New Opportunities for an Old ModelBy Michael O'Neil | Posted 2008-04-29 Email Print
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It might be too early to say it's back to the future for the channel, but old business models are starting to re-emerge thanks to some new technology and vendor channel programs.
Many years ago, when oil was cheaper than water and the only generation with a name was the "baby boomers," the channel was dominated by "VARs."
Like age groups and energy policy, the channel was simpler then. These VARs focused on a variety of markets, but in essentially the same way. They signed volume purchase agreements with "minicomputer" system vendors, wrote applications addressing the business requirements of a specific segment, and derived revenue from three sources; the resale of hardware, their own software and services – though the services were generally tied to the purchase of a "turnkey" solution, rather than sold as discrete offerings.
This approach survived the oil crisis, but in the late 1980s - at about the time that the Gen Xers were being replaced by the beginnings of Gen Y – the market, and the channel that served it, started to change. Demand for minicomputers collapsed as buyers opted for LAN-based systems. Demand for turnkey systems also waned with buyers looking for more modular approaches. The channel started to fragment: the notion of "value add," once tightly tied to proprietary applications, changed to include many different aspects of technical and business support. Channel members who didn’t understand how to decouple services from system sales, and charge separately for them, faded out of business.
Perhaps the biggest change came in the software area. Encouraged by the emergence of standard platforms – LANs at the low end, Unix in the midrange – to replace the myriad proprietary minicomputer OSes, ISVs introduced a wide range of application solutions. In short order, these began to elbow aside the thousands of applications that had launched thousands of VAR businesses. The VARs could usually compete with packaged applications on a feature basis, since their applications were tailored to the needs of a tightly defined target market. But they couldn’t compete with the ISVs’ economic model, which leveraged the cost of development over thousands of installations, rather than the hundred or two hundred clients served by a typical VAR. This discrepancy was even more meaningful in upgrade cycles, which were an important source of new customer revenue for ISVs, and more a "cost of doing business" for VARs. Eventually, many VAR applications were replaced with packaged alternatives.
One consequence of this evolution was a change in the VAR business model. With the increased competition from packaged software, proprietary products were viewed first as a differentiator and then as a cost/liability. Some VARs, of course, retained their ability to sell their own products, but eventually, most of the VAR channel focused on software implementation rather than creation.
Unable to remain competitive in applications, the VARs saw their proportion of revenue from resale increase (since packaged software supplanted first-party applications); differentiation became more difficult, since it was based primarily on varying types/levels of services expertise.
Long-time observers of the IT industry, though, know that in most cases, trends act more like a pendulum than a straight line, and this may be one case where we are starting to see a rebound of a traditional model. There are opportunities emerging for niche providers of software in several areas, and these may revive the "old model" of VAR activity, with a new twist.
Over the past few years, it’s become clear that the frameworks for on-demand and open-source products are giving developers an opportunity to compete for application solutions business in new ways. It’s no longer necessary to build a complex suite of software to meet all of the needs of a particular type of business; by embedding or mashing up with functionality available from other sources, it’s possible to focus only on serving specific customer needs.
For example, you can build the functionality needed to support the unique financial accounting needs of the property management industry without also needing to build modules to handle GL, A/P, A/R, etc. This gives VARs (who often attract customers by dint of having deep understanding of a specific type of business, coupled with technology skills) a chance to focus on development that adds value and differentiates their businesses, without needing to also accept the overhead of maintaining generic features/functions. This eliminates much of the burden that made proprietary products a liability for the previous VAR generation.
The way in which this might translate into renewed opportunity came into focus for me at the Cisco Partner Summit in Hawaii, when Cisco discussed the opportunity for its partners to develop applications for its ISR (Integrated Services Router). There are a number of appealing aspects to ISR-resident apps: They are developed in Linux, which is broadly used within the technical community; they sit on the router, so response time should be very fast (since user requests don’t need to travel from the router to a remote server and then back through the router to the user), and they can be designed to address a very wide range of infrastructure and business requirements. Perhaps most importantly, though, Cisco will make ISR applications available across its channel through its ISPN (Industry Solutions Partner Network).
This last aspect is intriguing because it addresses the other aspect of the VAR’s product problem: the need to scale broadly enough to generate reasonable returns on product upgrades. With ISPN distribution, a VAR has the same upgrade leverage that an ISV (well, a small ISV, at least) has – the ability to use upgrades to drive new revenues from accounts outside of the VAR’s core customer base. This is the "new twist" aspect to the renewed opportunity for proprietary VAR products: A VAR can use its own products to serve a narrowly defined group of customers and differentiate itself within its local market, while at the same time benefiting from the scale that comes from broader distribution, as other VARs sell the application to similar accounts in other geographic markets.
It’s obviously too early to declare a "back to the future" trend in the VAR channel. For the first time in many years, though, there is at least a reasonable prospect that VARs will be able to expand their revenue streams by coupling opportunity scale with expertise depth. It’s worth keeping an eye on how ISR apps fare through the ISPN to see if this will open similar doors into other market segments.
Michael O'Neil is the president and principal analyst of the boutique channel consulting firm Channel Input, and the co-founder and CEO/CCO of social media site IT in Canada.