The storage systems giant EMC Corp. (NYSE: EMC) announced today that a number of its products would be made available only through its channel partners. The channel program, which is designed to expand market opportunities for both EMC and its distributors, gives customers easier access to products and enables faster, easier training for the EMC partner community, according to a press release. It also gives distributors a little extra cachet. "Available only through selected partners" has a nice ring to it, I think.
Component distributors such as Arrow Electronics Inc. (NYSE: ARW) and Avnet Inc. (NYSE: AVT) also sell systems, and both are EMC channel partners. So I began wondering whether "channel-only" programs would work on the component side of the business.
Distributors definitely benefit through exclusivity agreements. If you can't get the product you want directly from the supplier, where else are you going to go? Distributors also don't have to compete on price. You only lower prices when somebody else offers a better deal. And once a distributor "captures" a customer, it has the opportunity to sell other stuff to this customer. Basically, distribution has a captive audience.
Exclusivity helps suppliers, too. Training a reseller takes a lot of time and money, so having only a few channel partners increases efficiency. Distributors can focus on a limited number of products, so suppliers get a bigger "mindshare" in a limited channel. And suppliers no longer have to sell and support every product they make. Channel-only products are handled by the distributors.
The downside, at least in the component model, is limitation. If a customer depends on a distributor to be a one-stop shop, exclusivity makes this more difficult. It's also possible customers will switch brands to consolidate their purchases under one distributor. The channel used to have an informal exclusivity practice called "shelf-sharing." If Brand A and Brand B competed directly with one another, a distributor couldn't sell both brands side by side. As a result, customers had to do business with multiple distributors to fill a bill of material. The practice began to unravel as distribution consolidation made it nearly impossible to separate Brand A from Brand B without a lot of customer fallout.
There still is some exclusivity in the component supply chain. You won't see Xilinx Inc. (Nasdaq: XLNX) and Altera Corp. (Nasdaq: ALTR) sold side by side. But for the most part, component suppliers and distributors have done away with exclusivity. Supply chain relationships have become too complex, and the channel eases that by providing a one-stop shop for most of the components their customers need.
Products that require a lot of engineering and customer support -– such as computer/storage systems and FPGAs –- still work well under a limited or channel-only model. But that model is costly for distributors. Tech support and enigneering are fixed costs in a business driven by sales and commissions. Arrow and Avnet run their components and systems units as two completely different businesses. Even though there is overlap (disk drives are considered components but used in systems), the cost models are different. Distributors can spend a little extra time and attention –- and they do –- on systems that cost $10,000 and up. When the entire BOM is worth $10,000, it's better to be a one-stop shop.