This year's model
Selling software over the internet is a logical step for resellers, but it is not as easy as it appears.
UK dealers are becoming increasingly concerned that if they implementut it is not as easy as it appears. electronic software distribution (ESD) - something which looks to catch on, despite a slow initial uptake - the channel will be muscled out as software vendors switch en masse to a direct sales model.
ESD in this country is so far limited to a number of small-scale pilot schemes as vendors dip their toes in the water. But in the US - where ESD trials, principally run by Microsoft, have been going for over a year - there are conflicting signs about the viability of ESD and confusion over which model of software delivery is likely to be adopted.
Microsoft says it is committed to ESD. In a white paper published before the start of the US trials, the vendor stated: 'The current method of obtaining software in CD-Rom or floppy disk format reflects the historical pattern of software distribution established long before the emergence of broadly available low-cost internet-based commerce.'
Mike Shaw, internet manager at Microsoft, claims CD-Rom as a method for distributing software may go the same way as the Betamax video recorder.
Instead, he suggests, the internet will be the future of software distribution. That may turn out to be true - and Microsoft's announcement (PC Dealer, 4 March) that it plans to sell direct to US customers over the internet, bypassing the channel, and possibly sell online in the UK by the summer, is sending tremors through the dealer community.
Microsoft - like all other software vendors - wants ESD to succeed. It's a godsend for software vendors, making product far cheaper to distribute and doing away with manual and packaging costs.
Windows 95, for instance, has shipped about 50 million copies worldwide.
The cost of printing the packaging and manuals, in a number of different languages, amount to about #1 per copy. Much of that could be cut if the software could be distributed electronically. Software would also be cheaper to the user. Alternatively, increased margin could be retained within the channel - perhaps to recoup the cost to resellers of setting up electronic store fronts.
Naturally, Microsoft maintains it does not want to be a direct sales outfit. It wants to continue working with distributors and resellers even if the relationship between them is changed by ESD. The indications from Microsoft are that it would like the channel to be involved in ESD pilots.
The problem for Microsoft and the other software vendors that wish to distribute software electronically and with channel involvement is that there is no effective model currently in place for the software vendor to monitor ESD sales through resellers.
The preferred model, which has been proposed by the Software Publishers Association (SPA), the trade association for software vendors, is to use an independent clearing house to ensure all software sales through resellers are legitimate. At the moment, with resellers selling boxed product, software vendors can keep a firm grip on piracy. However, their worry is that if they simply give resellers a master disk to distribute electronically, they will have no way of knowing what has actually been sold - the process is open to abuse.
The SPA's draft guidelines for ESD suggest the reseller sells the customer a secure electronic version of the software - a version of the software locked in a 'digital wrapper' that needs a code or password to open. Once the reseller receives payment for the software, the customer gets the code from the clearing house and is able to run the software. The key for the software publisher is to be able to independently audit the number of customers buying software.
The SPA says the key function is to separate the order-taking function from the delivery function. But one of the difficulties is deciding who should take on the role of clearing house. In theory, this role could be a trusted third party, the software vendor itself or even - for a larger reseller - a separate division within the reseller, that could be audited by the software vendor or its agents. The point is that the model is cumbersome and hard to set up. The SPA is still negotiating the finer points and some software vendors are keen to crack on - hence the pilot schemes enabling them to sell direct.
An example of the confusion surrounding this issue and its possible effects on the growth of ESD, is the decision last month of US clearing house LitleNet LLC to change its name to OrderTrust and move away from clearing house business towards a wider order-processing function for Web merchants.
Order Trust President Tom Litle said ESD had not taken off in the way he had imagined and software publishers had failed to adequately define contractual issues over the intellectual property ownership of the software.
In the US, at least, there is an indication that Microsoft has backed away from the original clearing house model and has now decided it wants to validate the transactions itself.
Microsoft suggests the role of the clearing house may be limited to handling credit card transactions, which would bring it closer to the model used by other Web merchants in delivering goods to customers online. There would no longer be a unique model for distributing software - it would be sold across the internet in the same way as books or concert tickets.
Gerard Gabella, European managing director of the SPA, says the guidelines for ESD - which would be necessary if publishers are to agree on a standard to involve resellers - are fairly well advanced. 'There are still changes being made,' he says. 'But all our members in Europe are at least running ESD pilots.'
