quality-of-service, security, network and device management, and location services.

Companies also need to reconfigure their WANs with new ways of handling wireless connectivity, including the adoption of more consumer-like products.

This is because business-class broadband, in terms of dollars per Megabyte per month, costs about 20 times that of consumer broadband and DSL, Orr said. "When there's a 20-X difference, someone will find a way to make it good enough for 80 percent of the users," he said.

Businesses will also have to adopt new security technologies that can scale to meet the needs of mobile workers on cloud computing, Orr said. For instance, with 25,000 mobile users, a company can't have 25,000 firewalls, but instead has to virtualize edge security functions into the cloud.

GTDC presented its Rising Star awards to the vendors with the best distribution sales growth according to analyst firm NPD.

Curran (left) and Dolan (right) handed out bronze, silver and gold awards in each of four categories.

For software publishers with distribution sales of at least $15 million, GTDC's bronze award went to VMware, the silver to IBM and the gold to Red Hat.

For hardware vendors with sales between $15 million and $100 million, the bronze award went to McAfee, the silver to Philips and the gold to CheckPoint.

In the $100 million to $500 million hardware sales category, NetApp took the bronze award, Asus the silver and Sharp the gold.

And in the $500 million-plus hardware sales category, Lexmark won the bronze award, HP the silver and Cisco the gold.

Dave O'Callaghan, Cisco vice president of worldwide channels and distribution, received his company's award from Curran and Dolan.

Dolan started out the second day of the conference outlining some of the changes distributor members of GTDC could expect.

A big change is growth of the organization, especially internationally, with the signing up of new distributor members in Poland and Italy.

As the organization expands around the world, Dolan said questions increasingly arise about business ethics. Therefore, the GTDC has adopted a new "Partner Code of Conduct" under which members agree to conduct business in an ethical manner.

"This brings more efficiency to the business and a higher degree of transparency," Dolan said. "We ensure our vendors that we comply to anticorruption regulations."

Dolan also said that Bob Dutkowsky, CEO of Tech Data, will take over as chairman of the GTDC next year. The chairmanship of the organization rotates on a yearly basis.

IT sales through distribution rose 3.5 percent in 2008, but that was a tapering off of the strong growth of prior years, Curran said.

Between 2007 and 2008, revenue growth for both distributors and vendors was the same, which was good news for the channel, Curran said.

"Vendors have access to high-growth markets like China, so we believe distribution growth was higher than vendor growth in established markets like the U.S.," he said.

IT distribution operating margins grew in 2007 to 2.4 percent, but dropped to 2 percent in 2008. However, the operating margin volatility is actually quite low compared to the entire spectrum of distribution, Curran said.

"The bottom line is, this is a healthy industry," he said. "This is a productive industry."

Total sales through IT distribution were at their recent lowest in January of 2009 thanks to the economic downturn, and have been climbing back since, Curran said.

Paul Otellini, Intel president and CEO, fresh from his keynote presentation at the Intel Developers Forum (IDF) the day before, sits in the front row during the morning GTDC presentations waiting for his turn on stage.

Otellini said the consensus in the industry is that IT will experience double-digit growth, with some observers predicting a 20-percent growth.

The only way to get 20 percent growth is an industrywide PC refresh, which Otellini said is a real possibility. Windows 7 is getting released at a time when the average business desktop PC is five years old and the average notebook PC is four years old.

"We're likely to see, barring any other economic change, a PC refresh next year," he said.

To meet the needs of that PC refresh and the increasing use of non-PC mobile devices, Intel has made several changes since 2005 and 2006, when it laid off about 25,000 people, Otellini said. "We were too big, too fat, not building the right products," he said.

Intel is betting big on its Atom processor. The company licensed its Atom architecture to TSMC, one of the world's largest IC fabs, to help partners easily build it into their own products, Otellini said.

Intel is also moving its entire embedded processor business to the Atom, he said.

The Atom is also key to developing the $100 PC, which is needed to compete with non-PC devices. "There will always be a need for PCs," Otellini said. "But [demand for] lower-cost devices is growing."

Otellini also said that the success of app stores for Apple and Nokia products will lead to the creation of APIs and frameworks that will let developers write applications that run on any device.

And, while Intel is not planning to enter the app store business, some of its customers, including PC makers Asus, Acer and Dell, plan to do so.

Ingram was one of the first distributors to engage in selling managed services with its Seismic offering, said Greg Spierkel, Ingram Micro CEO.

It already has between 16 and 20 different services, including Software-as-a-Service (SaaS) offerings, and has more planned to meet the growing demand for cloud computing.

"Cloud computing will eventually be crucial for the channel," Spierkel said. "Small businesses can't manage everything from one site."

The IT market seems to be coming off the lows it reached in the economic downturn, Spierkel said. "But, and I mean but, at what point does the slope go up?" he said.

Vendors in general are making better use of the distribution channel, with Cisco being one of the fastest-growing vendors in terms of distribution sales, Spierkel said. HP, which saw distribution sales slip under former CEO Carly Fiorina, has also showed stability, he said.

