Vendors squeeze mid-tier disties

Distributors who refuse to reinvent themselves as VARs are walking the plank, as yet more vendors show a willingness to bypass medium-sized wholesalers to get to the customers.

US-based software vendors Sage International and ACCPAC have become the latest manufacturers to swallow up their primary resellers in an obvious effort to secure a route to market for their products and to get in on the lucrative value added-services revenues from the solutions involved.

ACCPAC created a stir by clipping Brocker Vendor Services (formerly known as Sealcorp) distribution arm 1World from its channel model, while Tetra Professional Services changed its name to Inecom, following a merger with long-time business applications software vendor Sage International.

ACCPAC, a subsidiary of Computer Associates, bought out the assets and development arm of Smart Business Systems, its largest reseller in Australia/New Zealand. ACCPAC will improve margins through a two-way rather than a three-way split however David Holden, founder of Smart Business Systems and assistant vice president of research and development for ACCPAC says the consolidation is more about increasing visibility in the market to roll out ACCPAC's ASP offering.

The move has fuelled speculation that the traditional three-tier channel is in danger of becoming extinct for mid-tier distribution partners. In his 10 years in the Australian IT industry, Paul Dundas, general manager of Blue Planet Online, says the channel has thinned significantly.

"I don't think the middle-tier resellers will survive beyond another three or four years," warns Dundas. "There will be some mega-behemoth distribution channels but beyond that, I expect to see a consolidation of the manufacturing suppliers going directly to the consumer.

"It's a pretty scary position to be in, being a distributor at the moment. You're at the mercy of vendors who could change their strategies at any time. "Brocker Services CEO Chris Spring believes the issue is more complicated than simply cutting out tiers of the channel. While unable to speak at length, Spring said that "ACCPAC didn't buy Smart Business as a reseller - they wanted the skills". He added that Brocker is "very secure with its position in the market place".

After sustaining some hefty blows throughout this year - including the downscaling of its supply agreement with IBM and Novell suspending it altogether - the ACCPAC-Smart Business Systems merger is a kick in the shins for Brocker. With the market place getting more competitive and vendors getting smarter at talking directly with customers, Dundas believes the salvation for distributors is in value adding.

"If the second tier is pure distribution they're actually taking more margin than they're worth," he said. "The average IT wholesaler is probably working on about 5 per cent margins and on a $50,000 product, that's $250 to pick up a box and move it.

"By buying the company directly attached to the customer, you stand to make a 20 per cent margin increase."

From the vendors' angle, buying partners has become an effective method of locking in resellers and ensuring customer base.

"The smaller vendors require the channel because it's their distinct growth advantage but once you reach critical mass it's cheaper to market directly to the consumer and drive the business back into the channels.

"There has always has been a definite push towards the preferred supplier arrangement. But because the margins aren't there, they can't discount so much and they have to find another way of locking in the resellers," Dundas added.

According to Roger Bushell, director and owner of CHA distribution, vendors bypassing the channel is an issue he's been wrestling with forever. "Everyone's going to have a play with e-commerce," he says. "Companies like Compaq will start slashing everyone they can but all they're really doing is dropping Peter to pay Paul. At the end of the day, they need the channel because it works."