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Adapt for the era of virtual distribution

Virtual distribution – the delivery of subscription services rather than physical products – is a growing IT trend. We consider what this means for channel businesses and how they can remain relevant in this changing IT world

This article can also be found in the Premium Editorial Download: MicroScope: MicroScope: A virtual world

At an investor conference in January, Tech Data CEO Rich Hume revealed virtual distribution billings were growing at 36% per annum and the distributor would “do a lot more virtual distribution moving into the future than we will physical distribution”.

Speaking at the 21st Annual Needham Growth Conference in New York, he said the distributor had surpassed more than $1bn of annualised virtual distribution billings, and forecast that growth in this area would outstrip Tech Data’s overall business growth by two-to-one, possibly as much as three-to-one.

Hume added that the shift towards higher growth rates in cloud, software as a service (SaaS) and infrastructure as a service (IaaS) would not necessarily affect the relationship between vendors, channel partners and customers. “The change is in the delivery model,” he said, “not necessarily in the relationship.”

His comments give rise to a number of questions. Is the shift to virtual distribution likely to be as pronounced as Hume believes? If it is, how prepared are distributors for that change? Will the relationship between vendors, distributors and partners really remain unchanged, as he argues? What role will resellers play in a virtual distribution model and what changes do they need to make to operate successfully in it?

Virtual distribution in action

Steve Armstrong, regional sales director at cyber security company, Bitglass, believes Hume is “likely right” in his predictions for virtual distribution. 

“Technology consumption has changed and traditional box shifting will slowly dwindle over time,” he says. “Users are sweating hardware assets far longer than before. We are in an as-a-service era so why buy a box to do X when you can rent a service that does X with none of the ongoing burden of maintenance, deployment and replacement?” 

It’s not as if this is anything new, he adds. “Most distributors have historically always had some element of virtual, for example ‘shipping’ software licence keys rather than physical hardware.”

So it’s quite possible that the logistical supply chain won’t change much, but the look and feel of a distributor might not require extensive warehousing and physical distribution facilities.

“There are several distributors in business today that do not carry any vendors which require hardware,” he notes, “so clearly the model is already working.” 

Hybrid is model of the moment

Alastair Edwards, chief analyst at Canalys, says virtual distribution is already a “big trend” in the distribution space, even if it isn’t achieving significant volumes of business in terms of overall revenue. It started with Microsoft, in particular, and other software vendors moving more of their business to a cloud delivery model, alongside a change in customer consumption models with the demand for subscription services.

“We’ve seen a lot of investment by big distributors which are having to face up to the reality of their future – to remain relevant they will need to have a play in an IT world that is moving further beyond the distribution of physical products”
Alastair Edwards, Canalys

“We’ve seen a lot of investment by big distributors which are having to face up to the reality of their future – to remain relevant they will need to have a play in an IT world that is moving further beyond the distribution of physical products,” says Edwards.

He adds that there isn’t any major distributor that hasn’t already considered this trend and built a strategy around it.

Nevertheless, Edwards believes the majority of distribution business will continue to come from physical products for a long time to come. “The cloud world creates opportunity for lots of physical products as well. The reality is we’re in a hybrid world,” he says.

Change in business mindset

Jason Hill, Exertis sales director for security and wireless, describes SaaS as a prime example of virtual distribution, with users preferring a licence model that you subscribe to with the benefit of always having the latest version and features. 

He accepts that it has led to “a change in business mindset” for vendors and resellers because of the shift to recurring revenues with smaller, but ongoing, subscription fees.

But there are benefits for all parties, says Hill. “For businesses, it provides a predictable cash flow, fewer issues with payment, continued entanglement, satisfaction and loyalty with the customer, and the ability to capture data that can track consumer trends and preferences at a level which can’t be achieved through a single purchase. Besides access to the latest versions, users get the benefit of consuming what they need, when they need it,” he says

Relentless servitisation

Mark Edge, chief revenue officer at CybSafe, believes distributors “have been forced to invest heavily in virtual distribution” in response to what he describes as “relentless servitisation”.

For a vendor like CybSafe, there were two choices, he says – partner with a pure-play specialist or with a big player that has made that investment. “There are distributors that we feel give us access to a greater market, but which we would simply not consider because the complexity and administration involved doesn’t fit our business model,” says Edge. 

The company opted for Cloud Distribution because it was able to understand and articulate the Cybsafe offering, but Edge says it was also impressed with its ability to remove friction.

“Resellers know they can deliver an almost immediate new revenue stream through an established and experienced virtual distribution partner,” he adds.

Growing demand for virtual solutions

Hanspeter Eiselt, chief marketing officer at Nuvias, agrees that virtual distribution has taken off in the UK and across the rest of Europe, and says Nuvias is witnessing higher adoption in its markets.

The distributor has seen growing demand for virtual solutions in the advanced networking and cyber security sectors. With some vendors struggling to redesign their software solutions to accommodate pay-as-you-use consumption models, distributors are racing to offer such solutions, he says.

Eiselt says traditional distributors are “struggling” with the shift from a one-time sale to subscription-style annuity streams because “their cost structure is based on upfront sales, rather than monthly instalments”.

Distributors adapting to new consumption models

Ed Baker, senior director for Europe, the Middle East and Africa (EMEA) partners at McAfee, says virtual distribution networks in security are already established and cloud-based because it has moved so heavily to software.  