Maintaining stability as Oracle acquires Sun Microsystems is a goal for Jeff Bawol, president of technology solutions, Americas, at Avnet.

Avnet has long enjoyed running combination campaigns with the two, Bawol said. "Our goal is to keep doing this until things change," he said.

For now, though, the two vendors are tight-lipped about the future. "I'm not sure they even know what will happen next," he said.

Bawol also said it is unclear how relations between Oracle and system vendors such as HP and IBM will change. "We haven't seen much change yet," he said. "But with all the new ads popping up, I'm not sure things will stay the same."

Avnet has been moving to focus more on solutions in the past year or two, particularly health care and SLED (state and local government and education), Bawol said.

"We've launched practices to help our resellers get into businesses they didn't do before," he said.

When asked how business will be affected by Oracle's purchase of Sun, Rich Severa, president of Arrow Enterprise Computing Solutions North America, responded with his own question: "Besides who would'a thunk it?"

Sun's SPARC innovation combined with Oracle's software strength is creating a lot of buzz, Severa said.

There are a lot of conversations going on between the two vendors, he said.

"We're helping Oracle get a grasp on what Sun is doing," he said. "We're mostly focused on being part of the due diligence with Oracle, and on what we can do with customers of Oracle and Sun."

The IT market in general remains challenging, Severa said, with customers deferring decisions when they can.

"It's become a safe way for customers to look at their spending," he said. "With the economic uncertainty, we still need to convince the CIOs and CFOs that there is a clear positive ROI before they will do something."

Tech Data last month opened a new configuration center in Fontana, Calif., to take part of the load off New Jersey center, said Kenneth Lamneck, the distributor's president for the Americas.

"Customers asked for the same thing in the West," Lamneck said. "Business in the California center is already up to 40 percent of what we do in New Jersey."

Tech Data took advantage of existing space it already owned to quickly ramp up the new configuration center.

The new center's equipment cost the distributor about $500,000, Lamneck said. "We get discounts from our vendors," he said. "They are very supportive. They benefit from it."

Another big Tech Data project is SaaS, Lamneck said. "We're doing a lot of work around how to help enable hundreds and thousands of IP partners find a cost-effective way to work with the channel," he said. "There are so many ways for them to do it."

D&H is unusual in that its business continues to grow despite the downturn. The privately held distributor reported in August a first fiscal quarter 2010 sales growth of 5.5 percent over last year, helping it gain distribution market share.

Schwab said September's sales were up in double digits compared to last year, and growth in the fourth calendar quarter of this year should be robust compared to a challenging year-end 2008.

"When the recession kicked in, a lot of companies cut back on salespeople and credit," he said. "We had the [former General Electric CEO] Jack Welch philosophy -- when business is down, it's time to invest. We added $40 million in credit, added new salespeople, and added new product categories like mobile solutions."

Growth will come from small businesses, Schwab said. "[Enterprises] walked away from tens of thousands of employees, and have a lot of unused technology."

Bell Micro, one of the IT industry's primary storage distributors, last month signed a distribution agreement with Pliant Technology to market and distribute its full line of Lightning Enterprise Flash drives throughout North America.

Bell Micro is expecting solid state storage to be a growth market, said Don Bell, president and CEO.

"It's not big yet, but it's growing very rapidly," Bell said. "We'll see more combinations of solid-state and rotational disks going forward. The cross-over point for solid-state and rotating storage should happen in 2013, and then the market will really take off."

Bell said that his company is seeing growth this quarter, with business getting close to the same level as last year. "We're seeing signs of a turn-up," he said. "We're seeing big customers buying again. So it's reassuring."

Rather than waiting for business growth to return, ScanSource is seeking it out in new endeavors, said Mike Baur, president and CEO.

This includes a move into physical security, a business that is currently very fragmented and not a focus of IT distributors, Baur said.

Physical security products, such as video cameras and intrusion detection devices are more and more being connected to IP networks. "But a lot of security dealers are not ready for IP networks," he said. "We can help them get the experience."

ScanSource is also expanding its opportunities with recent first steps into the Europe and Latin American markets, Baur said.

Software is also expected to be a growth area for ScanSource, which last month started a partner-to-partner exchange to help ISVs find a handful of partners looking for a specific application. "We can't sell that kind of software," Baur said. "But I want to facilitate the solution sale."

Westcon has been moving into the business of providing services to its solution providers such offerings as global procurement and deployment, reverse logistics for end-of-life products, and smart logistics for monitoring and optimizing operations, as well as ERP infrastructures to apply these services to projects around the world, said Dean Douglas, president and CEO of Westcon.

"Such services are becoming more and more a part of our business," Douglas said. "We are continuing to invest in this part of the business."

However, Douglas said, Westcon is being very careful in its approach to things like Software-as-a-Service. "Service providers, vendors, and our solution providers want to provide SaaS themselves," he said. "We don't want to compete with our customers."