News Analysis: Terms of endearment calm choppy channel

Most 3Com distributors seem happy to stay put in light of its planned post-USR merger contracts

Vendors issuing new terms and conditions (Ts&Cs) for contracts is an annual thing that distributors have to put up with as they get to grips with the changes. But it will be slightly different for 3Com distributors this year, as they will not only have to cope with the recently issued contract, but yet another, which is due after the merger between 3Com and US Robotics is completed this summer.

All 10 of 3Com?s distributors received their contracts two weeks ago, and they made for interesting reading. While most of the Ts&Cs remain the same, the vendor has woken up to the fact that it needs to offer better conditions to its partners. For example, 3Com will increase price protection from 30 to 90 days ? now the industry norm ? and will offer an extra one to two per cent discount on all its products (PC Dealer, 23 April).

The revised contracts have been welcomed by UK distributors, which have previously claimed their US counterparts got a better deal. Steve Lockie, sales and marketing manager at Data Translation, said: ?It?s no better than distributors should be receiving. But it allows us better stock holding and is definitely of benefit to the reseller.?

And it is imperative that 3Com gets distributors on its side. The new contracts may be the key to convincing partners to stick with 3Com rather than switching to a rival with a less clogged channel, but most distributors are calling for drastic cut backs in the number of channel partners. After all, if there are too many distribution partners, then it is the margin that takes the flack, as partners can only win business by price ? by giving away margin.

Although 3Com has 10 distributors, it also operates segmented distribution contracts. While Unity and Anixter have access to 3Com?s advanced systems products, such as ATM modules, Azlan, Persona, Data Translation, Logitek and Data Connectivity, as well as Unity and Anixter, are accredited to supply systems products such as terminal servers and ATM adaptors. For the rest of its products, the vendor has a volume supply agreement allowing CHS Electronics, Frontline and Ingram Micro, plus the other previously mentioned partners, to supply commodity items, such as Ethernet hubs and switches.

But this whole complicated channel structure could be overhauled when 3Com?s merger with USR is completed, because the number will jump from 10 to 12 with the addition of USR distributors Datatec and Globelle. Logitek and Persona already supply both compa-nies? products.

Whoever the combined operation decides to keep and what products partners are allowed to supply, some distributors have complained about 3Com?s present setup. ?It seems everyone has access to everything,? one source said.

Peter Rigby, networking general manager at CHS, said: ?Over-distribution has been an ongoing problem for several years. There?s been a lot of price slashing with distributors making less and less margin. Six would be an ideal number, we can live with seven. But it?s always worrying for the vendor if it downsizes its channel that distributors will go elsewhere.?

Neil Ledger, MD at Data Connectivity, is adamant that the contracts, although designed to prevent distributors moving to a rival, will not make 3Com products any more profitable. ?It will make no difference. The discount will just be given back to the Vars. No one?s going to increase their net profitability. They will just compete with each other and give it away.?

He added that distributors did not carry 3Com products by choice, but out of necessity because it was a market leader and users demanded it.

But Ledger?s concerns seem to set him apart from the rest of the distributors. On the whole, distributors have expressed confidence in their continuing relationship with 3Com. Rigby claimed that CHS was selling #20 million of 3Com product a year, while Matt Walmsley, 3Com product specialist at Logitek, said his firm was selling #1.5 million of 3Com kit each month.

Lockie agreed that the second change in contracts this year would unsettle things, but maintained it would only be short-term. ?It?s a little bit irritating if channels to market change, but out of change comes opportunity. There will eventually be some squeeze, but the distributors that panic are not in touch with their own business. If you?re not prepared for change then get out ? it?s a fast business.?

Walmsley echoed this view. ?We?re working on today?s business, not on what?s going to happen in a month?s time. The cost of changing contracts doesn?t get in the way of business,? he said.

History gives a good indication of how 3Com?s distributors will fit into the post-merger channel. When it bought Sonix in 1995, 3Com took the firm?s remote access products for its own channel, axeing the surplus distributors. With this in mind, Globelle and Datatec will have the most work to do if they are to hang on to USR product. ?It?s a shame, because those companies have done so much for USR, but that?s the dynamics of mergers and acquisitions,? said Lockie.

But Ledger thinks there will be little opportunity for the true niche distributors to make any real money with 3Com/ USR. ?They are just looking for fulfilment houses,? he said.

So while distributors have been given extra price protection and margin, it is still uncertain how 3Com/USR will struc- ture its channel policy in the summer. In the meantime, distributors will be doing their best to prove they are capable of selling the products well.