How Will the Communications Industrys Indirect Channel Be Transformed in the Next 10 Years?

Channel Partners

December 22, 2009

17 Min Read
How Will the Communications Industrys Indirect Channel Be Transformed in the Next 10 Years?

“Consolidation of the carriers and the individual agent will be challenged in the years to come, in that the increased complexity as the technology transitions to the data side of the house.”

— Dale Stein, Co-founder, TAG National

“With the continued convergence between IT and telecommunications, either the telecom agent channel or the VAR (system integrator) channel will have to cry ‘uncle’ and start to embrace the other’s technology. Personally, I think the VARs are best suited to take on this challenge just due to the nature of adopting the support structure necessary for telecom services vs. telecom agents taking on the role of providing equipment-based solutions. With that said, there is still plenty of room for partnerships between these two groups, but that adoption has been pretty slow at best. Perhaps it will pick up over the next decade or maybe VARs just may take over the telecom channel space altogether. Time will tell.”

— Brad Miehl, President & CEO, MicroCorp Inc.

“Business owners will need to invest in staff training to field knowledgeable people who can maximize margins and maintain a competitive edge. The cost of untrained employees will result in lost business and lower profit per transaction. WiBOC estimates the current cost of an untrained salesperson at over $50,000/year to the average wireless business. Many businesses are acquiring additional locations to produce economies of scale and reach higher income levels from their carrier. Fielding a well-trained staff in retail and/or B-to-B environments is critical to long-term success.

With ‘reported’ unemployment approaching 11 percent, finding employees will be much easier. Paying them, however, will become more difficult due to higher costs of inventory, smaller margins on the post-paid side and lower commissions for prepaid sales.”

— Mark Landiak, Executive Director, WIBOC (The Wireless Business Owners Consortium)

“Price compression will continue making it necessary to drive sales costs down. The industry’s indirect sales channel will continue to gain more market share within the carriers away from the direct sales forces for the majority of the next 10 years. I think some providers will re-engage a direct model in the later years of the 10-year period. The sales process will become more complex. Network sales will be integrated with equipment and software applications. The era of sales reps selling voice on price is over. The future success of that type of veteran will depend on their ability to partner with others that can provide the technical support that will be required by vendors and customers. The master agencies will become more established and harder for new companies to enter.”

— Geoffrey Shepstone, President, Telecom Brokerage Inc.

“Aside from the given requirement for the channel to stay one step ahead of customers’ technical requirements, successful agency owners will find significant opportunity to band together with other like-minded and synergistic agency entrepreneurs to aggregate their collective market presence. This is not likely to be a broad coalition of the various types of agencies, but rather a targeted consortium of organizations who have similar business philosophies and go-to-market strategies.

We’ve already seen the benefits of such pseudo-consolidation, as handfuls of agents are currently operating under collectively owned carrier agreements, to the advantage of both the carriers and the agency owners. The carriers benefit from the additional mindshare and focus of such consortiums, while the agencies gain additional support and contract protection to assure maximum protection to the revenue streams generated.

In the coming years, this trend will continue and evolve into specific ‘end-game’ strategies for owners who are of the same mind. Consolidation of duplicative functions like quoting, order management, customer service and commissioning are all targets for cost reduction from increased efficiencies.”

— Bill Power, CEO, Agent Alliance

“I believe you will continue to see carriers lean more heavily on the channel for growth and empower selected agencies with even more resources and tools to manage their clientele. I also believe we’ll continue to see some further carrier consolidation but not at the same rate as the last 10 years. The elite master agents will continue to thrive and become more powerful and instrumental in distribution of products and services. Wireless will continue to gain momentum and the most successful agents will have to stay on top of technology developments or risk being left behind.”

— Ted Schuman, CEO, PlanetOne

“Today, SMB customers are buying more managed services offerings, which are paid for on a monthly recurring basis similar to how carrier services are paid for. These same services are provided by many VARs, carriers and other new managed service providers (MSPs). And even newer companies to the space like Dell, HP, IBM, Amazon, Google, Zoho and are now offering cloud-based computing services. These same companies and similar ones are also are offering managed voice, managed exchange and managed storage services, as well as completely managed desktops. 

