Is Channel Distribution Merging in the Cloud?

By Khali Henderson

A Look at Emerging Collaboration & Competition Between Master Agents & Distributors

Distribution is a critical link in nearly every supply chain. IT and telecom are no different. Distributors like Ingram Micro Inc., ScanSource Communications, SYNNEX Corp., Tech Data Corp. and others help manufacturers deliver IT and telecom hardware and software through VARs and dealers to business customers. Separately, master agents like Intelisys, MicroCorp Inc., Telecom Brokerage Inc. (TBI) and WTG help telecom service providers deliver phone and Internet services through telecom agents to businesses. These distribution channels have evolved side by side for two decades, but now convergence of IT and telecom technologies as well as the emergence of service-delivery models like cloud are changing that, making their once-distinct roles less clear.

“As technology converges, so will partner types and the supply chain that supports them,” said Tiffani Bova, vice president of research for Gartner Inc. “Master agents and IT wholesale distributors will continue to play an integral role in the delivery of technology solutions to their downstream channels; however, both will need to invest in more advanced services to ensure their relevancy remains intact as cloud adoption continues to rise.”

Lane Changes

In pursuit of the end-to-end solution, a few master agents have added a couple of telecom and/or IT hardware/software brands to package with connectivity services. TBI, as one example, sells IP PBXs from ADTRAN Inc., while WTG offers mobile bridges from Top Global USA Inc. and IP PBXs from Fonality Inc. In these cases as well as most others, the master agencies are not fully duplicating the role of the traditional equipment distributor as they are not offering a range of suppliers nor do they typically handle credit, logistics or pre- and post-sales technical support, which are left to the manufacturers’ services organizations.

Interestingly, some master agents like Digital Planet Communications Inc. have put bundled telecom and IT gear/services at the center of their strategy while others like X4 Solutions and Telarus Inc. have made the opposite choice. “We do not have any plans to provide IT or communications hardware/software through our channel,” said Patrick Oborn, vice president of business development for Telarus. “There are plenty of places that can do this better, faster and cheaper than we could, but most importantly, that’s not our core business.”

While sticking to their knitting is a primary reason for eschewing hardware/software distribution, some master agents also are concerned about competing with VARs a growing channel for their core carrier services. “To enter the hardware space, in particular, would be to compete directly with our existing and prospective partners. That is an area [wherein] we would rather support their efforts than compete with them,” said Curt Allen, president of X4 Solutions.

Competition with channel partners also has been a concern for distributors in adding carrier services to their portfolios. Brian Cuppett, vice president of merchandizing for ScanSource Communications, explains: “In many cases we’re providing hardware to many of the service providers that would like us to sell their services, and choosing one over another could cause a distributor challenges.” Because of this, ScanSource Communications is exploring alternative ways to satisfy both the service providers’ hardware requirements and their interest in selling services through ScanSource Communications’ VAR network.

For other distributors this has not been a particular hang-up though their forays have been limited in scope. Ingram Micro, for example, operates a mobility division, Ingram Micro Mobile, that includes carrier services from the big four wireless operators Sprint, Verizon, AT&T and T-Mobile USA. Tech Data also has a mobility unit, TDMobility, which was formed as a joint venture between Tech Data and BrightStar in summer 2011 based on BrightStar’s acquisition of a wireless master agency.

Noticeably absent from the distributor line card is carrier wireline services. That is changing with the fall 2012 deal between TD Mobility and MicroCorp. TDMobility now offers carrier services through MicroCorps contractual relationships with more than 50 service providers. In addition, MicroCorp will manage all pre- and post-sales functions, while VARs will be able to monitor opportunity and order status through Nautilus, MicroCorps carrier services management system.

Such alliances between master agencies and distributors are not unprecedented. In 2008, for example, WTG signed with Westcon Group Inc. to provide SIP trunking services from its carrier suppliers as part of Westcon’s CollaborationPoint OpenSource solutions program, which supports Asterisk-based open-source telephony platforms from Digium Inc. paired with open standard SIP trunking.

Collision Course

As it concerns core services offered by master agencies and distributors, the overlap presently is slight and, as noted, occasionally assisted by partnerships between the two. Gartner’s Bova contends that the intersection will remain confined to specific legacy categories, such as mobility, networking and voice solutions.

Where there is more crossover potential is in emerging services, i.e., the cloud. That’s because cloud enables IT and telecom hardware and software capabilities to be delivered as a service. “As the market continues to move away from being product-centric to service-centric the overlap is bound to happen,” said Anurag Agrawal, CEO of Techaisle LLC, a channel-focused market research firm.

