10 Things I Learned About the Channel This Summer, Part 1

10 Things I Learned About the Channel This Summer, Part 1

The channel is evolving and shrinking, as the market continues to contract and Millennials enter the channel. How will this change the channel as we know it?

As the summer of 2014 is quickly wrapping up, I wanted to share some of my observations on the ever-changing technology channel.

I am seeing the very definition of the channel changing. The first generation of the IT channel opened its doors in the late 1970s, with business models around midrange computing, Apple education sales and hobbyist PC sales. 

When IBM announced the PC on Aug. 12, 1981, the Microsoft/Intel revolution began. The channel grew quickly and weathered numerous storms such as Dell direct in the early 1990s, explosion of the internet in the late 1990s, Y2K and, more recently, cloud, consumerization, mobility and convergence.

The channel topped out at roughly 500,000 companies worldwide in 2007, employing more than 5 million people directly. In addition, tens of thousands were employed indirectly at vendors, distributors, associations and media organizations.

The deep recession of 2008 is not experiencing the expected bounceback most of us expected.  While the broader economy is trending back to a 6 percent unemployment rate, the channel continues to slide.

What is happening out there?

1. The channel is shrinking at an alarming rate: Recent reports from CompTIA and IPED show a current North American partner base of 160,000 companies. It may sound like a healthy number, but it is down 36 percent since 2008 and continues to face 10 percent to 15 percent annual attrition for the foreseeable future.

Keep in mind the 160,000 includes a much broader audience than just resellers—it also includes all kinds of consultants, coaches, etc. A more accurate number, including people who directly influence and resell hardware and software products, is closer to 75,000 (with half of those selling enough product profitably to sustain a business).

2. The channel is getting younger – much younger: Todd Thibodeaux, CEO of CompTIA, kicked off his 2014 ChannelCon keynote with a couple of pieces of research. First, an estimated 40 percent of the entire channel will retire in next 10 years.

Yes, 4 in 10.

Second, those retiring will be replaced by millennials. In fact, 75 percent of the channel demographic in 10 years will not have been alive when IBM made that 1981 introduction.
This generation grew up on computers and will be pursuing different business models than the traditional reseller models we have today. They will look more like vendors, with in-house development teams, software products and intellectual property.

3. M&A is strong but suffering from low multiples: With a 40 percent retirement rate and a 10 percent to 15 percent annual attrition rate, it has become a buyer’s market for VARs, solution providers and MSP companies. Larger companies are scooping up geographic assets for both the customer base as well as talented, local employees.

I am now hearing about M&A activity falling well below 1X annual revenue, which is unheard of in my 20 years in the channel. There are dozens of underlying facts to each deal, but suffice it to say that traditional IT businesses are not as attractive to investors as they were before 2008.

In my next post I'll discuss some other reflections on the channel. But I'd love to hear your thoughts on my first three observations—drop me a line in the comments section below.

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