This change will significantly impact the indirect IT channel of classical VARs as well as any kind of solutions provider, including telecommunications agents. Once hardware, software and other computing services are viewed more as a ‘digital’ on-demand offering instead of an on-premise offering of the past, I believe we’ll witness a significant change in the entire supply chain of indirect IT business over the coming years. Instead of buying the physical hardware and software for their specific needs, the customer will buy it as a recurring service, and the hardware and software will be housed ‘in the cloud’ and not in the customer’s physical office. VARs will become these managed service providers or MSPs as will many more partners, and a new ecosystem will develop over time. As this change occurs, our communications industry channel of agents will become more deeply involved with that of the solution providers from the IT channel who will become MSPs, and perhaps they will even be indistinguishable channels over time. What matters most is what customers will want from their suppliers. Solutions providers (agents included) have an incredible opportunity to increase their perceived value in this new evolving supply chain. There are probably five to seven thousand telecom agent companies and individuals today in the traditional carrier services channel in the United States for voice, data and IP services. But there are more than 200,000 other partner organizations that exist in the IT channel that has been built over time. I see an integration of these two channels coming over the next three to five years and beyond.”

— Craig Schlagbaum, Vice President, Indirect Channels, Business Markets Group, Level 3 Communications

“This is a question and a fear. However, I believe things will continue to get better for those who stay on top of new technologies and channel trends. I see three main transformations.

First, the larger carriers will push hard for consolidation in the indirect channel. You will likely see the larger carriers dealing with fewer and fewer master agencies and dropping the smaller independent agents (and underperforming masters). Previously, this was limited to the ILECs. This is and will spread further to the larger CLECs and other players as well. The support structure will move to greater support by the carrier to few master agents and them in turn supporting their subagents. Master agencies will grow bigger and the smaller agents will find themselves pushed to sign up with one or more master agencies. Some larger carriers will do this ethically, others will simply ‘clip’ the smaller and underperforming agents.

Second, VARs will start to play a far larger role, to the extent that most master agencies and agents in general will have to create equipment vendor relationships. VARs are waking up to the revenue they leave on the table with network services and carriers are becoming more cognizant of the value VARs bring with their on-site relationship and close confidence of the customer. Add to it converged networks, VoIP service over data lines and the rest, and the line between equipment and network services starts to disappear, forcing greater collaboration between these two elements and the ones who sell them.

Third, I think there will be more channel integration with ILECs and regional fiber-based carriers. The indirect channel will start to both find more opportunity with some of the ILECs previously off their radar and will also find themselves forced to deal with them. With copper starting to expire and the FCC ruling that fiber access facilities do not have to be offered for open access by the ILECs, there will be locations and products outside of major metro areas where the ILEC or single area fiber provider will be the only one. This will be especially so as bandwidth needs grow and fiber becomes more and more of a requirement for many solutions in the coming 10 years. The hope is that they keep those areas open to the indirect channel. However, previously you had agencies specializing in ILEC services and then other agencies working all the rest. We will start to see a lot more interactivity between those groups.”

— Zachary Schechter, President, ZCS Enterprises

“I believe the indirect channel will mature over the next decade to appear much more like the equipment channel which means we’ll see certification requirements, more of a two-tiered distribution model, and an increased percentage of carrier sales provided by the channel. I also think we’ll see more full-service agents as agents become managed service providers and managed service providers figure out how to become agents.”

— Adam Edwards, President, Telarus Inc.

“Intelisys believes the importance of third-party distributors to communications providers will continue to grow in the next decade both in terms of strategic selling and percentage of overall growth dollars. We believe that the fastest growing segment of the market for the channel will be mid-sized companies (500 to 5,000 employees), and that they will continue to decrease the numbers of IT/telecom vendors they deal with while also looking for added-value distributors that can procure and manage networks, analyze costs and spend, provide security solutions and offer genuine expertise in network migrations to new technologies (including wireless).”

— Jay Bradley, President, Intelisys

“In 10 years, the indirect channel will be experts on integrated communications and business application implementations over fixed and wireless networks. Voice-only solutions will be less than 10 percent of the channel’s overall revenue mix. We’ll also see more global alliances and partnerships in the channel as the world’s business centers shift to today’s developing world economies like India, China and Brazil.”

