Channel Disrupt – an Introduction

“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.”
-Charles Darwin

I’ve headed up channel sales for the Americas at Nutanix for 19 months now, but previously worked on the partner side of the IT infrastructure channel for 25 years. During that time, I saw a lot of disruptive technologies such as Ethernet, VoIP, the Internet, etc. But from a datacenter standpoint, nothing came close to the impact of virtualization.

VMware’s introduction of vMotion 11 years ago turned out to be an incredible boon to the IT channel. Solutions providers grew in both number and size as they helped organizations across the globe to virtualize their data centers through the acquisition of high-end hosting servers, SANs and switch fabrics.

Many VARs, especially the larger ones, were reluctant to fully embrace VMware’s revolutionary technology. But they were fortunate in that virtualization spread surprisingly slowly; they generally had time to adapt. The VMware consultancy I ran, for example, was purchased after only three years in business by a much larger publicly-traded Cisco partner desperate to quickly acquire virtualization expertise.

Today’s disruptive climate is dramatically different. Rather than enjoying an exploding increase in purchases of traditional datacenter hardware, solutions providers are going to see the opposite take place. And the timeframe is going to be very fast.

Consider:

  • Web-scale technology, as introduced to the enterprise by Nutanix three years ago, has gained exceptionally fast mind share across the globe including an OEM offering by Dell.
  • VMware has introduced its own hyper-scale technology, EVO:Rail, that competes with both its long-term storage partners and with parent company, EMC.
  • HP is jumping on the hyper-converged bandwagon both with EVO:Rail and with an updated version of its Left-Hand Networks. And it’s splitting off half of its business in order to focus on the enterprise space.
  • EMC, the leading storage manufacturer, has been seeking to be acquired.
  • VCE, the leading player in the so-called “converged infrastructure” space has increasing animosity among two of its primary partners, and Cisco is rumored to have turned off the financial spigot.
  • AWS is making big strides as they work to take away everyone’s hardware business.

According to IDC, the total server and storage market is now over $70B annually. An incredible $56B of this business is done by only seven vendors (eight once Lenovo’s purchase of IBM’s server business is reflected): EMC, HP, IBM, Dell, NetApp, Oracle and Cisco. Most of this revenue flows through channel partners.  As the status quo business decreases, resellers are going to have to react very quickly to compensate.

Manufacturer 2014 Server Revenue
(in millions – annualized)
2014 Storage Revenue
(in millions – annualized)
Total
(in millions)
HP $12,776 $2,384 $15,160
IBM $11,888 $2,848 $14,736
Dell $8,332 $1,700 $10,032
EMC
$7,056
$7,056
NetApp
$3,060
$3,060
Oracle
$2,948
$2,948
Cisco
$2,908
$2,908
Subtotal $38,852 $17,048 $55,900
Hitachi
$1,492 $1,492
ODM Direct $3,340
$3,340
Others $8,084 $4,940 $13,024
Total $50,276 $23,480 $73,756

Putting the Customer Second

All solutions providers say that they have their customers’ best interests at heart. But infrastructure VARs are typically dependent upon a few, or less, of the handful of leading datacenter manufacturers for most of their business.

The VARs make significant investments in trainings for both salespeople and technical folks. They work to obtain both individual and organizational certifications. They attend manufacturer conferences, engage in manufacturer led demand-generation events, and develop close relationships with their manufacturer partners. In return, the resellers receive Marketing Development Funds, access to sales and engineering resources and, most importantly, opportunities.

This channel structure has worked quite well since the early days of IBM-initiated solutions integrators, and many reseller organizations are now doing hundreds of millions or even billions of dollars in annual revenues. But the channel structure can often make it challenging to put customer advocacy ahead of manufacturer loyalty.

When a manufacturer, for example, introduces a partner into a new account, that partner has to push the manufacturer’s products regardless of whether or not the technology is the best fit. Introducing a competitive product would spell the death knell for receiving future opportunities.

Partners of the leading datacenter incumbents need to be careful even in their existing accounts of mentioning one of the newer disruptive technologies as an option. The partner will typically position it, if at all, only in situations where the incumbent either lacks a competitive product or is not likely to notice. The alternative is to risk the potential wrath of the datacenter giant.

So while a channel partner will privately often concede that, say, web-scale infrastructure makes a lot more sense for a virtualized datacenter than a Vblock, it can’t even bring up this option to the customer for fear of jeopardizing its large Cisco and EMC revenue streams. The manufacturer  relationships supersede the customer’s best interest.

In Boldness There’s Opportunity

Ray Noorda of Novell used to tell his partners, “In mystery, there’s margin”.  Today’s corollary might be, “In boldness, there’s opportunity”. The handful of infrastructure giants are selling virtualized organizations tens of billions of dollars worth of equipment that was designed and optimized for a physical datacenter.

Enterprising channel partners have an extraordinary opportunity to educate clients and prospects about the advantages of web-scale converged infrastructure. Not only is the revenue and profit potential vast, but they can also differentiate themselves from the pack as innovative, forward-thinking, and as leaders in integrating cloud technologies.

Sources
Weak Demand for Storage Systems…as Worldwide External Disk Storage Systems Revenue Falls for Second Consecutive Quarter.  09/05/2014. IDC Press Release.
Server Refresh Cycle Propels Industry Forward in Q2. 08/27/2014. Charlie Osborne. ZDNET.

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