The average life expectancy of computer distribution companies is somewhat limited. Very few, in what is admittedly a young industry, even make it to junior school age. For every success story - Azlan, Persona, Datrontech and Ideal Hardware - there are dozens that fall by the wayside.
In the networking market, we have the examples of niche distributors like Skytech and Micro Macro, which had their moments of glory before going down the toilet. The mistake those companies made was to tie their fortunes too closely to Novell Netware at a time when the operating system moved along the product lifecycle from high-margin niche into commodity pricing and broadline territory.
The clarion call to the channel in the early 1990s from Don Pinchbeck, former Epson bigwig, was to get big, get niche or get out. But at the time it was questionable whether there was much of a future for niche distribution.
The broadliners were then operating at the height of their self-confidence. The world seemed to be turning their way. In 1993, Martin Blaney, Ingram Micro UK managing director, predicted in PC Dealer that the broadliners would slowly but surely squeeze niche distribution opportunities as they expanded their own activities.
His forecast, while making perfect sense at the time, turned out to be wrong. Broad-liners Ingram Micro, Frontline and Merisel, and semi-broadliner Northamber, have grown at a decent rate in recent years. But growth for the multinational wholesalers has been fuelled largely by the adoption of mainstream hardware franchises such as IBM and Compaq.
Frontline made a valiant attempt to build a strong niche business through its advanced products division as well as in the volume products market.
For a time it was market leader in the Unix software market, heading Sphinx Level V and Top Log. And it took top slot in the Netware market, ahead of traditional networking niche market specialist Azlan. But it never succeeded in overturning Azlan or Persona in high-end networking. Now Front-line is abandoning some of the more niche product lines that 'clutter up the warehouse', according to joint managing director Graeme Watt.
Niche markets sometimes have a habit of expanding to the point where the broad-liners start taking an active interest - the Apple market is an obvious example. But occasionally the niche market is big enough and complex enough to support the emergence of players that are strong enough to fend off broadline raids on their territory.
Ideal Hardware is a case in point. 'We are a niche distributor which happened to grow big,' says product manager Grant Morgan. The New Mal-den-based distributor has grown to a u100 million operation through its command of the arcane world of high-end storage. The firm has moved down-market into volume PC lines, but is also looking into big margin opportunities in fresh niche territories. Morgan says the company has marked out the electronic document management (EDM) market as a particularly promising area.
EDM is almost a casebook study of how specialist distributors can survive and thrive for years, so long as they choose the right market. Ideal Hardware approaches EDM from its position as a storage wholesaler. EDM roll-outs require vast amounts of storage, particularly expensive optical jukeboxes.
But the company is an arriviste compared with the two long-standing specialist distributors in the imaging market: Headway Technology of Farnham; and Paperlink, an Aptec subsidiary, the venerable London-based distributor best known for its Mac-based lines. A third distributor, Swiss-based Dicom, is also beginning to make waves in the UK EDM software front through its Aldermaston-based sales office.
In 1990, John Sturt, the founder and chairman of Headway Technology, told Personal Computer Magazine that the document management market had a life of two or three years at most for the specialist distributor.
Headway had started as a specialist in distributing products for the desktop publishing market. When that business fell to the broadlines, it identified imaging as a possible new niche through a trading relationship with Fujitsu's scanner arm - Fujitsu is still the dominant supplier of fast, heavy-duty scanners for the EDM market. Six years on, Headway is still operating in the EDM business.
Headway and Paperlink had the EDM distribution market almost to themselves for several years. The two companies built their businesses on the back of exclusive franchises for image compression boards from Kofax and Xionics respectively. In the early 90s, every imaging reseller needed to go through these outlets to get those boards. This is no longer necessary, with compression functionality increasingly added at the scanner level.
But the distributors are laid-back about the entry of other players into the market. They say there is a relatively high cost of entry to get into EDM, in terms of training and pre-sales and post-sales support. The EDM vendors are also choosy about who they award franchises to. Paperlink, for example, has the exclusive UK rights to wholesale Watermark Software, which is the current leader in the mid-range market.
They both seem fairly relaxed about the arrival of Ideal into the EDM market. Ideal is a rival in the 'lower-end Fujitsu product areas and in storage', says Paperlink sales manager Andrew Chaplin. 'But our most immediate rival is Headway. When it comes to imaging specialists understanding what it takes to sell products to imaging dealers, there are few who can compete with us.'
