Sector comparison: The Internet is at the heart of how technology is used in business, but the arrival of the web has caused profound change in the way businesses buy it. Karl Flinders finds out more
During the 1990s, driven by the Internet, there was a huge upsurge in IT spending. It was during this period when companies of all sizes recognised the value of technology and began demanding IT products and services to access and harness the online world.
At this time corporate IT budgets were incalculable, IT directors were all powerful, demand was inextinguishable and to cap it off it was a seller’s market. Roll on the good times for suppliers.
But the Internet had a sting in its tail. It not only fuelled the growth of what is known as the IT Channel, made up of third-party IT suppliers taking manufacturers to a highly competitive and dispersed end-user market, but it also led to the downfall of many traditional suppliers. These were often local companies that provided bespoke products and services to local customers through telephone support and onsite consultancy.
Over the past few years online IT sales growth rates have far exceeded that of IT sales as a whole, according to Office for National Statistics figures. In its most recent survey, the ONS found that total UK online sales of computer/ other business services were worth £4.2 billion in 2005, compared to £2.3 billion in 2004, £1.8 billion the previous year and £0.4 billion when its records of this began in 2002. In the period from 2002 to 2005 this represents almost a 1,000% increase, with no sign of the growth slowing.
But if these figures are taken at face value, it is clear the Internet is taking a bigger share of IT sales every year, and this is at the expense of some resellers.
It is important to note that it is impossible not to relate the growth of online IT sales commoditisation, another variable in a maturing IT market. It is only when products become commodities that cost is the biggest influence on a buyer’s choice, with human interaction and local relationships no longer required. Thus it becomes an online sell.
The ability of suppliers to remove overheads and reach a wider audience, via the Internet, enabled them to sell high volumes of commoditised products at competitive prices. Sales of hardware such as PCs, printers and scanners were the first to be hit.
Analyst Andy Brown, who specialises in hardware at IT research company International Data Corporation, describes the effect of commoditisation and the Internet.
He says hardware prices fell steeply – starting in late 2001 – and profit margins with it. “There have been double-digit reductions year on year ever since,” he adds.
How could manufacturers survive on wafer thin margins? Cutting a reseller’s share of the profits was the knee-jerk reaction. Or even removing the middle man altogether and selling direct.
But what stands out is the fact that manufacturers have increased their direct sales through online activity, says Brown.
He claims today’s customers are savvy enough to buy online and confident of what they will receive. As a result they no longer require hands-on help for the product and are quite happy to buy from a virtual salesperson if the price is right.
Despite the loss of margins on commodities, Brown believes IT suppliers were adaptable to change. Their heritage in a fast-changing industry contributed to this. “[Many resellers] saw it as being disruptive but nothing that would impact their business. It pushed resellers into services and forced them to do more,” claims Brown.
Mike Lawrence, managing director at IT supplier Bentpenny, epitomises someone impacted by Internet sales. He sums up the paradox and the drastic rearguard action businesses in the sector have taken. “We now proudly
tell cold callers that we do not sell computers,” he comments.
He explains that he will supply computers to existing customers at cost price and receive reward for installation and integration with existing IT systems. He adds that quoting a price for a computer is an exercise in futility.
“Whatever price you give these days somebody will quote lower,” he laments.
So, traditional resellers turned to services while the giants of the industry cut costs and increased sales volumes.
But there are new breeds of suppliers, known as the online resellers, that blend the low-cost web-based sales model of pure e-tailers with the customer services of traditional resellers.
WStore was one of the pioneers of selling IT online. It was established in France in 1998 and soon after moved to the UK.
MD Tony Price claims that with the Internet came an opportunity to serve customers in real time and cut overheads. “The e-commerce system could support a sales team and make the whole purchasing process more streamlined,” he adds.
The company started with about 6,000 products in 1998. This has now expanded to more than 100,000.
WStore uses a hybrid model with traditional account management supporting online sales – which Price says has allowed WStore to avoid the pressure pure-bred e-tailers now feel.
Many of the e-tailers, spawned by booming online IT sales, are finding it tougher and tougher as prices continue to fall, while hybrid online resellers fair better. E-tailers have challenges, which Price says has a lot to do with customer retention.
“Companies that believe simply offering an excellent online system in the IT market will keep the clients coming back are not living in the real world, where account managers and human contact is paramount,” adds Price.
It seems that despite the initial threat, a good online sales system actually supports a traditional model and makes it more effective, rather than defunct.
Now that hardware commoditisation, and online sales of it, have become the norm, the next big impact the Internet will have on the industry will come from software, which is not only increasingly sold online but delivered the same way. The industry is already seeing a shift towards a hosted software model, where customers get software delivered over the Internet and they only pay for what they use.
This staggering change looks set to be a major opportunity for specialist suppliers, who will not only have a role in the sales cycle but will be critical in providing services on top.
Steve Bridge, European alliances director at Salesforce.com, which provides software on demand, says the Internet has already changed the software supplies industry. “It has had an enormous impact if you just look at the ability of providing software as a service,” he adds.
Bridge says resellers will make money adding services to software as margins on the transaction disappear. “It will be a nightmare for organisations that cannot provide additional value to customers in terms of services around software,” he warns.
As if the threats to resellers from legitimate software firms flooding the market with software at cut-throat prices were not enough, there is an even bigger threat from the Internet. Software pirates have made fortunes selling counterfeit software and the Internet has made their crime easier.
John Lovelock, director-general at the Federation Against Software Theft, which works with the software industry to stamp out piracy, says the software industry is suffering and this is money out of resellers’ pockets.
“The Internet has made software piracy easier. More and more people have broadband and can download anything in a short time,” he says.
The Internet has shaken up an industry that today thrives off it. Computer resellers can no longer make money selling computers, and the industry has consolidated to be populated with fewer, leaner and more service-orientated companies. But although companies have suffered at the hands of the web what would the technology sector be like without it? Smaller, with fewer opportunities is the answer.