Microsoft is considering changes that would dramatically alter thetheir leading distribution partners have their way. But will delivery service providers lose out if the change goes ahead? shape and operation of its distribution channel, after two of its leading distribution partners - Computer 2000 and CHS Electronics - applied for dual status. Both distributors sell boxed and licensed product, but they want to be allowed to sell OEM software to systems builders - a sector of the market that Micro-soft has hitherto kept separate.
Microsoft has always been keen to keep a split between the large mainline distributors that sell its boxed product to dealers - CHS, C2000, Gem, Ingram Micro and Metrologie - and the Microsoft delivery service providers (DSPs). The DSPs sell OEM software for Vars and systems builders to pre-install and tend to be more specialised distributors with a tighter focus.
There are currently five DSPs - Actebis, Datrontech, Enta, Ideal and Osmosis. The split enables Microsoft to control its channel better, and particularly to control the flow of OEM software, which is potentially easy to pirate.
CHS is unique in that it was originally a DSP, but after the acquisition of Merisel it found it was also a Microsoft mainline distributor. This lasted a few months before Microsoft revoked its DSP status - ostensibly because sales had dropped while it concentrated on integrating the Merisel business. 'As a dual distributor, we did not fit into Microsoft's existing channel strategy,' says CHS director of vendors, Jan Lawford.
But CHS is hoping Microsoft will change its decision - Microsoft reviews its channel policy annually in March - and that it may be more receptive to the idea of a one-stop distributor. 'As a well-known Microsoft distributor, we get sales enquiries about all types of products,' says Lawford, 'boxed and OEM.'
Lawford believes it would be far quicker for the dealer or systems builder and would avoid time-wasting duplication if resellers could get all the Microsoft software they need from just one distributor. 'Resellers should not have to go to two distributors for Microsoft product,' she says.
The key argument of the dual distribution camp is that the present system is more cumbersome for resellers than it needs to be. Lawford points out that CHS sells large volumes of product to systems integrators, such as disk drives, which means Microsoft DSP status is applicable and that CHS has the technical skills to sell and support OEM product. 'We have a clear view about how our business could work with dual status from Microsoft,' says Lawford 'It makes sense for the way we work.'
There are also strong arguments from Computer 2000 that the present Microsoft method of splitting its channel lacks the flexibility that the market now needs. 'Things have changed since Microsoft first divided its channel,' says C2000 software general manager Axel Lagerborg. 'Although overall we are a large mainline distributor, we have 12 very focused business units,' he adds.
Lagerborg says the PC components division is one of the fastest growing and, as with CHS, it would be the obvious place for Microsoft to push OEM software.
'It would not be a change of Microsoft's strategy if they used us as a DSP as well as a mainline distributor,' he says, 'because we are bringing something new to their distribution strategy.' Lagerborg's argument is that even the largest mainline distributors are less like one huge behemoth and more like a collection of nimble and focused business units.
The key question for Microsoft is whether it and its dealers would gain more from expanding the OEM market through a mainline distributor than it would lose in dissatisfaction from the existing DSPs - and the danger of the OEM business getting out of control.
Lagerborg says existing DSPs may have some concerns about the entry of mainline distributors into their territory, but that its PC components division should be viewed in isolation from the other parts of the C2000 business. 'If the existing DSPs look at the whole of Computer 2000 they might be worried,' he says. 'But they need to look at how we do business now. Our PC components business is very much a separate division.'
The message then from C2000 is that it would not be unfair on smaller DSPs because they could compete on an even footing with the autonomous components division. Whether this argument persuades existing DSPs - or Microsoft - remains to be seen. Lagerborg acknowledges, though, that it will need to be persuasive if it is to see a change of policy by Microsoft.
'We are under no illusion that it will be easy to get Microsoft to change its policy,' says Lagerborg. 'It expects any new applicant to add value to its OEM product range.'
Like CHS, C2000 has the advantage that it is a dual DSP/distribution partner and one of the driving forces for dual distributors is to simplify the software delivery process throughout Europe. 'I think that C2000 and CHS are the two most likely distribution partners to go for DSP status,' says Lagerborg. 'And I think we have the best case.'
