Warren Buffett: IT Distribution 'Like Selling Jelly Beans'

Renowned investor Warren Buffett acknowledged the workmanlike value of IT distributors in a recent Q&A as he reflected on Berkshire Hathaway's past attempt to buy Tech Data.

Buffett – Berkshire's chairperson and CEO – and vice chair Greg Abel fielded a question about tech distribution at the massive holdings company's annual meeting.

Berkshire in 2019 made an offer of roughly $5 billion to buy Tech Data. The bid came shortly after Apollo Global Management announced its intent to acquire Tech Data.

Abel said Berkshire saw a "unique opportunity" in Tech Data and the distribution model; in turn, the Tech Data management team was interested in Berkshire investing in the company.

However, Apollo subsequently upped its bid to about $6 billion and successfully closed on the deal —with Berkshire known to never bid twice.

Apollo would go on to sell Tech Data to Synnex for $7.2 billion, leading to the formation of mega-distributor TD Synnex in 2021.

Five years later, Buffett and Abel were asked how they evaluate distribution businesses. Both noted Berkshire's positive experience investing in electronics distributor TTI.

It does require understanding the sheer scale of the model. Abel said the average piece of equipment TTI processes is worth about 9 cents, but 95 billion parts go through its warehouse every year. That makes for about $10 billion in revenue, he said.

“It’s a model that if you have the right people on both sides of the equation and you understand that, there’s a unique opportunity there," Abel said. "And that is something we saw in Tech Data.”

Buffett offered a measured assessment of the model, emphasizing the role distributors play in logistics.

"It’s not a business that you can dream about. It’s a decent business. For example, for many of the items, the manufacturers just don’t want to tie up their capital. If you have a million-plus SKUs, it’s like selling jelly beans or something like that," Buffett said. "You’re serving a purpose to a degree, but it isn’t your product, in effect. You’re just a good system for the producer of the equipment to get it to the end user without tying up a lot of capital being in a business they don’t want to be in. We understand, but there’s no magic to it.”

A backhanded compliment or a diss to the IT distributors? In the eyes of Alex Smith, vice president of channels at Canalys, Buffett's comments ring very positively.

"If you look at Berkshire Hathaway's portfolio, it's a lot of value investing — companies like Coca Cola and HP [that are] longstanding, reliable businesses that generate good return on working capital," Smith told Channel Futures. "It's much more that type of investing than it is high-growth, unicorn-type companies."

Canalys' Alex Smith

Berkshire's confirmed attempt to buy Tech Data speaks volumes, Smith said.

"Even though [distis] don't necessarily own their own products or own IP, the reality is that they can play an integral role in many technologies' go-to-market strategies, and they always will," he said.

IT Distributors Evolve

But have IT distributors morphed into a different breed of companies since Berkshire was eyeing Tech Data in 2019?

TD Synnex CEO Rich Hume said the role of distribution is becoming "increasingly vital" in the tech world.

TD Synnex's Rich Hume

"Our traditional core business serves critical segments like the PC ecosystem, providing the resources and logistics that allow our partners to free up more resources to go after new opportunities," Hume told Channel Futures.

Hume pointed to advanced technologies, included but not limited to AI and cybersecurity, which businesses are adopting at a fast clip. That fast pace of tech evolution makes both suppliers and customers (VARs) more dependent on IT distributors, he said.

"With this backdrop, our vendors rely on TD Synnex to help them accelerate the adoption of new technologies and bring those emerging offerings to the right places in the market at the right times," Hume said. "At the same time, our customers depend on us more than ever to help them understand and capitalize on the market opportunities represented by these new technologies. Through our unique vantage point at the center of the ecosystem, we can help our partners not only see where the opportunity is today, but also where it will be in the future."

What about the notion from Buffett that IT distributors don't own intellectual property? While Smith pointed to new software and platforms like Ingram's Xvantage, the core value of distribution remains the same.

"I think a lot of that is the cherry on top of 'Let's make some strategic bets,'" Smith said. "But I think the fundamental core value of distribution that keeps them in the overall market opportunity kind of stays the same."

TSDs on Distribution

On a different side of the indirect sales channel, a debate has waged over the proper nomenclature for technology services distributors (TSDs), formerly known as master agents. These companies historically held agreements with key telecom carriers and provided financial protection and back-office support to their subagents (now known as technology advisors), though their reach has expanded into software solutions and various IT suppliers. The TSDs and their advisor partners earn a residual commission from their vendor partners, rather than reselling a product to earn margin.

Some business leaders elected to call their companies tech service brokerages (TSBs), considering Remax a better way to explain their business. While TSDs similar to IT distributors functioned as an intermediary between the vendor and the partner, TSDs don't physically handle equipment as distis do and don't own warehouses to run logistics. That stems in part from the actual technology TSDs sell: cloud and carrier solutions that are delivered by the vendor to the customer as a monthly service, rather than equipment that the VAR buys and resells to the customer.

Telarus CEO Adam Edwards said a significant difference exists between the TSD and the disti.

“The traditional distributor aims to deliver a product from the producer to the business consumer, while focusing on the warehousing, logistics, purchasing and transporting of equipment. A TSD is the evolution of the traditional distributor model, uniquely positioned to enable complex purchasing decisions in a product environment that is increasingly cloud and remotely deployed," Edwards said.

Furthermore, technology advisors can source a wider number of suppliers for their business customers due to the fact that the model doesn't require them to earn formal certifications, as they can tap into the aggregate sales volume TSDs generate to negotiate with vendors.

"Thus, technology advisors can provide candid recommendations and creative solutions that always put the business consumer first," Edwards said.

Edwards said the TSD also plays the role of delivering and protecting commissions for the partner, giving them tools to grow their businesses, and evangelizing the sales model to partners and customers.

Drew Lydecker, president at Chicago-based Avant, said his firm views itself as a "platform for sales enablement."

“The points made by Warren Buffett and Greg Abel are valid, and we don’t disagree. This is why Avant has never liked the term ‘distributor.' It does not describe what we do because Avant doesn't sell widgets," Lydecker told Channel Futures.

Lydecker said the end goal of such a company is helping its partners – known by Avant as trusted advisors – to "drive confident IT decision-making for today’s most disruptive technologies."

“Trusted advisors, when enabled properly, bring economies of scale to service providers," he said. "That’s why I genuinely believe that in today’s complex, ever-changing IT world, direct sales are dead.”