Distributors lose industry share in 2011

IT distributors are in for a bumpy ride for the foreseeable future, according to a report from channel analyst firm, Canalys.
The report claims disties are not matching the growth seen in the rest of the industry. The Canalys IT Industry Titans (Apple, Cisco, Dell, EMC, Google, HP, IBM, Intel, Lexmark, Oracle, Microsoft and SAP) grew revenue by 18 percent worldwide on average in the first quarter of 2011. In comparison, the big four distributors (Tech Data, Ingram Micro, Arrow ECS and Avnet TS) managed 11 percent, with many smaller disties faring worse.
Distributors have blamed recent disappointing results on excess inventory, poor retail demand, sluggish sell-out and weakening economies. However, Canalys argues that distributors “need to realise that industry trends are now conspiring against them.”
The report outlines how distribution thrived for the last decade on the back of rapid notebook and netbook adoption and the virtualization of the server room, with the major PC, server, networking and application vendors all putting two-tier distribution at the heart of their routes-to-market for both B2B and B2C.
Poor position with pads
However, Canalys says it’s now clear these growth drivers have changed. For example, while mobility is still booming, it is now on the back of smaller devices, notably smart phones and pads. Canalys estimates that across North America and EMEA around 23 percent of smart phones ship through two-tier distribution versus a mere nine percent of pads (compared to 47 percent for netbooks and notebooks.)
Some of the new pad entrants, notably HP and Acer, will leverage distributors more than Apple, while others, such as RIM and Samsung, prefer the service provider route. Canalys says disties need the PC vendors to gain share in the pad market if they are to recover from the poor position that they currently hold.
Meanwhile, companies are building ever larger datacentres to serve their customers. Distributors are best placed to serve the mid-market, but they play a reduced role within the very large datacentres. Canalys believes the best they can usually hope for in the larger installations is a modest fixed-rate fee for equipment supply.
App store pressure
Also, the report warns distribution to prepare for a rapid decline in its client application software business, as vendors follow Apple’s move into the app store business. The decision by Apple to make the next version of its Mac OS X operating system available exclusively as a download will further increase the pressure on Microsoft to launch its own store, it says.
Canalys expects Microsoft to launch an app store for PCs within the next 18 months, perhaps as part of the launch of Windows 8. As familiarity with Office 365 increases, the proportion of that offering sold directly seems certain to increase quickly.
Distributors will be able to protect their software licensing business for some years ahead, as most customers are locked into multi-year agreements. But new business opportunities for client-based software licensing will surely diminish from 2011 onwards, it warns.
Finally, investment and IPO dollars will be cloud, not product, focused in 2011. Distributors have a role to play in the cloud, says the report. They will provide large parts of the infrastructure roll-outs. They can also serve as aggregators and deliver cross-platform expertise. But this business is likely to be very competitive, with plenty of investment behind new entrants. Distributors will have to fight hard, and be very smart, if they are not to lose relevance as the industry adopts the cloud.