Dell's Secret Reseller Channel

By John G. Spooner  |  Posted 2006-05-11 Email Print this article Print

Customer pressure is driving more resellers to work with direct-market giant Dell, and Dell is making it easy for them. But don't tell Wall Street.

Dell and the channel are secretly growing fond of each other.

More and more VARs (value-added resellers), indifferent to shrinking hardware margins and prodded by price-sensitive customers, say they are buying Dell computers for their clients.

The Round Rock, Texas, PC maker embraced resellers by granting them visits from account representatives, sales support and even hardware discounts, VARs say.

That Dell is seemingly growing fonder of the channel should be no surprise. Some industry insiders estimate that 20 percent or more of Dell's revenue is derived from the channel. VARs offer the PC maker incremental business opportunities, which it might not have been able to win on its own. The company can also fill those orders using its traditional direct-sales mechanisms to provide hardware to the VARs at a time when it is wrestling with slowing unit shipment gains—and PC market growth itself is slowing, according to analysts and Intel—while it sees tougher competition from rivals Hewlett-Packard and Lenovo Group.

Still, "they'll never admit it or make [the channel] a formal program," said one analyst who asked not to be identified. "If you look at Dell's stock versus HP's, part of the difference has to do with Dell's reputation for owning the customer. There's a sense they own the entire margin and have higher profits because they sell directly. It makes them appear more valuable to Wall Street."

Dell lowers its forecast as it cuts prices. Click here to read more.

But more and more VARs say they are selling Dell's portfolio as their customers seek savings on hardware. They say that Dell is treating them to discounts equal to its competitors, usually between 1 and 4 percent. Those surveyed by eWEEK expect the trend to continue, particularly since Dell needs to find a way to keep growing. Dell announced May 8 that it will miss Wall Street forecasts with first-quarter revenue of $14.2 billion and earnings of 33 cents a share. Dell had projected revenue between $14.2 billion and $14.6 billion and earnings ranging from 36 cents a share to 38 cents.

"I think they are recognizing that the channel is the best leverage into the market," said MJ Shoer, president of Jenaly Technology Group, of Portsmouth, N.H., a reseller serving SMBs (small and midsize businesses) in the New England area.

"They're great at getting into NASA and Boeing, but they're not so good at reaching the CPA firms and law firms where so much opportunity lies. … It's more efficient for them to send a representative to meet with me a few times a year and let us reach hundreds of customers every day."

Shoer said he now has regular contact with Dell sales personnel and presales help arranging specifications and quotes.

Dell representatives would not confirm any arrangement with individual VARs, saying only that the company does not differentiate between customers and resellers. When asked about the company's sales strategy, Dell spokespeople did not have an immediate comment.

The Dell Solution Provider Direct program, launched in August 2002, provides volume discounts, but claims to be primarily a streamlined source of Dell product, leaving time and energy for "high-margin value-add activities," according to Dell.

It sounds a lot like a channel program.

Dell further claims not to pursue VAR customers for direct sales, but will not turn away inbound requests.

The arrangement leaves many to ask, "How is this not a channel program?"

Martin Brys, president of Brys Consulting, in Holbrook, N.Y., who said he is selling more than $100,000 worth of Dell hardware annually, proclaimed Dell a better channel partner than HP, which he said had too many qualifications and requirements to make the program worthwhile.

For most resellers, the decision to sell Dell is less their own than their customers.

"Sometimes, we just can't match [Dell with another vendor], and they say 'Ron, bring in Dell,'" said Ron Cook, chairman and CEO of reseller Connecting Point Technology center, in Las Vegas.

"When that happens, I get them what they want. I'm not making anything from the margin selling boxes anyway."

One Connecting Point customer, whom Cook declined to name, recently switched its $35 million annual spending on PC hardware from HP systems to Dell systems, he said.

Dell does have something to bring to the table for VARs' customers.

Those customers benefit from Dell's ability to offer lower prices every time the PC maker comes into play in a deal, said the analyst, who requested anonymity.

For Brys, whose net revenue is about 90 percent services, giving the customer what they want is the primary goal.

Resellers care more now about getting their foot in the door with a customer than what type of hardware they sell, said Tiffani Bova, research director of IT channel sales at Gartner Group, based in Sherman Oaks, Calif.

"From a channel perspective, if VARs have opportunities where customers are requesting or demanding Dell or it is the only solution fitting the price, they're probably inclined to sell Dell to protect the relationship," Bova said.

"They'd rather sell what they have to keep a competitor out and make their profit on the services."

For Dell, the decision to work with resellers isn't necessarily new. The company launched a white-box PC program, for example, in August, 2002. The program, which offered unbranded PCs manufactured by Dell, was shut down in March 2005 due to what Dell said was lack of demand. However, Dell kept a program that allowed resellers to offer its products in place.

But channel sales may be more appealing than ever for the PC seller, which saw an atypical slip in unit shipment growth in the first quarter of 2006, preceding its May 8 warning.

"We believe Dell's problem is the result of both its product mix and geographic exposure. Its core PC and server market is not growing from a revenue perspective. Also, the company generates approximately 65 percent of its sales from the Americas market, which is growing units at roughly half the market rate," wrote Robert Semple, an analyst with CreditSuisse in New York, in a May 9 report. "Additionally, for Dell to deliver above market growth, it needs significant market share gains, which we believe are increasingly difficult in the current environment given the improved flexibility of its competition."

Is there a chink in Dell's armor? Click here to read more.

Dell, which has historically grown unit shipments faster than the market, stumbled in the first quarter. The company continued to lead in shipments with a market share of between 16 and 17 percent. But its unit shipments increased by about 10 percent versus the market rate of about 13 percent, according to IDC and Gartner.

During the first quarter, unit shipments grew at 13.1 percent, according to Gartner's preliminary figures, released on April 19. Dell grew shipments at 10.2 percent, versus rivals such as Acer and HP, which grew shipments 45.5 percent and 22.3 percent, respectively, according to the Gartner numbers.

IDC shows Dell growing shipments by 10.2 percent versus a market rate of 12.9 percent.

"The growth engines in the market are the areas that [Dell] doesn't play in," said Richard Shim, analyst at IDC in San Mateo, Calif. At the moment, they include channels and retail.

To be sure, "it's not like [Dell] is dying. It's growing at the industry rate. But that's significant in that it's the first time it hasn't grown above the average" in recent history, Shim said.

"You look at it in the long term—in emerging markets retail is the channel, because there's not infrastructure for direct sales. It seems like they've got to start addressing [the channel]. Especially as the emerging markets become increasing factors for [PC] market growth."

Editor's Note: This story was corrected to reflect the annual sales of Dell hardware by Brys Consulting. Brys Consulting sells more than $100,000 worth of Dell hardware annually.

John G. Spooner John G. Spooner, a senior writer for eWeek, chronicles the PC industry, in addition to covering semiconductors and, on occasion, automotive technology. Prior to joining eWeek in 2005, Mr. Spooner spent more than four years as a staff writer for CNET, where he covered computer hardware. He has also worked as a staff writer for ZDNET News.

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