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HP, Dell, IBM, Others in Trouble when Corporate Customers Go Direct

There was an interesting story in the New York Times about Seagate Technology (STX) selling its disk drives directly to large corporate customers. Much of traditional technology industry success has been the strength of a distribution strategy, using distributors, retailers, system integrators, value-added resellers (VARs), and others to get products in front of potential customers and try to push competitors out of the way. Although direct purchases by large customers are nothing new, the idea of buying parts and creating do-it-yourself systems is relatively unusual among IT departments. But economic pressures, shrinking budgets, and falling hardware prices are changing the world, and vendors are having to respond. The result over the long term will likely shatter old business models and reshape how the industry looks.

That's a pretty big statement, but let me walk through the thoughts behind it:

  • We have the continuing downward pressure on hardware prices. That's been largely focused on commodity products, like PCs, with competition exerting the pressure. But as the article notes, large corporations feel pressure on their budgets and impose that on computer vendors. Think of it as bottom-up pulling instead of top-down pushing. Whatever the name, the result is the same.
  • Cloud computing is increasingly offering the opportunity to offload massive computational and storage requirements onto someone else's physical infrastructure. The more that happens, the less corporations need to bring specialized, heavy muscle machinery in-house. In other words, if they're buying servers or networking equipment, it's likely to be more in the commodity line, underscoring the price pressure. When you are a big company that wants generic Intel-based servers, you can buy components and put them together yourself ever more easily. Why pay the extra freight for a Dell (DELL), HP (HPQ), or IBM (IBM) to assemble something when you don't need and don't get much in the way of added value?
  • To get to big corporate customers, hardware vendors have often used distribution and specialized resellers. If companies are buying components direct and selling them, the need for the distribution chain starts to disappear. The likely path left open to them is to become hardware aggregators, using the combined purchasing of multiple clients to exert even more economic muscle, get lower prices for parts, and charge for the service, like the server equivalent of a warehouse club. Some resellers with specialized technical knowledge and capability would survive, but many would find themselves pushed out and forced to look for mid-market and smaller customers.
  • With the push to the cloud, the big hardware vendors will focus ever more on becoming viable cloud service providers. IBM is already moving well down that route. Dell and HP want to. The chance of those in the distribution chain saving themselves by providing cloud services is negligible, as they don't have the resources to compete on a big scale and are already late in the process.
We're going to see more hardware companies and more resellers and distributors out of business, prices plummeting, and virtually everyone forced to become a service provider rather than a product company. I think these pressures will take hold in an obvious way within five to seven years.

Image via stock.xchng user djeyewater, site standard license.

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