iSeries Resellers Struggling to Survive in Overcrowded Channel
January 26, 2004 Alex Woodie
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There is a growing dissatisfaction in the iSeries reseller channel, and an increasing wariness over what IBM might do about it. As iSeries volumes have declined over the past few years and all servers have inched closer and closer to commodity status, buyers enjoy more CPWs for less money than ever before. But these same economics are also forcing smaller resellers to scrimp by on meager profits of one to two percent or take more daring chances with “winkware.” 
More information about the current channel situation will be known when Big Blue’s partners converge on Las Vegas for the PartnerWorld event next month. Presumably, this is when IBM will start talking about how it intends to address channel issues and conflicts. Five years ago, IBM’s former chairman, Lou Gerstner, made no bones about the fact that he wanted a smaller, more focused, more motivated, more Blue channel. Big channel partners have made it clear to IBM that they expect to make money if IBM wants their support. IBM wants loyalty to its hardware and software brands as a condition of doing a lot of business. This makes sense, but it has made matters very tough for the small reseller downstream–the one who actually interfaces with the iSeries customer–that has been hurt by changes in the iSeries line and IBM’s and its master resellers’ administration of the iSeries channel. To be sure, all resellers, big and small, have been hurt by IBM’s more aggressive iSeries pricing, which lowers their revenues and profits but which was necessary to keep the iSeries competitive. The same can be said of any platform. Still, there are other issues that are not forced directly by price/performance advances in the server market that have had negative effects on iSeries resellers. One smaller reseller, who asked to remain anonymous for fear of recrimination, says IBM gave an unfair advantage to larger iSeries resellers last year when it made its annual tweak of the reseller rules. “IBM removed our coverage value-add, even to the point where I cannot sell to my existing customers,” he says. “If I have a customer with an AS/400 Model 720, I can’t sell him a processor upgrade. I gotta come up with a software solution for him. It’s absolutely aggravating and insulting.” This reseller is not alone. With the word out on the street that IBM and big resellers give 20 percent discounts on all iSeries machines, customers today are more dialed-in than ever, and they are getting good deals as a result. But what the customer gains, the reseller loses. The reseller corps continues to chase what is probably a modestly shrinking installed OS/400 server base with an iSeries that just doesn’t command the prices and profits it used to five or ten years ago when midrange computing was expensive and the X86 platform was, to put it bluntly, a joke. As a result, some resellers report that they are barely breaking even selling the iSeries. Some aren’t breaking even. IBM has said there are about 2,000 companies reselling iSeries boxes. Running such a large channel without a set of rules would lead to chaos. Each year, IBM makes changes to its set of rules and then announces them to its “solution providers” at its annual PartnerWorld conference in February. These changes are necessary to balance the forces of economics that are constantly at play in the IT world. Ideally, IBM’s role in this is as a benevolent dictator (it already owns the customer relationships with the largest iSeries shops). If this process is done correctly, Big Blue’s lead brings peace and prosperity to the most of the channel, and the channel gets through another year. Right now, the problem is that the channel (when taken collectively) is neither healthy nor profitable, and resellers are worried about their ability to make a living. For example, IBM last year changed the special bid process in a way that hurts small resellers, the reseller quoted above said. Prior to the change, a reseller was able to protect his prospects from being raided by other resellers by applying for a special bid for an iSeries purchase from IBM. No other reseller could apply for a special bid for that client for the year or until the first bid went through. IBM loosened the rules to allow any reseller to apply for a special bid for any client, thereby hurting a reseller’s ability to retain clients, our source says. That source says IBM made this change in order to redistribute the wealth. IBM wants to reward the larger resellers who have invested more in infrastructure, certifications, and building their sales organizations, by giving them an installed base to milk, he says, whereas the role of the smaller resellers in this scheme is hitting the street to find new customers, the so-called fresh blood. “I think there’s a shakeup in the distribution,” the small reseller says. “There always have been too many resellers.” In all fairness to IBM, sometimes drastic moves are required to restore an ecosystem to health. With 2,000 resellers chasing a pool of sales that some say would be more economically served by 1,000 resellers or less, it’s an extremely difficult job ensuring every company gets its fair share. That’s the problem: there isn’t enough business for everybody to get a fair share. Even with iSeries sales up slightly in 2003, sales are around $1.8 billion to $2 billion at the IBM level (resellers profits are on top of this, of course). But the typical AS/400 sales year in the 1990s was somewhere around $3.5 billion in sales, pushing twice as many OS/400 servers as IBM does today. The obvious solution is to shrink the channel to restore profitability for remaining players. Winkware One of the ways that resellers have tried to restore their margins is by selling “winkware.” Winkware is non-existent software sold to a client in order to make that reseller eligible to sell hardware or an upgrade. “It’s software you sell on a deal, and both you and the client wink at the same time,” says another reseller who asked not to be identified, for fear of recrimination. “When IBM compliance comes by, asking about that human resources package for the new computer, they say, ‘Yup, we’re using that package, or we just installed it, or are installing it.’ You’ve got a lot of that going around. You can’t make a living without breaking the rules.” Part of the problem with having too many resellers chasing a shrinking pool of sales is that resellers are not able to differentiate themselves on price anymore. Through its rules for resellers, IBM is more or less able to dictate the prices that customers will ultimately pay for an iSeries. Some resellers are only able to cover their costs through the six to eight percent rebates that IBM offers, a reseller says. However, some resellers have problems getting those rebate checks on a regular basis, making it harder for them to pay their bills. “It takes IBM forever to process them,” a reseller says. “IBM’s using a twentieth century, legacy system. It’s crude at best.” “The problem is, there are way, way, way too many partners, and IBM can’t get rid of them without legal complications,” one reseller says. “There are lots of mom and pop service providers, or two-guy shops with maybe 10 customers. Now all of a sudden, they’re barely making a nut, they’re getting squeezed. IBM would like to have that number [of resellers] diminish by half or more. What IBM is doing now is treading as delicately as possible, hoping for the mom and pop shops to make a decision,” the reseller says, “then try to delegate as much as possible to the distributors, to insulate themselves from those horrible decisions.” Next week, we will look at IBM’s possible solutions to the iSeries reseller channel dilemma. Stay tuned. Other Articles in this Series |