Indeed, both master agents and distributors are adding cloud-based providers of communications and IT hardware and software to their portfolios.

For master agencies, the combination of cloud services plus cloud-enabling connectivity seems to be a no-brainer. While it’s fair to say that most master agencies now offer cloud communications, their approaches to delivering “IT-as-a-service” vary. In general they all are cautious about the potential for conflict with their IT VAR channels. For WTG CEO Vince Bradley, this is a deal killer. “We see ITaaS as directly competing with the VAR community, so we have avoided it,” Bradley said.

Others like X4 Solutions’ Allen tread lightly, positioning competing as-a-service offerings as “another bite at the apple” for customers that prefer an alternative delivery model to on-premises hardware/software. Telarus’ Oborn said his company doesn’t push the IT as a service offering with its VARs, instead packaging them for telecom agents that can “layer on the products without too much of a change from their current models.”

The layered approach is not lost on distributors. Tech Data, for example, is offering software as a service (SaaS) to its VARs, a strategy that also dovetails with its TDMobility offers. “As the world moves to cloud, we aim to provide those cloud solutions in a SaaS format while also providing the required connectivity to these platforms,” said Charles Kriete, executive vice president for TDMobility.

SYNNEX takes a similar view with its CLOUDSolv UC offering. “We bundle the carrier, the platform and the hardware,” said Reyna Thompson, vice president of product management for SYNNEX. “We smooth everything out on the front end for the reseller so the compatibility is worked out beforehand.” SYNNEX also goes one step further, adding professional services through its SERVICESolv group. “If the reseller wants to sell hosted voice and they don’t want to go out and install, they can enlist SYNNEX SERVICESolv professional services group to execute this on their behalf,” Thompson added.

Master agencies however, seem to avoid this part of the equation. “We have experienced that many master agencies are already providing telecom hardware as hosted/cloud-based solutions. However, they will stop short at that point as most won’t want to have technicians, trucks [and] overhead to implement the hardware services,” said Kyle Miley, president of Sonoran Integrations, a VAR that also sells telecom services.

SYNNEX’s Thompson cites technical capabilities as a clear advantage for distributors. “As industry complexity grows, we can integrate products from our core distribution into these services while the master agent isn’t capable of this,” she said.

While Thompson’s observations may reflect the state of the master agency model today, some forward-looking master agencies are building internal organizations to handle more complex pre-sales engineering and post-sales integration requirements for cloud customers.

Even with master agents’ expanding to include these capabilities, the distributors’ traditional model of providing hardware and software for deployment in a data center better aligns with cloud-building opportunities that many VARs want to pursue. These include becoming a cloud provider, building the platforms for other cloud services providers or building private clouds for their business customers.

That said, master agencies have a leg up on distributors when it comes to understanding the recurring revenue model of cloud-based services, said Jessica Mayo-Pike, business development leader for advanced services at IPLogic Inc., a Cisco Gold Partner, and Intelisys subagent. “They have expertise to guide channel partners in understanding how to achieve their targets, how to best compensate their sales forces and other best practices associated with a subscription-based revenue model,” she said.

Cloud Road Map

The inherent differences in the core business models of master agents and distributors may influence the suppliers and partners that they align with such that their cloud ecosystems may not necessarily mirror each other’s.

On the supplier side, most master agents interviewed for this article said they were sourcing cloud services primarily from their existing carrier suppliers, which have developed their own cloud services or acquired data center providers with cloud services offerings. One of the key reasons was to ensure fair contracts from companies unfamiliar with compensating sales partners for subscription services. Another is that startup cloud service providers pose a greater risk of folding, leaving the customer stranded and the partner unpaid.

As noted, distributors most likely will corner the market on cloud-enabling gear/software, but most sources predicted that there would be commonality between the cloud services suppliers served by master agents and distributors. Examples include leading carriers and data centers/hosters as well as companies like Mitel Networks Corp. and ShoreTel Inc., which each have premises and cloud services offers that are sold through distribution.

“I do think master agents and distributors will represent the same suppliers,” said Jeff Nolan, vice president North American channel development for Mitel. “Competition will force them to differentiate their offerings based on logistics, financing, market/branding and combine them with other offerings that they have today.”

Gartner’s Bova agreed. “Without value-added services there is little to compete on if everyone is offering the same services except price. Falling back on a lowest-price strategy is a slippery slope and one which is not sustainable over the long term,” Bova said.

While their cloud supply bases may have some similarities, it remains to be seen if master agents and distributors will be successful courting partners outside their traditional spheres of influence.

