Is It Curtains For DMRs?

I believe direct market resellers, or DMRs, are going to be an extinct species in five years, and a quick recap of the open sourcing model of the 1990s (a sales model not to be confused with the open-source software model) reveals why. In the early days of the PC industry, the major PC manufacturers had a closed sales model that prevented distribution from carrying their products. Preferring instead to sell through franchise organizations and the few company-owned store chains of the day, the manufacturers limited access to their product.

That all changed around the middle of the decade when first Compaq and later IBM and others authorized the broadline distributors to carry and sell their systems.

With systems readily available from multiple outlets at better pricing, franchisees had options other than buying only through the franchisors and, within a few short years, a dozen or so multi-billion-dollar companies were out of the market as we knew it. Names like ComputerLand, Intelligent Electronics, Inacom, BusinessLand, The Computer Factory and others that once graced the front page of CRN on a weekly basis were gone seemingly overnight. The reason was a business model change they were ill equipped to deal with.

Business model changes are much more difficult to adjust to for large players than a technology change. As the franchisors began to falter, what we now call the DMRs began to gain strength and today carry a powerful position in the market.

But there is a new business model change afoot that is challenging the future of the DMRs the same way open sourcing challenged the franchisors. This time it’s a technology shift as well: cloud computing.

The VAR community and distribution are adjusting well to the cloud, but the jury is out on whether the DMRs will make it through this change. The biggest reason is actually pretty simple.

Cloud computing is forcing all IT suppliers to sell to multiple decision-makers. More importantly, it’s about solving problems -- not supplying product. The DMR business model is all about supplying product at a low cost and has very little to do with solving problems. It really boils down to when you call a DMR, the question is, “What can I get you?” That worked for a long time, but the rest of the supply chain is now asking, “What problem can I solve?”

So what is a DMR that has built a business on low-price delivery of product with little value-add but which commands rebates and lots of marketing dollars from manufacturers to do? They have to make a decision to get out of the model they have and either become a distributor or a mega-VAR because over the long term there isn’t going to be a middle here that looks anything like the traditional model they have exploited so well.

Distribution is well ahead of the DMRs in making the cloud model transition. UBM Channel research is showing 72 percent of the VAR community is in the progressive transition stage with only 13 percent remaining in the vintage sales model we have described in our evolving channel model.

Fortunately for the DMRs, the cloud model is evolving much more slowly than the open sourcing model of the 1990s. But they need to pick their poison and shift or we will begin to see the signs of extinction in a few years just like we did with the franchisors 20 years ago.

BACKTALK: Make something happen. Robert Faletra is CEO of UBM Channel. You can contact him via e-mail at [email protected].