Although Microsoft appears undecided - at least as yet - about the possibility of opening up its distribution policy, any move is unlikely to go down well with existing DSPs. The software giant argues that the separation of OEM and boxed product, and the tight focus of its OEM channel, reduces potential problems of piracy and grey importing - both huge concerns of Microsoft, and something which it spends a lot of time trying to combat. Opening up the channel might be good for resellers that build PCs and sell boxed product, but it won't be popular with DSPs.
Alex Campbell, marketing manager at Osmosis, says the biggest problem he faces in selling Microsoft OEM software to systems builders is in coming up against pirated and grey imported software. 'The key thing is for Microsoft to have tight control over its OEM software channel,' he says. 'For that reason it should continue to keep boxed and OEM product separate. There is no need for them to open it up any further.'
OEM software is easier to pirate because it can be pre-installed on to large numbers of PCs and is far harder to detect than pirated software that should be sold in a box but is not.
A number of PC vendors, including former high street giants Escom, have been censured for failing to supply licences with pre-installed software, and it is potentially a huge problem for vendors. Hence, the Microsoft dilemma.
There is, of course, no evidence that allowing mainline distributors to sell OEM software would open up the Microsoft channel to piracy problems, but it could lead to a blurring of the distinction between boxed and OEM software if they were both available from the same source.
It is this potential blurring that critics of opening up the channel cite as an argument for maintaining the status quo. 'The Microsoft decision to take back CHS' DSP status after the Merisel acquisition shows the way Microsoft are thinking and what their policy is,' says Campbell. 'Mainline distributors have a different set of skills to us, and they sell to a different market. What the Microsoft channel needs is clear demarcation, not a blurring of lines.'
There is pressure on manufacturers, admits Campbell, to give distributors greater economies of scale, particularly when it comes to pan-European distributors that can handle huge volumes. Manufacturers have to ensure they move at a pace that brings their existing channel with them, and does not cause upheaval and confusion, he adds.
Although no one from Microsoft was available to comment on the specific issue of possible changes to its distribution strategy, a Microsoft channel representative told PC Dealer late last year there was a chance that changes would be made that would bring parts of Microsoft's OEM distribution into the mainline arena. 'In the UK, no mainline distributor is authorised for OEM product,' said the representative. 'But CHS in France sells both, for example.'
Microsoft admitted there had been some confusion from resellers about its distribution policy, and there was some crossover in terms of dealers buying both boxed and OEM software and having to go to two distributors.
The problem for Microsoft is the classic manufacturer's dilemma. Any changes that benefit one set of distributors would be unpopular with the distributors that, having done a good job developing the OEM market, would consider themselves as missing out.
The issue of the role of the distributor is further muddied in the US where channel giant Ingram Micro, that assembles its own PCs for resellers, is lobbying software manufacturers to get the same OEM deals as other PC vendors.
Ingram president Jeff Rodek was quoted as saying: 'We would hope to get competitive pricing from Microsoft to serve our resellers and continue our efforts to allow resellers to outsource their logistics and assembly to us.'
Although the issue of large distributors competing with PC vendors is not directly related to the Microsoft channel split, it is indicative of the way demarcation lines are becoming erased.
A large mainline distributor might compete with Microsoft DSPs, but it might also compete with large PC vendors. It is another way the large distributor would get involved in OEM software - selling it on to resellers and installing it on its own PCs.
In the US, Microsoft group vice president Jeff Raikes said it was still considering whether to give large distributors like Ingram the same OEM agreements that PC vendors get.
Microsoft is holding back to see whether there is sufficient volume to make it worth getting involved. But if there were, no doubt it would rush in to boost sales. The possible beneficiaries of any change to the Microsoft channel strategy - in the short term at least - would be resellers that go to a one stop distributor to get OEM and boxed software, and avoid distribution.
The problem for Microsoft is how to simplify things for the resellers without destroying the focus and targeting that it strives for in its channel delivery.
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