— Steve Hilton, Enterprise Research, Analysys Mason

“We are already witnessing the transformation into wireless services becoming a larger and larger part of most businesses’ telecom spend and that will continue to grow steadily during the next decade. On the consumer side, prepaid wireless will surpass postpaid wireless, and the applications that seem endless now will pale compared to what we will see a decade from now. For the channel, that means OPPORTUNITY!”

— J. Sherman Henderson III, Founder, President & CEO, Lightyear Network Solutions LLC

“All communications will be mobile, international and all about latency since EVERYTHING will be IP (voice, video, etc. will all just be applications of IP) and, of course, price will always be there as a decision-making criteria. Energy will become just like telecom in terms of procurement and sales volume and it will have the same decision maker, which will create new profit centers for agents. Cloud computing and hosted VoIP will explode. Equipment will all but disappear with cloud and hosted systems. Social networking will be paramount and mandatory. Google wins the game!”

— Vince Bradley, CEO, World Telecom Group

“The communications industry’s indirect channel will contract at the top on the rep side. In addition, the indirect channel will face increased threats from the providers’ direct channels. Also, an interesting shift may occur as providers are able to make the order process and the provisioning of services more ‘user-friendly’ to the potential end user.”

— Philip Josephson, Founder, the Law Office of Philip Josephson

“The indirect channel focused on this market sector will need to continue to adapt to technology advancements, customer demands and competitive pressure. There is no single right way to adjust your business except to say that watching the market, analyzing margins and preparing for additional services must be part of 2010 planning.”

— Tiffani Bova, Vice President of Research, Gartner Inc.

“We’re likely to see a high level of activity in health care IT as health care providers realize that new technologies have to be adopted to improve their business. A 2009 CompTIA study found that 59 percent of health care providers are somewhat to very excited about the prospect of telemedicine and 79 percent are interested in portable tablet PCs for point-of-patient care. It should come as no surprise that health care providers are interested in the time savings and improved efficiencies offered by advanced IT, such as electronic medical records, to better serve patients. Small VARs are playing a big role in helping doctors to make the transition because they have those people as customers now.”

— Todd Thibodeaux, President and CEO, CompTIA

“I believe the U.S. economy will continue to be sluggish for many years to come and consequently, service providers will continue to look for ways to manage costs. One of the best ways to control selling costs is to establish an indirect channel. I believe service providers will therefore become increasingly more dependent on the channel as their primary means to reach end user customers.”

— Benjamin W. Bronston, Partner, Nowalsky, Bronston & Gothard, APLLC

“I think more agents are feeling like statues and the carriers are pigeons. I see two developing trends for surviving agents. First, agents are beginning to look to master agents instead of negotiating direct carrier agreements. The underlying reason is simple: there is strength in numbers, and agents feel less vulnerable when hitching their wagon to a master agent instead of working directly with the carrier. It’s not a bad idea overall, but the agent’s commissions are diminished under this model because some of the agent’s commissions will instead be paid to the master. In addition, this approach doesn’t necessarily ensure the agent won’t be bullied; the carrier could still push the master agent around — or worse, the master agent could be the new bully.

Because of the potential risks associated with seeking cover under the master agent umbrella, I am seeing a second option begin to gain momentum. I see efforts by agents to form an alliance that allows them to continue in their current operating models. For example, aligned agents can share the costs of competent legal counsel to assist them in negotiating agreements with carriers or even in litigation costs, where agents have a common complaint against the same carrier. This approach has also seemed to encourage carriers to rethink their position when confronted by a group of similarly wronged agents, presumably because of the collective power of the group and because the carriers want to avoid a deluge of lawsuits by the solo agents after an agent group prevails.”

— Greg Taylor, Attorney, Technology Law Group LLC

“The indirect channel will change and adapt in several fundamental ways, which are:

Consolidation: There will be fewer master agents, and those master agents that are in the distribution model will reduce to a handful. Large direct master agents will find it harder to serve many carriers or service providers. There will be M&A activity in the master agent ranks.

Differentiation: Like in the technology hardware distribution world, the remaining big players will have to differentiate from each other. The paths of differentiation will have to intersect with customer demand. First movers will be rewarded. Many large and lucrative paths to differentiation abound for channel players.

