Over the Far horizon
As vendors look east for further growth, will the result represent a threat or an opportunity for UK resellers? Simon Meredith looks at the road less travelled
For western European markets, the opening pages of Forrester's recent Global Tech Market Outlook for 2012 and 2013 report make for gloomy reading. "The US and Canada [are] in third gear; and western and central Europe and Japan in second gear. With the overall downshift in the global tech market, each of these regional markets will click down a notch in 2012, with the European tech market going into reverse, that is, declining," according to the market research firm.
It notes, however, that the tech markets of China and India have been operating in fifth gear, and the rest of Asia-Pacific (apart from Japan), Latin America, eastern Europe, the Middle East and Africa in fourth gear. Faster growth is now expected in Asia-Pacific, and in the Brazil, Russia, India, China, Turkey, South Africa and Mexico (BRIC plus TSAM) regions. Little wonder vendors are turning their attention to these markets in earnest.
More mature markets such as the UK could see much less investment and that could spell bad news for the channel. If marketing support and co-op funding dry up and distributors and resellers are left to their own devices, life could get a lot tougher than it has already.
Carter Lusher (pictured, left), chief analyst at market research firm Ovum, confirms that vendors are looking to new markets to drive growth.
That does not necessarily mean developed markets will suffer, but the balance between today's mature and emerging markets is going to shift dramatically.
"In general, the older, more established markets are typically 70 to 80 per cent of a vendor's current revenue streams. However, we anticipate that, certainly by the end of the decade, it will be at least 50:50," Lusher says.
Room for expansion
Emerging markets by their nature still have plenty of room for expansion. "Some of the vendors, such as HP and IBM, have been in those markets for decades and already have a strong presence, but some of the other hardware, software and services vendors do see it as a major growth opportunity," he adds.
Ross Brown, vice president of worldwide partner strategy at Microsoft, suggests the vendor could derive half its revenue outside of the current mature markets within 10 years. However, he adds a caveat.
"The underlying growth still implies a double-digit growth in the developed world and a higher double-digit growth in emerging markets. We are not anticipating flat growth in the developed world. On a near-term horizon of 36 months, given that roughly 40 per cent of our worldwide revenue is just the US and Canada - and when you add western Europe and other developed countries - that's a big chunk of the remaining 60 per cent; it would be a stretch to get to 50:50," he notes.
That said, Microsoft is keen to achieve it. "But I would like to [get to 50:50 in that time] because it would imply a much higher top-line revenue for us if we can do that," he adds.
Ovum's Lusher says there are three possible scenarios for the channel in developed markets.
"Number one is the status quo; number two is the channels in mature markets become underfunded and suffer; or number three, channels in mature markets obtain small but meaningful incremental investment and actually improve," he predicts.
If existing markets are too big and too important for vendors to neglect, the status quo will hold. Vendors will maintain their investment and attention level because they need the cashflow to support R&D and new market development. This would be very much business as usual for the channel in the so-called developed world.
The second scenario, where mature markets become neglected, is likely only if senior vendor executives put all their focus on emerging regions. Clearly, channels across Europe and the US would suffer due to loss of sales and marketing support, says Lusher.
The third possibility is that, as the newer markets take off, there will be more investment for everything and that will flow back into mature as well as emerging markets. Vendors may also learn from their efforts to drive new business in other regions and start bringing new products and innovations that were developed specifically for those emerging markets back into the more mature regions, reinvigorating them in the process.
Which will it be? "In terms of likelihood, I would give preponderance to the status quo," Lusher says. "I would give the second-highest probability to the third scenario, that things improve. But that would not happen for four to six years. I would say that things getting worse is the least-likely scenario."
Of course, it will depend on the choices that individual vendors make. Each of these scenarios is possible for any single vendor. It may mean distributors and resellers need in future to pay closer attention to where their supplier partners seem to focus their efforts.
Microsoft's Brown (pictured, below right) is quick to reassure that Redmond will remain loyal to the European, UK, and north American channels. He reiterates that "significant growth" is still expected in the developed markets.
"It's not an either-or. We do see significant opportunities [in emerging markets] but when you talk about BRIC, for example, each of those markets is very different.
"Brazil is behaving more like a developed country than an emerging one. Russia is completely different; four years ago it was a significant anti-piracy play for us and now it has recently moved to being a significant cloud play for us. We have a very healthy business in India but it is still around the tech business inside India itself, as well as the organic growth in SMB," Brown claims.
There are specific problems in some markets too. In China, software piracy remains a major problem that may take some years to resolve. This will restrict the growth potential for companies such as Microsoft. Such vendors cannot yet rely on emerging markets to give them enough stability.
