The second half of 2000 should be a boom time for UK corporate resellers that are quickly becoming used to the concept of a two-track peripherals market. UK businesses are facing strong pressures to invest in all manner of IT peripherals: from traditional storage systems, printers and network and graphics cards, through to digital cameras and pen scanners.
However, this does not mean that resellers will have a clear run. Without some rapid changes to traditional business practices and approaches, the channel risks being left behind.
Everywhere, many industry analysts are predicting that the storage and imaging markets are going to explode, thanks to the web, new applications and the fact that the mobile revolution is only just starting to take hold in the corporate sector.
However, so far this year, life has been tough in the channel. Distributors complained of a dire spring, but there are hopes of a busy summer. While the prognosis is quite good and all the market indicators point to a big year for shipments, a sense of foreboding hangs in the air.
The best of times?
The shipment figures make good reading. According to research firm IDC, the number of goods shipped across the whole peripherals sector will soar this year. IDC has issued numerous reports, all predicting growth. Pen scanners are writing the next chapter in a rapidly expanding market; worldwide optical and removable storage drives will grow by 19 per cent in 2000; and cathode ray tubes remain dominant as the worldwide PC display market exceeded $33bn (£22bn) in 1999.
But beneath the top-line revenue figures lurks a shadow. For many of these sectors, turnover is expected to be flat, which means squeezed margins for the channel. In one example, IDC reported that: "The worldwide removable storage market is having trouble breaking even. In 1998, revenues plummeted 10 per cent to $7.3bn. Through to 2003, they will increase at a compound annual growth rate of only one per cent, bringing them to $7.5bn."
Shipments, on the other hand, are rocketing. In 1998 they soared by 34 per cent to 123 million, and IDC predicts that they will surge past 218 million by 2003.
Wolfgang Schlichting, removable storage research programme manager at IDC, says: "The revenue loss is mainly the result of pressure on CDRom prices. The technology is becoming a commodity."
The smart money is moving into DVD, but with demand outstripping supply by a wide margin, finding the products to sell is a major challenge. Higher up the food chain, revenue is also expected to be tight. Sales in the worldwide mid-range server market took a dive in 1999, dropping by 10 per cent from $17.6bn in 1998 to just under $15.9bn. Although the market is expected to rebound slightly in 2000, it is not all good news for the channel.
According to IDC's research, the indirect channel handled about 45 per cent of the $239bn spent on hardware, software and services in Europe in 1999. Most of the top distributors and resellers experienced strong turnover.
Brian Pearce, programme manager of IDC's European distribution channels expertise centre, says: "The outlook for 2000 and beyond is not entirely rosy. Increased pressure on hardware margins, softening of large-accounts demand following the year 2000 deadline, the shift in market dynamics towards smaller IT projects and the emergence of an internet channel constitute major challenges for European distribution companies and for vendors.
"Differential rates of growth are widening the gap between components, PCs and technical products. From early 2000, the European distribution channels provide a contrasting picture. Increased price competition, declining margins and vendors re-allocating their marketing budgets towards the internet and direct lead-generation programmes have started to strip away the already modest profit margins in the core volume PC distribution business.
"While the figures for 1999 still indicate high growth for volume channels, IDC expects much lower turnover growth and significant business failures in 2000."
Cracking the corporate market
If you want to differentiate yourself from the competition, you have to look beyond the figures and accept that there is more to selling to large businesses than turning up in a van. Selling to corporate customers is a special skill. In a rapidly changing market, the vendors themselves don't know what the best approach is.
For example, at the high end of the market, storage company EMC has been making overtures to the channel for so long that most people don't listen any more and just accept that its product range and target market are best suited to a direct-sales approach. It is far better for resellers to concentrate on the mid-range product set in the storage, printing and presentation sectors.
At the lower end, monitors, cameras and projectors are the big sellers, with huge demand expected from an expanding customer base. The word from the distributors is that the traditional peripherals market is recovering.
James Lee, general manager of storage sales at reseller Computer 2000, says sales picked up significantly in May. "With all the year 2000 worries, a lot of corporates were asking, 'why do I need back-up?', because they were concentrating on the systems problem. But there is more confidence in the market now," he says.
There is plenty to be confident about in storage, with Altrium products due out at the end of the year and products such as digital audio tape becoming entry-level products for corporate customers, says Lee.
What year 2000 lockdown?
Ray Rice, business manager at CMS Peripherals, says his company did not see the pre-millennium boom or the squeeze immediately after it. "There was a lot of investment in primary hard-disk sub-systems and enterprise back-up," he says.
The big plus for CMS, says Rice, is that upgrade cycles are being squeezed as the data mountain rises and demand surges. But many users remain cautious about investing in new technologies such as storage area networks (Sans) because of interoperability issues.
"Demand for storage is huge," he says. "A lot of people will wait before investing in Fibre Channel for Sans. DVDRam is becoming number one in large businesses for archiving."
