What lies beneath
While the authorised channel exists in full view, below the surface is an ecosystem of independent players coming under increasing pressure, reports Tom Wright
The IT channel could be likened to an iceberg, in that a substantial portion of trading has always occurred beneath the surface, out of view of the official routes to market commonly covered by CRN and other trade press.
But the submerged underside of the channel has become starkly visible in recent times, and for all the wrong reasons.
Broker after broker has gone under in recent years, normally in the wake of enforcement activity from one of the big vendors. Gamma Global, KX Network Solutions and Gen-X IT are just some of the big independent distributors to have vanished from view.
Others are attempting to avoid that fate by reinventing themselves and building ties with the vendors they carry.
CRN spoke to some of these players to explore what is behind the market shake-out and what the future holds for independent distribution, a sector many see as still fulfilling a valuable function in the channel.
Sharks circling
The basic premise of independent distribution and brokers is to offer resellers and other suppliers legitimate kit at a cheaper price by operating outside the vendor's official channel.
"I'm a broker and I'm changing my business as a result of what is going on because if I stay the same, I'm dead."
But the big hardware manufacturers are heaping more pressure on some who employ that tag by cracking down on the sale of kit that has originated from outside the European Economic Area (EEA), or is counterfeit.
A legal precedent was set in 2012 on this front when Oracle won a high-profile legal battle against Manchester grey market trader M-Tech over 64 Sun disk drives it had imported from the US and sold without the vendor's consent.
DP Data Systems - a £50m-turnover firm just two years ago - ceased trading after HP filed a claim against the Manchester outfit last May for alleged trademark infringement. The "importation and sales of parallel goods sourced within the EEA is no longer a feasible business model", DP Data said in its recent annual report.
Since the M-Tech ruling, numerous other firms, including KX Network Solutions, K2 IT and Gen-X IT have also been the subject of litigation from vendors, sometimes with terminal consequences for the companies involved.
The rule breaking need not be intentional, with Stockport trader K2 IT agreeing in November to pay Cisco a "substantial sum" after acknowledging that its unauthorised trading activities led to counterfeit items being inadvertently transacted by the firm.
An independent broker told CRN that a number of firms have been caught dealing in counterfeit products, without knowing they are doing so. More frequently, he claims, serial numbers and documentation are being forged further up the supply chain and the hardware is then falling into unknowing hands. With this in mind, he has stopped trading branded hardware and now deals solely in compatible components, and only to VARs instead of other brokers.
"It's very hard to determine what is counterfeit and what isn't because some people label compatibles as originals and some dealers don't ask - no questions no answers," he said.
"Lots of brokers and independent traders are having to embrace the reseller channel in order to survive because there are too many independent brokers and the big venders are really tracking anyone bringing stuff from outside Europe into the UK sales channel.
"I'm a broker and I'm changing my business as a result of what is going on because if I stay the same, I'm dead."
Burial at sea
The body count in the independent distribution sector continues to mount, with yet another Manchester-based player, Gen-X, going out of business in January following legal action from Cisco. The networking giant was pursuing Gen-X - which turned over £17m in its last full financial year - for a payment of £1.8m after lodging a claim against it for alleged trademark infringement.
The shift to cloud and related decline in on-premise hardware sales has acted as a second source of pressure on independent players.
Gamma Global, a Manchester sub-distributor that went out of business last year after unsuccessfully attempting to reinvent itself as an authorised distributor, said in company accounts filed ahead of its demise that the switch from in-house datacentre to outsourced cloud services "accelerated way ahead of our forecasts".
DP Data Systems' managing director Steve McKeever told CRN that the closure of his firm was driven predominantly by commercial reasons, and that the team was in the process of setting up a new authorised distributor.
"It was becoming very commoditised and there was very little value you could add to your customer other than trying to buy products cheaply and sell them at a low price," McKeever said. "To me it was not a long-term, sustainable business.
"If you're selling products without knowing what they're being used for, you're missing out on opportunities to add value to your customer to increase your sales, and also to make sure the customer is providing the best solution for the end user."
DP Data's recently filed 2015 annual accounts also show that it made a £1,858,000 loss, compared with a £591,000 profit in the previous year.
Treading water
Pessimism in the independent sector is not universal, however. High-profile entrepreneur Adrian Barnard (pictured) recently took over as CEO at long-standing independent distributor The Change Organisation, with a mandate to rid the sector of its negative connotations.
"We are known by the vendors and we exist very successfully with the authorised channel prospering. We don't threaten it, we don't undermine it; we support the UK ICT resellers."
"There are people who give all of us a bad name and one of my jobs is to talk about the reality of the industry and how independence has a leading role to play in supporting [the channel]," he said. "We are known by the vendors and we exist very successfully with the authorised channel prospering. We don't threaten it, we don't undermine it; we support the UK ICT resellers."
Barnard (pictured) said that although the independent sector is beneficial to the channel, it is unlikely to ever be publicly endorsed by authorised vendors and distributors. They are, however, fully aware of the sector's existence and will regularly turn to independent traders when they need to shift a large volume of stock quickly, he added.
Many firms on the receiving end of vendor litigation have labelled themselves as independent distributors but Barnard drew a distinction between these firms and the role The Change Organisation plays.
"I don't see brokers, grey market, unauthorised at all in the same boat as an independent trader or distributor," he said. "It's an important distinction. [Grey market traders are] the kind of people who get fined, who get shut down, and are going into liquidation."
This view is shared by Stuart Hall, marketing director at independent distributor Intec Microsystems. He told CRN that Intec has positive relationships with major distributors and vendors in the UK - regularly purchasing mass quantities of end-of-line hardware.
"We'll go to the likes of Tech Data, Ingram Micro, Westcoast, and we'll take a vast quantity of stock and hold it at our warehouses, he said.
"Equally, when there are discounts we'll take advantage of promotions, buy stock and hold it, and then sell it out at certain margins.
"That is simply how it works for us - we're a valuable customer to distribution because we buy all the stock they want to get rid of."
Sinking ships on the broker seas
DP Data Systems
- £50m turnover
- Ceased trading this year
- Currently involved in a lawsuit with HP over alleged trademark infringement. The management team shut down the firm to focus on authorised distribution with Utopia, and a new education-focused distributor. The managing director claims it is becoming increasingly difficult to operate in the independent sector as a result of falling margins.
KX Network Solutions
- £23m turnover
- Voluntarily liquidated in 2012
- Collapsed under the weight of a Cisco lawsuit in 2012. Was found to be importing kit from the US and China for resale in the European Economic Area, which was effectively made illegal when Oracle successfully sued M-Tech just three months earlier.
Gamma Global
- £53m turnover
- Went into administration in March 2015
- Tougher conditions in the grey market led to the loss of key clients who decided that buying from brokers instead of the authorised channel was not worth the risk, according to an administrator's report. An authorised distributor, Datacentre Distribution was set up and separated from Gamma, but dissolved this year.
Gen-X IT
- £17m turnover
- Went into administration in January 2016
- Cisco made a claim against the firm for trademark infringement and passing off last year, according to the administrators' report. Cisco offered Gen-X a compromise if it agreed to pay $1.8m, but has since told administrators it expects the claim to "greatly exceed" this amount.