Andrew Bartels, vice president and principal analyst at Forrester Research, adds though that most vendors probably cannot risk leaving the market open to nationally based rivals, who would no doubt be all too eager to fill any gaps.
"For many vendors, western Europe is today the largest or second-largest market so they cannot afford to ignore it. Vendors will be putting more emphasis on emerging markets because the growth is faster there, but they will not be abandoning their ‘home' markets," Bartels says.
Competition intensifying
Ovum's Lusher agrees that competition in mature markets is going to intensify as well. We will also see emerging-market players looking to expand into more mature markets. Lusher believes this will be a positive development for resellers and distributors.
"For the channels this is the great thing, because it gives them more vendors to work with and play off each other.
"If a vendor takes its eye off the ball in the western markets, some of these emerging vendors will be more than happy to step in," he claims.
"It is not completely upsetting the apple cart, but we will see new competitors and new opportunities for everyone."
As well as the companies spawned by localised growth, more innovative start-ups may appear as larger global players continue with aggressive acquisition strategies. As big players snap up smaller companies, the entrepreneurs behind those acquired firms may move on and start new businesses.
Lusher says such new entrants often grow quickly and soon become a force in their market. If cloud lowers the barriers to entry in many markets, this process could accelerate. There is already some evidence of this, he notes, in the enterprise applications sector, where Oracle has spent billions of dollars acquiring companies over the past decade.
"You might think that this would consolidate the market but in fact we have more players. It is relatively easy to launch a new company now, because of cloud technology and open-source tools. After Oracle bought Peoplesoft, the founders of that company went off and formed Workday. And only a few years later, that company is worth more than $200bn in sales.
"Yes, Oracle took out Peoplesoft but in essence they created a stronger competitor, because Workday was built natively, in the cloud. It is growing extremely fast, is extremely popular and is about to go public. There was consolidation, but it has just spawned new competitors," Lusher says.
The same process is playing out in hardware markets, especially in the appliance segment, where smaller players such as YarcData, a spin-off of Cray Computers, and Nebula are emerging fast. Yarc focu-ses on big data and data analytics; Nebula is using the OpenStack platform to support standard server instances in the cloud. If there is a revolution in IT, these are the kind of firms that could drive it.
Of course, you still need regional service and support capabilities and local market knowledge. It is also better to have a distributed cloud infrastructure to reduce latency issues. But the problems with trying to take a cloud-based business global from a central location are national sensibilities and regulatory issues, says Lusher.
There has been a great deal of concern in Australia, for example, about companies working with cloud providers that host their infrastructure in the US, where the federal government has the right to examine the data on any server located on US soil. There are similar concerns in Brazil and Russia. Meanwhile, the EU is looking to introduce new unified data privacy laws.
The bottom line here is that while some new vendors may be able to gain a foothold in mature markets, they will need to set up offices, infrastructure and partnerships locally if they want a long-term impact. They will need distributors and resellers on the ground in all major countries. As competition intensifies, channels will be even more important to vendors looking to retain their positions or move into mature markets.
Western vendors looking east in particular will also need to tread carefully as they move into new markets for fear of upsetting their own production partners. The companies that do most of the manufacturing in the Far East for the likes of HP, Dell, Apple, Cisco and other big-name vendors could eventually become their competitors.
Lusher states: "Large western vendors already have a lot of technological partnerships with a lot of companies, so they will be in a situation where their partners now become their competitors - especially on the hardware side."
While established vendors will be looking to exploit the growth in fast-growing regions such as Asia-Pacific, BRIC and TSAM, the growth of these markets is going to trigger an expansion of vendor players that could make sweet music for the whole sector. "You can think of it as like an accordion," suggests Lusher. "We have gone though some contractions and now we are seeing some expansions."
He notes that as they grow stronger, these contract manufacturers will no doubt start to produce and sell their own branded products and look to move in on mature markets. We have already seen this to some degree. HTC was a successful contract maker of cellphones but has now established itself as a major brand in the market.
Korean giant Samsung is one of Apple's biggest component suppliers, but also one of its strongest competitors in the tablet and smartphone markets. More of these dichotomies will happen as new players grow out of the emerging markets, according to Lusher.
But he adds that it is too early to tell exactly how this will affect the market and relationships between vendors. "It will be a classic situation of ‘co-opertition' [sic]; it's going to be crazy - and great to watch," he says.
They may be looking elsewhere for the growth, but no vendor will want to take its eye off the ball in large, established markets, including the UK.
We should, then, not worry too much if vendors do not get the levels of growth immediately they say they would like. In developed markets the emphasis in years to come will shift from driving growth to protecting market share. It is likely to prove even more important for vendors to look after their most reliable and trusted partners.