Gordon Milner, sales director at Ideal Hardware, says demand for disk and tape sub-systems is exploding. He also sees huge interest in graphics cards. This growth is driven by the web. As more companies create their own websites, they are upgrading their internal systems so that their employees can take advantage of these corporate sites.
But Milner believes the boom in the storage market will continue. "At the corporate reseller end, Computacenter, Compel and SCC are all beginning to divisionalise in storage," he says. "By 2003, 73 per cent of all corporate IT expenditure will be on storage. At the moment, the pressure is heavily on DVD. You just cannot get enough DVD drives. The tier-one manufacturers are getting supply, but it's tough out there for tier-two resellers."
Unlike his rivals, Milner sees a lot of business in Sans. "We will see a lot of movement in Sans this year. Products are starting to emerge that will drive this market."
Things are also looking up for printers, which are traditionally a big part of the peripherals market. Colour laser, which accounts for only six per cent of corporate sales, is set to be the next big thing.
QMS Minolta is about to launch a new range, and plans to ship the Magicolor 6100 in a couple of weeks. According to Andrew Haji-Hannas, QMS Minolta's marketing manager, demand for colour lasers will double every year, driven by a combination of internal corporate demand and the arrival of technologies which either did not exist before or were prohibitively expensive.
"In the past, we did not have the speeds necessary to make colour laser a viable option for printers," Haji-Hannas. "We now have the speed and the paper capacity to enable these machines to sit on a corporate network and not clog it up with printing jobs."
He adds that the administration functionality built into modern printers is beginning to make them attractive to corporate financiers, who like to be able to see how much everything is costing. As for managing its own channel strategy, QMS Minolta has appointed Northamber as a distributor.
The rise of the server appliance
Other major changes in the corporate peripherals market have been brought about by the emergence of the server appliance. In the past, PCs were almost always attached to the server and peripherals worked from the desktop.
Thanks to the number of products available and the different network architectures, peripherals are getting their own dedicated servers, with printers, scanners and storage devices, and in some cases even projectors, being attached directly to servers.
The rise of storage farms is another change that will reach the UK in the next couple of years. These are just taking off in the US, where corporates are effectively outsourcing their storage needs and paying for capacity on a monthly basis. Storage farms provide unlimited storage space and insurance against crashes.
At the other end of the market, large businesses are finding new applications for mobiles, digital cameras and projectors. The market is healthy but the competition is stiff.
Companies in the insurance, mortgage and automotive industries are all moving to digital technology for their image processing. In the public sector too, councils and government departments are investing in image-capture technology as cost-saving devices.
Also, on the presentation front, the days when a company bought just one projector for the boardroom are long gone. Midwich Thame recently shipped more than 100 projectors to a large bank, something unheard of a year ago. Nick Culley, product marketing manager at Midwich, says: "The largest companies are buying everything from projectors to cameras. Every quarter more and more bundles are being sold."
Buying habits are changing. Companies are bundling a camera with a projector and a notebook PC, thus equipping a sales force with all the IT it needs to do its job end to end. "We are hearing a lot about bundled sales," says Culley. "Unit sales and value of sale are definitely up on last year."
Bundles of opportunities
Even without bundling, there are opportunities to earn services sales off the back of these technologies, with bespoke warranties and guaranteed four-hour service contracts.
But Milner is not so sure. He says of digital cameras: "I'm not convinced they will ever be anything other than retail and catalogue market. Whether it's in peripherals or anything else, corporate resellers are trying to get into the datacentre. Compaq, for example, has done a good job with NT."
Compaq is a good example of what happens when a company tries to move up the food chain. The biggest lesson of recent years in how not to address a corporate market came when the vendor went on a buying spree and took over Digital and Tandem and tried to become a corporate systems player. It ended up losing most of its management team, including chief executive Eckard Pfeiffer
The reason was that Digital and Tandem had all the corporate accounts and it was the Compaq account managers - who were used to looking after their channel partners - who were replaced. The relevance of this for today is that even in the peripherals market, which is becoming a major part of corporate IT spend, relationship building is the key. The areas to concentrate on can be split between newer and older technologies, with the smart money to be made in bundled solution packages.
Demand for storage and for colour printers is unstoppable, but margins will be continually squeezed. Cameras, scanners (even pen scanners) and projectors are the new niches in corporate peripherals. At the top end, healthy margins can be made, but bundles are the way to real profit.
- Big companies are increasingly viewing the peripherals market as two markets: the traditional which deals with storage systems, printers and networks and graphics cards, and a new market involving digital cameras, scanners and mobiles.
- While peripherals shipments are expected to soar this year, margins are tight and for many peripherals vendors and resellers, turnover probably will be flat.
- Bundling many peripherals together to provide an end-to-end solution is the way to make real profit.
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