When Will the Channel Die?

CHANNEL TRUISMS SERIES

Cloud computing is a disruptive trend, period.

The move to services-based IT delivery models and their corresponding revenue models is causing vendors, distributors and solution providers to rethink their entire way of doing business – technology skills maintained, go-to-market relationships, pricing and profitability models, future investments, and sales and marketing imperatives.

Change is scary and often expensive, which is why many solution providers have, or continue, to put off their transformation journey. They see it coming like train in the distance; it appears slow until it gets close, and then it just whizzes by. As the old saying goes, “Change happens slowly until it doesn’t.”

During a webcast yesterday with SMB Nation’s Harry Brelsford and Small Business Thoughts’ Karl Palachuk, we talked extensively about the disruptive forces of cloud computing and services transformation hitting the channel. The discussion prompted a member of the audience to ask, “How much time do we have to change?” A different way of asking the question: “How much longer before the channel dies?”

My answer: “Grab your towel. The Earth will end on a Thursday.”

It’s a rather silly question; the channel has no expiration date. Vendors and analysts love to tout the big numbers that show the growth and power of cloud computing and the IT services model. By best estimates, the cloud computing market will top $250 billion by the end of the decade. It’s a spectacular growth curve.

Few, however, put the cloud number into context. By the end of the decade, global IT spending will top $4 trillion annually, making cloud computing a little more than 6 percent of total IT expenditures. Of course, this assumes the services trend doesn’t result in a technology market contraction. If that happens, let’s assume global IT spending is only $3 trillion by 2020. In that scenario, cloud computing’s share increases to 8.3 percent.

>> CHECK OUT: Channelnomics’ 10 Big Cloud Spending Numbers

These aren’t exactly numbers that would indicate a mass extinction event in the channel. If these numbers were asteroids, dinosaurs would still be walking the earth.

The problem: These transformation trends won’t be uniform. Different parts of the country and world – as well as different market segments and industries – will have different levels of adoption. The U.S. and other developed nations will have huge upticks in cloud and services because IT maturation and cost containment pressures will compel model changes. The developed world has the infrastructure, too, to support broad application of cloud-based services.

Some industries will be reluctant to move to cloud computing and services-based IT. Government agencies and financial services are less likely to have a mass migration to services as they are more risk-adverse to disruptions. Low-margin industries such as hospitality and high-volume manufacturing will likely stay on conventional platforms for the foreseeable future, waiting for the rest of the world to work out the services kinks.

We can see the bifurcation of the haves and have-nots today: IT vendors are building products to meet the needs of both technology consumers. For companies that want cloud and services-based IT, there’s software-, infrastructure- and platform-as-a-service. For companies that want to maintain the status quo, plenty of conventional technology remains. Look no further than Microsoft Corp., which is marketing conventional and cloud versions of just about every product in its portfolio. The SMB Nation webcast was precipitated by Microsoft discontinuing the popular Small Business Server in a move intended to push more businesses to cloud hosting services.

IT vendors love the idea of cloud and services as it finally breaks the cycle of giving away products and support. Instead of customers buying a one-time license and expecting perpetual support, vendors can charge a recurring fee. This provides the predictable revenues and profits that managed service providers in the channel have enjoyed for years. Hardware vendors like the idea of a services-based industry as it reduces the number of customers they sell to from millions of end users to tens of thousands of service providers. The reduction in the cost of sales alone is worth the change.

The challenge facing both vendors is that the market isn’t moving fast enough in its transformation. As a result, they have to support conventional and cloud versions of their products. What they want is to quickly get to the cloud future – with its predictable revenues and higher profits – and away from the low-margin and uneven sales cycles of conventional products. Hence, the big push to get the channel to move to the cloud.

So how much time does the channel have when there’s no agreement between vendors and customers on the pace of change? Again, Thursday. (Did anyone read Hitchhiker’s Guide?)

Sure, there’s a possibility that the conventional channel – value-added product resellers, systems integrators and managed service providers – will be disrupted and potentially driven out of the market by services forces. Sure, these forces will compel change. And sure, a fair number of solution providers will fail to make the turn.

Forrester Research estimates up to 15 percent of the channel will be disrupted by services. Gartner says the number is around 40 percent. The 2112 Group (our parent company) pegs the number at 60 percent, due to a combination of channel companies that will disappear or be marginalized to low-margin labor arbitrage. Worse for the channel: The cloud is creating a barrier-to-entry, meaning there are fewer new companies coming into the market to take the place of those exiting. This is because the cost and complexity of starting a viable technology business is too high.

Does this mean the channel’s end is nigh? Emphatically, the answer is no.

Every solution provider will have to chart its own course into the future. Every solution provider must decide its own business models, strategic objectives and value propositions. Even as the market moves toward services, plenty of gaps will remain in conventional technologies. Hardware sales aren’t going to stop. Endpoint sales and support aren’t going to cease. And end users will always need local support. Even in a disrupted channel, solution providers will find plenty of opportunities.

>> CHECK OUT: 10 Tough Truisms about the Channel’s Future

The question isn’t when will the channel end, but rather what you – the average solution provider – will do to future-proof your business and ensure its sustainability and viability for years to come.

There’s no magic formula, three-ring binder, or weekend seminar that will provide the answer. These are only sources of ideas and information. Only you, the solution provider can determine what your business will be and the value it will deliver. And, as long as a solution provider delivers a product or service for which customers are willing to pay, they will remain viable.

The end is nigh, indeed.

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