To speed up market adoption “of the security platforms that will protect customers from device to cloud, vendors and distribution partners will likely require significant adjustments in the operating models that dictate how they collaborate and add value”
Ed Baker, McAfee

He observes that distributors “are aware of these changes and adapting to new delivery and consumption models, which are new ways of demonstrating value for shared partners and customers”.

Baker argues that distribution is already “highly capable of efficiently transacting and providing an excellent customer experience” for software in standard licensing models. But for cloud-based delivery of cyber security solutions, “we are at the start of a shared journey with our distributors”. If they want to speed up market adoption “of the security platforms that will protect customers from device to cloud, vendors and distribution partners will likely require significant adjustments in the operating models that dictate how they collaborate and add value”.

Distributors need to add new value

Bitglass’s Armstrong says virtual distribution represents a big change from the traditional role of distributors in areas such as supporting logistical growth, management of shipping and taxation.

“When products become intangible, distribution must offer far more value in business development,” he claims. “This means it is key that distribution takes on a more central role in channel management to ensure vendors see value in the relationship.”

“When products become intangible, distribution must offer far more value in business development. This means taking on a more central role in channel management to ensure vendors see value in the relationship”
Steve Armstrong, Bitglass

They also have to play that role with resellers, many of whom may just see the distribution partner as margin erosion now it is not physically managing hardware. “Professional services, user lead generation and generally providing higher value soft skills to the reseller community will be an important shift,” he says.

Key transformation strategies

Margaret Adam, AVP, European services, channels and alliances programmes, at IDC, acknowledges that transformation of the distribution business model is difficult, particularly when you consider the margins at which they operate.

“But we are seeing some positive signs, with a variety of strategies being deployed. We see a couple of key transformation strategies being deployed by different distributors: cloud marketplaces, incubation of next-generation technologies such as the internet of things (IoT), specialisation (particularly in cloud), representing startup/scaleups, and, of course, acquisitions,” she says. 

Adams believes distributors will play a much “more visible role” in connecting the ecosystem. “Partner-to-partner collaboration is a major theme in the industry, digital solutions are becoming more complex and require a mix of established tech, emerging tech, independent software vendors, services companies, developers and so on. Distributors could – and should – play a role here,” she says.

Adam quotes a recent IDC channel survey in western Europe which found that 40% rated “connecting me with other partners” as a critical distribution function. The same survey also found that “availability of a cloud marketplace” was in the top three most critical distribution functions for partners.

Focus on relationships

Canalys’s Edwards argues that distributors are starting to understand there is a lot more to do than simply putting the technology in place for virtual distribution platforms.

“What distributors have discovered is that building a platform and marketplace only gives you the delivery model,” he comments. Many of them haven’t been focusing as heavily on the relationship side as they ought to have.

With virtual distribution they have two different audiences to serve and they need to treat them differently. With traditional partners, there is “a lot of heavy lifting” in terms of educating them on how to package, position and sell cloud products and services and how to make money out of them. The other group may be more familiar with this approach, many of them possibly being born in the cloud, but possibly haven’t had much interaction with distribution before.

Managing the migration

Nuvias’s Eiselt sees an important role for distributors in managing the migration to virtual distribution.

“Vendors recognise the value add offered by distributors, and many struggle to support a wide and diverse base of resellers who have varying support requirements to be efficient and productive,” he says. “This is where distributors can step in to funnel tech support, order management, credit management and multivendor requirements for the migration to virtual distribution.”

Resellers want choices

One interesting point that Canalys picks up on is that even with a move to cloud platforms and marketplaces, resellers are still keen to work the way they always have by sourcing from a number of distributors. Initially, the expectation was that resellers would be tied to a single distributor if they used its marketplace and cloud platform, and that distributors who weren’t first to the party would be left behind and left out of that business.

“But in many cases, there is still a mentality of using two or three marketplaces instead of one,” says Edwards.

In other words, resellers are still defaulting to a traditional distribution model of spreading risk and seeking to work with more distributors. “I don’t think resellers want to be tied in. They may have a preferred platform, but they want a couple of others as well,” he says.

The other good news for distributors is that resellers “don’t want to go directly to a cloud vendor – they like the option of using a distributor”.

Virtual distribution will become more of an established business model over the next two to three years. Edwards notes that “it is still well under 5% of most distributors’ business” but says it is “growing fast and there’s a big growth opportunity ahead for distributors on this”.

What does this all mean for resellers?

As virtual distribution becomes more widespread, will that lead to a change in the role of the reseller?

Bitglass’s Armstrong doesn’t think so. “I don’t really see their [resellers] role changing in this model – they are the conduit to users for most vendors. As trusted advisors they will undoubtedly need to change their business models to reflect the as-a-service model their users have access to,” he says.

“While the business model might change, users still need their resellers as trusted advisors and SaaS vendors need resellers for their reach”
Jason Hill, Exertis

The bottom line, he says, is that the basic role for resellers “does not change” even if their internal revenue models change with a move to an annual recurring revenue business model compared to the typical capital expenditure approach many have focused on historically.

CybSafe’s Edge believes virtual distribution could be positive by enabling resellers to “have a more strategic conversation about solving problems and deliver a trial subscription through using customers’ usual purchasing preferences before they finish their pitch”.

And Exertis’s Hill is adamant that resellers will still have a place as virtual distribution takes off.

“While the business model might change, users – particularly small to medium-sized enterprises – still need their resellers as trusted advisors and SaaS vendors need resellers for their reach. Resellers and distributors can provide the platforms to make it easier for the model to operate and to help with the renewal process. For that reason, the channel remains as important as ever.”

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