Is Cloud Computing a Distribution Killer? No Chance

A recent CRN article questioned: “Will Cloud Computing Kill Distribution?” Seeing as cloud computing inherently bypasses the entire channel—connecting the end user to the cloud provider—the author raises a valid question. However, consider any technology ecosystem, and one should quickly be assured that no technology (including cloud computing) will “kill” distribution.

Any time a new technology or new vendor within a certain technology enters the market, a common lifecycle begins. First, a vendor develops a product. Next, the vendor determines a go to market strategy. The go to market strategy either includes a direct model, or a one-step channel model (where the vendor uses resellers to go to market). Most often, vendors choose a blend of direct and indirect as their go to market strategy. As the vendor grows, the vendor faces certain operational challenges. How do they scale production? How do they offer end users or resellers lines of credit to continue sales growth? How do they lower delivery times? Typically, technology vendors would rather spend their profits on continued research and development, not warehousing product and acting as a bank for their customers. Here is where distribution takes major cost out of the ecosystem. Distributors relieve vendors who use the direct model of operation costs by being a warehouse and a bank. Distributors offer the same benefits to those using a one-step channel strategy because resellers do not have the warehousing capabilities or the financial resources to offer major lines of credit to end users. Now, an obvious question arises: how does this benefit a cloud computing environment if no product exists to inventory. Again, a valid question, but easily answered.

First, there will always be product to inventory; hardware never goes away. For instance, on premise switching will always exist as long as end users are plugging into a LAN. If the end user has completely migrated to a wireless LAN, access points are required. Don’t forget about the end points that connect to the LAN and WLAN: scanners, tablets, phones, etc. Additionally, the more cloud computing a customer adopts, the more requirements exist to ensure adequate connection. For instance, as a customer transfers more of its applications to the cloud, the more important WAN optimization becomes (more hardware on premise). Additionally, load balancing becomes an issue (more hardware on premise). Security issues arise as an end user depends more on cloud based services (more hardware on premise). I could list more, but you get the idea: the hardware market will survive, and the network hardware sector has long adopted distribution.

Next, the cloud providers themselves will eventually see the need for financial services. Most cloud providers have adopted a monthly billing model. Monthly billing constitutes one of the core benefits of cloud computing (pay for what you use, and no more). As much press as cloud computing gets these days, one would think it has taken the IT world over. However, over the next two years, cloud computing is only expected to make up 1% of IT spending. Accordingly, cloud computing is in its infancy from a growth perspective. There is little doubt that this number will increase, but it has not grown to a level where accounting demands are more than cloud providers and resellers can handle. However, this will change and it will change quickly. As resellers move to an OpEX/monthly billing model, their accounting departments will be slammed with exponentially more invoices than they had under a one-and-done/CapEX model. Every cloud service sold will generate twelve invoices a year. That same service, will generate twelve invoices in year two. Likewise, that same service will generate twelve invoices for as long as the end user requires the service. Remember the financial/credit/accounting pressure distribution relieves from both the vendor and the reseller? That accounting relief will become even more important in a cloud environment. Just imagine cloud spending increases to 10% of IT spending. The day might not be far away, but the accounting needs required by such an increase are needs that no vendor or reseller wants to absorb. However, a distributor has the capability to relieve that accounting pressure.

In the end, distributors don’t create products. They don’t create end user demand, and they don’t shape the technology industry. Rather, distributors adjust. They adjust to technology trends, reseller needs, and offer their economies of scale in whatever area they are needed. Whether the operational relief needed is provided by a warehouse, or an accounting department, a distributor will adjust to relieve a pressure point in the technology ecosystem. This function will be no different in a cloud computing dominated industry.