Margin pressure: Transactional service margins (or commissions) will drop significantly while volume rises for fewer remaining survivors. Margin pressure on transactional services will drive successful players to innovate towards higher margin services, but more will fail than succeed, and hence one big driver for the consolidation already mentioned.

Automation – self-service: Increasing focus will be made towards self-service for transactional services at both the agent and customer level. Master agent and direct agent portals will provide more self-service wherever possible. Ignoring automation of transactional services in favor of only higher margin services may push some players farther into a niche and thus leave the benefits of volume to larger players who successfully tackle transactional and value-added services.

Polarization between large carrier and independent or private brands: Large carriers in both wireless and wireline will find it increasingly difficult to compete with smaller and mid-size sophisticated multivendor players that are more flexible and solution-oriented as master agents, master VARs or hybrid resellers and carriers. Choice will continue to reign while multivendor scenarios that incorporate their competitors’ services will remain challenging at the LEC.

Rise of the VAR: It may still be off in the future a few years, but the VAR will eventually rise to replace many agents in the channel. Agents will become VARs, and VARs will become agents while simultaneously retaining their VAR model.

Fall of the VAR: The VAR ranks will thin by as much as 50 percent over the next few years. Decades-old VAR models are suddenly crumbling with cloud services and many will not adapt. Smart players will see and seize the opportunity in this dynamic.

Dominance of the cloud: Agents and VARs will sell services in the cloud or perish.

Recurring revenue: VARs will adopt recurring revenue models. Agents will adapt to new types of recurring revenue models that are different than the 90 percent-plus they rely on currently.

Barriers to entry: Entry barriers will grow because software development of tools to effectively manage and service the channel will continue to move significantly higher. Barriers will also grow because the cost of assembling complex service bundles will grow and sales, marketing and training cost will grow with them accordingly. For instance, TEM software is improving by leaps and bounds, but so is the cost of selling and supporting it. Specialized staff is required to succeed in areas such as TEM, mobility, cloud services, installation/maintenance, VoIP, etc.

Rise of expectations: Master agents will spend more money on better solutions for subagents, but they will also expect more of those subagents because they will have to recover the cost of the investments. In other words, larger distribution master agents will not be able to provide as high level of service to an agent that only brings in small infrequent orders. Conversely, higher producing subagents will reap benefits of improved service in return for loyalty and increased sales.

Billing: Large agents will incorporate increasing levels of back-office billing for services they purchase wholesale.

Consolidated commission visibility and reporting: Master agents in the distribution model will dramatically improve their commission reporting and visibility, and will tie that into a full quote-to-cash system.

Education: More efforts will be made toward education of the subagent, direct agent and end customer.

More professional and sophisticated sales and marketing: Successful channel players will increasingly utilize superior sales and marketing methods as the industry matures.

Rise of social networking: Successful channel players will use more social networking tools to touch customers, subagents and prospects.

Rise of TCA: The industry is ripe for a neutral leadership body like TCA. If TCA can make it through its toddler years, it just might become one of the most important entities in the telecom channel industry.

Complex solutions — offered a la carte: Master agents and other successful channel players will have the vision and wherewithal to assemble interrelated complex solutions that can be offered a la carte, or together.

Rise of wireless last mile — empowering the mobile worker: The mobile workforce is approaching 60 percent and successful channel players will find ways to offer solutions that are secure, fast and reliable for this exploding user base.

Rise of the wireless device: Successful channel players will tackle solutions built around increasingly powerful mobile devices and the software that runs on them. Android is an opportunity.”

— Emmet Tydings, President, AB&T Telecom

“It will increasingly shift away from PSTN-based telephony products, and migrate to Internet telephony, wireless and other innovative offerings.”

— Thomas K. Crowe, Partner, Law Offices of Thomas K. Crowe, P.C.

“I think the indirect channel will eventually incorporate the role of the direct channel as well. Meaning, we will represent the carriers left standing to the client base in all ways. I believe you can see that occurring as the carriers provide less and less service to the end user. (For example, services are offered on a hosted basis to the end user who in most cases will be the agent/consultant.)

In addition, you will no longer see the vendor as the equipment provider (in the large majority of cases). That will fall upon the agent and those vendors who see the change occurring inside our world. This change began in 2006 and is moving at an alarming pace for those agents that are vendors.”

— Dan DiOrio, President, Telco Pro USA Inc.

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