“The question is whether to focus on recruiting new partners or working to get the existing partner ecosystem to expand into new areas,” Bova said. “The answer will depend on the willingness of the master agent or distributor to invest in training and enablement tools to help their respective partner bases get into new product categories.”

Some partners already are looking across the traditional aisle to find their cloud-enablement partner. VAR IPLogic signed first with master agency Intelisys to offer cloud services. IPLogic’s Mayo-Pike said her company isn’t “shying away” from the distributor programs, but it purposefully wants to keep its cloud partnerships limited while learning a recurring revenue business.

“The value they add as a master agent is helping their existing reseller base understand recurring revenue businesses, training for and enabling the transition of product sales to recurring services and helping these resellers aggregate multiple hosted services on a single bill,” said Mark Arman, vice president of international sales and worldwide distribution for ShoreTel, which offers premises-based UC as well as cloud-based UC through ShoreTel Sky (via its acquisition of M5 Networks in early 2012).

“If the distributors do not adapt, partners will migrate to where the business is easy to do and have a higher margin,” Arman added. “If a master agent builds the right services and pricing model and the partners can understand recurring revenue, their model may be more attractive in the long run.”

On the flip side, Jeremy Kerth, president of telecom agency Wired Networks, said his company has had to seek out distributors to support its effort to “stay relevant and competitive” by offering hardware, software and also cloud services. “As an agent of the future, we not only need to be able to sell [cloud], but we will likely need to be able to design and build it too,” Kerth said. “It has become more apparent that master agents stand to lose long term if they don’t start to offer more of the traditional VAR-type distribution services in order to  build relationships with those entities that have major building blocks to the cloud.”

Analyst Ryan Brock, vice president of worldwide SMB cloud and channels for AMI Partners, might agree. He argued that “with the cloud, there isn’t a lot of value in aggregation. Where the value lies is in meaningful integration.”

That said, he gives neither master agents nor distributors good odds for attracting new partners or retaining their existing ones for cloud services. That’s because small and medium businesses are turning to cloud providers directly for help. “SMB customers and their partners don’t have the patience or risk tolerance to wait for traditional [information and communications technology] distributors and agents to figure out how to effectively support them across a range of cloud solutions,” Brock said. “This is why we have seen many partners realigning with cloud vendors and hosters that have years of experience in offering and servicing hosted infrastructure and applications.”

Merge?

Nearly all sources said the relationships between master agents and distributors, if any, were more likely to remain collaborative than competitive at least in the short term.

“They would be best to work as collaborators today as what they provide is still very differentiated. The barriers to entry into each other’s business based on each of their models is high,” said ShoreTel’s Arman.

Matthew Stevens, vice president of product line management and professional services for Cbeyond Inc., agreed. “‘Co-opetition’ may be the answer to the master agent/distributor relationship. All parties need to stop viewing the market as a zero-sum game, or a win-lose proposition. As technology advances and solutions change and at an ever-increasing pace, no one company can do it all.”  

Not everyone is optimistic that the relationships will remain collaborative, however. “[Their relationship will be] collaborative to an extent as some distributors outsource to master agents, but I see it becoming increasingly competitive,” said Stephan Tallent, director MSSP Americas, Fortinet Inc. “Distributors are operating in a hotly contested, low-margin business but have strong cash flow and resources; they are investigating value-added services to increase channel wallet share. Many have added private cloud and telephony services to their portfolios as well as training services.”

A third option is merger. “If distributors and master agents possess the right skill sets and have qualified people, it will make sense to consider a merger,” said Greg Praske, CEO of telecom agency ARG. “This business cycle appears to be much more intense and growing rapidly. There simply may not be the time to build in and thus [they] may have to buy it.”

Nearly all sources said the most likely scenario would involve a distributor buying a master agent by virtue of the distributor’s greater size and the master agent’s narrower focus. “I think a distributor might look at the acquisition of a master agent with strong technical sales capabilities, process management software and/or a solid back office to check the telecom box,” Fortinet’s Tallant said. In fact, Tech Data already has done this, by bringing  in a wireless master agency as the basis of its TDMobility unit.

Meanwhile, both master agents and distributors are going to continue traveling down their own pathways to the cloud.

Khali Henderson is editor-in-chief of Channel Partners.
Twitter: @khalihenderson
LinkedIn: www.linkedin.com/in/khalihenderson

MORE INFORMATION

Hear more from leading master agents and distributors on channel enablement in the Keynote Roundtable, “The Future of Distribution in a Converged IT & Telecom World,” at the Channel Partners Conference & Expo, Feb. 27-March 1, in Las Vegas.