Trend Alert: Routes to market are diversifying (quickly) for IT vendors

A few different predictions are converging at once; Including new subscription/consumption models forcing new go to market strategies and accelerating disruption in distribution .

The global technology industry last year ($4.5 trillion of business/government spend on hardware, software, and services) was dominated by the indirect channel. In fact, 73.3% of all revenue flowed through, to, or with partners.

For over 40 years, the foundation of indirect sales has been two-tier distribution. Roughly 375 global distributors have driven most of the volume, including major broadline distributors TD SYNNEX (who is larger in revenue than Coca-Cola) and Ingram (larger than Cisco), value-added distributors in EMEA/APAC, and niche distributors. Supporting a very large audience of 500,000 sales/service VARs and MSPs with specialties across different geographies, industries, buyer types, customer segments, product areas, and delivery models.

More information about these companies can be found at the Global Technology Distribution Council (GTDC) whose members drive more than $150 billion in annual sales across North America, Latin America, Europe, the Middle East, Asia and Africa.

We have written in the past about headwinds facing the industry and the transformations that are underway by distributors as they adjust to a younger, digital-first buyer and new vendor business models such as subscription, consumption, product led growth, direct to consumer, and marketplaces. We also level-set channel leaders as the industry tends to get overzealous on the growth of hyperscalers, SaaS, managed services, and emerging technology. Staring at the pie chart above shows trillions of dollars of on premises hardware, software, and services that require smart orchestration.

IT Vendors now have more choices than ever to take their product to market. The vendor conversation starts with the total addressable market (TAM) of their product portfolio and then moves into a routes conversation to maximize the serviceable addressable market (SAM) underneath. Every vendor market is different – if you sell security, roughly 80% of it will be sold through partners. If you sell CRM software, less than 10% of it will be sold by partners (although 90% of CRM deals will be partner-assisted outside of the transaction).

Cloud software and infrastructure have been the primary driver of expansion in two-tier distribution. The average buyer will procure and provision 7 different products to drive an outcome and ranking integrations at the top of their buying criteria, and are increasingly looking at alternatives:

1.????Cloud distributors have the luxury of distributing bits instead of atoms, allowing them to avoid supply chain, logistics, warehousing, and capital/credit facilities. Focusing instead on supporting partners in front of new buyers – with different psychology, behavior, and elongated journeys – and scaling digital platforms that are designed to enhance partner experience. Private equity and venture capital firms have invested significantly in this market and fueled global capabilities and consolidation.

2.????Cloud marketplaces are growing at 84% CAGR and have moved from a future-looking trend, further accelerated by the pandemic, to a strategic and actionable routes-to-market (RTM) conversation with thousands of software and hardware vendors and services partners. Significant development dollars are being spent in channel-friendly private offers, multi-partner deals, and services multipliers. In fact, we are calling AWS a global “top 10” distributor by 2025.

3.????Technology Services Brokerages (TSB) are quickly moving from the telco agent model into the technology space. As communication and collaboration move from copper wires to the IT network, traditional business models are also moving into subscription and consumption (eg. UCaaS and CCaaS). The market has been ripe for consolidation as we have moved from 25 TSBs last decade to only a handful today. Earlier this month we had AppDirect acquire TBI, adding it to AppSmart and a number of other telco acquisitions - marrying marketplaces with distribution. Blockbuster TSD acquisitions last year included Telarus acquiring TCG and AVANT Communications acquiring PlanetOne. ScanSource acquired Intelisys years ago blending traditional distribution with telco.

4.????Aggregators have been the (somewhat) hidden two-tier distributors for decades. Major resellers have significant buying power, digital eCommerce, and logistics capabilities. For many smaller VARs and MSPs, these aggregators provide competitive prices, predictable stocking, excellent delivery, and a better overall experience in acquiring hardware and software. Large vendors such as Dell, HP, Lenovo, and Cisco don’t formally recognize these companies as distributors, but don’t actively discourage the behavior.

5.????MSP Platform Providers have grown significantly over the past 24 years and support 76,000 global MSPs (and many VARs) with a single pane of glass to manage their businesses and service their clients. Investments have been made to build larger more integrated platforms including remote management, backup and disaster recovery, documentation, security, and yes, digital marketplaces allowing for the procurement and provisioning of the broader MSP technology stack.

6.????Marketplace development platforms (MDP) have provided end customers, vendors, partners, and smaller distributors with scalable, white-labeled marketplaces. Much like other mature software categories, creating a marketplace is now solidly a buy versus build decision. In the past couple of years, billions of private equity dollars have created separation among the hundreds of MDPs with a handful of top players emerging. Offering very large catalogs of products and a one-to-many benefit of integration, this has become a cost-effective, viable route to market for many vendors.

To be clear, this is not another one of those “death of distribution” articles. In fact, it is the opposite.

Orchestration of customer outcomes today is more complicated than ever. It is almost impossible for a single customer, partner, or vendor to handle the permutations and combinations necessary for success. Working in an ecosystem requires a level of digital/physical orchestration, resources, and skills that are best suited for distribution.

The competition for this distribution opportunity is now 7 layers deep. The technology industry is doubling in size (this decade) and trillions of dollars will transact indirectly through, to, and with millions of partners. We are looking at this three dimensionally – what will be the mix across the 7 layers of the total pie and then, subsequently, who will be the winners in each layer?

Exciting times indeed!

Read more about trends in channels, partnerships, alliances, and ecosystems:

1. How to successfully build channel ecosystems to drive subscription and consumption models
2. Have the industry’s channel chiefs really moved to an ecosystem model?
3. Channels Ecosystem Landscape
4. Canalys outlook: 2023 predictions for the technology industry
5. Use the bottom-up approach to grow your partner base