Morgan says there is more than enough business to go around for the players in a fast-growing market and believes that Ideal is approaching the EDM market from the bottom up, while occasionally meeting Paperlink and Headway coming from the top down.
He cheerfully admits that Ideal is dipping its toe in the water as far as imaging software is concerned. It has franchises for PC Docs, a low-end EDM software line, and Caere Pagekeeper OCR software, but it is holding back from making a greater commitment until the market evolves sufficiently to support Ideal's distribution model and cost structure.
The company, for instance, resolutely refuses to operate franchises that need user support - a requirement of Watermark, for example.
Morgan and Chaplin estimate the mass market for EDM systems will arrive within the next two to three years. Driving this will be the arrival of more image-enabled software applications, such as wordprocessors, the growth of networking and intranets, and the increased adoption of more open standards. Chaplin adds that resellers will have to accept they will no longer be able to load their deals with so much consultancy and service revenue. Some Paperlink customers aim to make 50 per cent to 60 per cent of any deal from services.
No one appears to know exactly how big the UK EDM market is, but everyone says the market is growing fast, at least 40 per cent a year, according to Ian Painter, marcoms executive at Headway. Headway's turn-over appears to bear this out. Sales have climbed from u5 million to u20 million in three years, and the company claims to hold 70 per cent of the UK market for EDM products sold through third-party channels.
The company now focuses solely on third-party distribution in the EDM market, after completing an unhurried disposal programme which saw various direct sales divisions hived off into separate companies. Last October, Headway ownership changed hands from founder John Sturt to Apac, a Basingstoke-based holding company for a clutch of electronics firms. Apac also owns an EDM distributor in Holland, which could provide a spearhead for Headway's intended move to the continent.
The emergence of pure third-party channels in the EDM market, shows this business is maturing. Paperlink, for example, was once part of the Xionics group, which also included the reseller Image Solve. Watermark Software was originally distributed into the UK by ESP, the Maidenhead hybrid reseller-cum-remarketer, which now acts solely as a reseller for the line.
Paperlink and Headway both report an active dealer base of around 500, but the numbers of truly competent UK imaging Vars is considerably less, says Chaplin. He estimates there are only 50 to 100 Vars which come to Paperlink only to source product and for a credit line. 'The rest will need some handholding,' he says.
Chaplin categorises EDM dealers into various camps. Big corporate resellers are starting to look over the fence at the market - and the margins look extremely attractive - but where do they get the service expertise from? Also, at the high end are the very big document imaging resellers, typically touting their own solution, and which often have a manufacturing background, like ICL, Wang, IBM and Trimco. Then there is the third category of specialist Vars, usually with five to 10 staff, which have built up a great deal of expertise in EDM. Last there is the mass of dealers, which dip in and out of the market as and when customer-driven opportunities arise.
Many smaller specialist resellers are called on to evaluate EDM requirements for large companies, but lose out to big resellers at roll-out time, 'when the purchasing departments get their claws into the lowest price for 200 scanners', says Chaplin. He advises smaller resellers to investigate the burgeoning market for EDM systems in small and medium enterprises, and restrict corporate contacts to consultancy only.
So the EDM mass market is coming; but how will this affect the landscape of the distribution model? New players into the EDM market could include storage distributors or networking specialists. But it will be an awfully long time before the broadliners even think of getting involved, claims Morgan.
Paperlink looks forward to the advent of the mass market, says Chaplin. 'We want to ride the growth curve in a controlled way and then we would be happy to retreat upmarket.' He cites the example of parent company Aptec as the model for a niche distributor. 'Aptec had an exclusive agreement for Epson scanners in the Apple market. It took volumes up from 20 a month to 300 to 400 a month so Epson appointed more distributors. Prices fell and margins collapsed in the usual way. Aptec's response was to move up the product scale, with a franchise to wholesale high-end Agfa printers to the pre-press industry. We only do high-end Agfa flatbed scanners and at some point we will probably do drum scanners,' he says.
Painter believes the imaging market will support niche distributors for the foreseeable future. 'There will always be a need from some type of niche specialist to support the very large high throughputs, the one-offs for particular corporates which solve their particular needs.'
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