The pulse of the domestic IT industry could be best gauged by the health of the channel market. This thriving community comprised of a whole gamut of entities starting from large national distributors, to regional distis, VARs, regional resellers, sub-distributors to the small retailers, the lowest entity in the entire supply chain. In line with the changing market dynamics, most IT vendors in 2005-06 re-looked at their distribution strategies launched a host of new channel initiatives to bolster their channel partners.

The channel entities positively responded to the vendor overtures with a slew of strategic initiatives on their own-increasing their focus on retail, balancing volume versus value products, realigning their national and regional distribution model, rationalizing their credit exposure, and adopting a more solution-oriented approach. On the flip side, however, the market had to undergo serious turmoil owing to the shenanigans of a host of fly-by-night operators; the industry again responded by adopting remedial action to counter this problem.

Retail: Boon or Bane?
Retail market strategy was identified as the way ahead for distributors of all hues and sizes. The large ones in the Dataquest Top 10 club too initiated measures to either strengthen their existing retail strategies or providing stronger support to the retail channel and streamlining new activities around them. The vendor focus to increase their retail presence also pushed the distributors to invest heavily on retail, the effects of which are more likely to be visible from this year.

The retail wave amongst vendors was strongly visible: Canon had 105 retail centers known as Canon IT Image Zone; Samsung had 80 Digital Home Plazas, while 25% of Acer's revenue in 2005-06 came via its two retail formats, viz, the 200 Acer Points and Acer Malls across the country. And most importantly, HP had 700 retail outlets spread across 226 cities. However, the general consensus, at least in FY06 was there would be no complete cannibalization, but retail focus was only a sign of market maturity.

Understanding the Value Model
The channel industry definitely moved up the value chain and most distributors looked at high margin, low volume business vis-à-vis low margin high volumes business. In earlier years, the major emphasis was on price and availability. However in 2005-06, the industry was keen on long-term initiatives instead of short-term gains. The players were more customer oriented and tech savvy with a lot of emphasis on offering custom made solutions at lower costs. Factors such as increased competition, lower margins, geographical reach and high operating costs made the industry a challenging atmosphere to work in.

Indian channel partners in sync with their principals were constantly redefining their markets and business models - one such major shift occurred when the market moved from a volume to a value model a few years ago. It continued in FY06 when channel partners were keen to move up from the box pushing role and vendors began investing a fair amount in training initiatives.

Most of the larger channel players like Ingram Micro and Redington and a few vendors understood that the value model was a natural progression of a maturing market. In an era of diminishing margins, it appeared to be the next driver of growth - the model that allowed channel partners to move up the value chain. However, since it was more of an evolutionary approach till now, most channel partners of vendors at least this year have not got the overhaul they actually required. Players like SES, Neoteric and Supertron too followed the value model route by adding principals like Intransa, Molex, QNAP, Wacom and Twin Mos.

National vs Regional
In the industry, the basic business model rampant in FY06 was a real hybrid one; vendors operating with one national distributor and number of sub distributors/ regional dealers/business partners all across the country. However, there was no general consensus on which model is better-national or regional; all debates ended endorsing the hybrid model that had evolved. The role of a regional distributor was to generate incremental business for the company from niches that large, national distributors could not address.

Whether a company adopted a regional or a national model really depended on the kind of its products. Products like printers, monitors, and scanners were sold best through the RDM. For a product like high-end digital cameras, the NDM seemed to be the best option, since such products required specialized service centers and catered to a niche audience.

Basically, an RDM had multiple distributors; each distributor had a chain of resellers operating in a particular region under him. Or it was a network of distributors working in small towns who added to the vendor's overall channel reach. This was significantly different from the NDM, which was a three-to-four layered model, wherein a vendor had signed a memorandum of understanding (MoU) with a national partner who distributed a product through his network of sub-distributors and resellers. The shift to the RDM model helped vendors gain better penetration into class B and C cities and cut down the number of tiers to reach the end users. While the Ingrams and Redingtons already had nationwide presence, even Tier 2 players expanded to upcountry locations-Neoteric went to Patna, Rajkot, Raipur and Goa, Rashi, Iris and Savex all made inroads into B&C class cities.

Vendor Slugfest
This was the first year following the merger of Ingram Micro and Tech Pacific. This mega merger was like Coke and Pepsi coming together to wipe out all competition. Result: the new Ingram Micro entity clearly remained at the summit of our Top 10 club; its post-merger revenue was pegged at Rs 5,517 crore, excluding the business generated from the sale of Sony Ericsson mobile handsets. Similarly, we have excluded the HCL Infosystems revenue generated from the Nokia handset business. Ingram was ahead of its nearest competitor Redington by more than Rs 1,000 crore (Redington revenues pegged at Rs 4068 crore).

The year also witnessed the meteoric rise of eSys at the third position-with the Ingram Micro-Tech Pacific merger, many vendors looked out for an alternate strategy to mitigate the risk of having all eggs in one basket. eSys best leveraged this opportunity and gained the maximum. The SES Technologies acquisition by Sahara Computers was another key highlight of FY06. It led the Tier 2 distributor category staying ahead of competitors like Neoteric, Rashi, Savex, Iris or Supertron. There was a balanced geographical distribution amongst distributors in the Top 10-the presence of 5 from Mumbai and 3 from Delhi reiterated the importance of Lamington Road and Nehru Place in the channel panorama. There was one from Chennai while one new entrant from Kolkata proved the growing clout of GC Avenue as the new channel Mecca.

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