However, some of these pilots are through electronic resellers, which Gabella admits are more complicated and early schemes are more likely to involve the publisher selling direct. The danger for resellers is that they have to witness such pilot programmes from the sidelines, and risk missing out on the sales opportunities altogether.
'Resellers need to stock products from a number of vendors,' says Gabella.
'And that requires agreement between publishers as to how ESD delivery systems will work.' The problem is that the definition of what a clearing house does has become a sticking point. But Gabella says publishers will continue to pilot ESD schemes to see what works for them. 'The guidelines will never be finished,' he says. 'Licensing itself is not frozen, it is something that constantly changes.' ESD is the fastest moving part of a fast-moving industry and as Gabella says, it might all change in six months.
There is another issue to address in the fledgling ESD market - also being addressed by the Software Publishers Association - and that is the question of customers buying software in any country they choose.
In theory, it could mean customers ordering software from countries where taxes are cheaper. The European Union met in April to review the issue of tax over the internet, but what will happen is far from clear.
'It is not certain whether the EU will class software as a product or a service and this has implications for taxation,' says Gabella. 'If it is defined as a product then it will be taxed in line with the country it is delivered to, but if it is defined as a service, it is taxed by the country it originated from.' So, if software was classed as a service, it could mean UK firms ordering from European countries like Germany, which have a lower tax rate.
Already, in a bid to create a pan-European market, software publishers and large distributors are breaking down international barriers - Microsoft gives its large account resellers (Lars) pan-European status if they have a presence in at least three different countries. Any European customer can buy software anywhere in Europe and take account of currency fluctuations and the like.
The potential is for ESD to speed up the process, with large accounts shopping for cheap currencies before electronically downloading software.
If this happens, it might make it even harder for a small reseller, already squeezed by the massive economies of scale large resellers can offer, to compete.
However, there is such a push for ESD from the large software vendors, that its introduction is inevitable. US Research by IDC suggests sales for e-commerce on the internet will reach $150 billion by the year 2000.
The digital nature of software makes it the leading category for Web sales, according to a further study by Yahoo. It will not come in one go, according to analysts, but rather through small-scale pilots and delivery to selected large accounts. There are a number of well documented drawbacks to do with both limited bandwidth and the cultural acceptance of boxed software.
But as ESD does gain ground, the question for resellers is how they will get involved and how it will change their business model.
Lotus software distribution manager Kate Tarry says the vendor will work directly with resellers on ESD projects, rather than through distributors, because distributors are as yet unwilling to get involved.
Microsoft UK has said it does not plan to go direct, since it is not set up as a direct sales organisation that could field massive numbers of sales enquires from the public and so will continue to sell though resellers. But, it says, ESD will change the nature of the relationship between vendor, distributor and dealer.
Compaq is the dominate brand among corporate resellers in the US, with 31 per cent of overall PC sales. IBM is closing the gap between itself and Compaq, increasing its share from 24.6 per cent in January to above 30 per cent in March. Hewlett Packard is fourth with about 14 per cent of the channel. Toshiba has a six per cent share. Over Q1, IBM records the largest increase in market share with almost six percentage points.
gap between Compaq - the leader with more than 40 per cent share among corporate resellers - and its closest challenger, IBM, has increased from just over 21 per cent in January to almost 27 per cent in March. Toshiba is third, maintaining a share in the channel of between 11 and 12 per cent. Dell climbs to sixth position, with more than five per cent of the market's share.
Compaq and IBM together account for almost three-quarters of the channel's sales units. Compaq has more than 45 per cent, IBM has nearly 30 per cent. Hewlett Packard and Toshiba have approximately eight per cent each. Compaq's share grew from 43 per cent to 49 per cent, while IBM's share declined to 26.3 per cent.
Compaq, with 25.4 per cent, is getting close to the leader, Hewlett Packard, which has 26.8 per cent. Compaq claimed the number one spot in March with a 27.6 per cent share. IBM finishes Q1 as it started - in third place - but increased share from 15.3 per cent to 16.6 per cent. ZDS has fallen to fourth place, with less than nine per cent, with Toshiba coming third.
Hewlett Packard and IBM both have approximately 19 per cent of the market. Compaq leads with close to a third of the channel. AST is still fourth, with 9.8 per cent in March, falling from 18.5 per cent in January.