BIG YARN: The Net scramble: Are you ready for the main meal?

BIG YARN: The Net scramble: Are you ready for the main meal?

In the late 1990s, the Internet promised to revolutionise Australian business. Vendors seemed on the brink of direct-dealing with customers; distribution channels were looking marginalised. New efficiencies were about to redefine business relationships; dealer networks would soon be discarded. All those brand new Internet-based companies - with their agility as start-ups and their ability to form strong direct relationships with clients - would soon steal market share.

Meanwhile, traditional channel players weren't sitting on their hands. They worked hard to build defences against this new threat, throwing up e-commerce solutions - but with little analysis of their long-term utility.

Then in April last year, revolutionary exuberance came crashing back to earth as the "tech wreck" decimated the valuations of dot-coms around the world. With investor confidence shaken and money taps turned off, cash burn set in, exposing dubious business models and sending many to the grave.

The Australian channel found itself counting the millions of dollars spent to ward off a threat that never materialised, apart from exceptions such as Dell. Few traditional channel players even now report more than single-figure sales through online sites.

To date, the so-called "new-economy" businesses have yet to prove their value. Internet-only resellers are struggling to gain market presence or have failed completely application service providers (ASPs) and online marketplaces, the jury is still out. In the latter's case, the only IT-specific exchange was closed last December when its foreign backers withdrew support, while it's to early to assess broader purchasing markets such as corProcure and Cyberlynx.

Business models refined

The Australian IT channel has generally escaped much of the carnage besetting the dot-com sector, as few members of the local channel are publicly listed companies. And local stock brokers have come to view the e-commerce initiatives of traditional business as merely an increased table-stake necessary for doing business (although a company may be downgraded if it lacks a Web strategy).

The Internet revolution has proven that the real power behind the Internet in the channel lies not with the stock market, but with the customers themselves, be they resellers or the people who buy from them. It's the customers who are choosing to vote with their telephones and fax machines, largely ignoring the Internet's capability to put them in direct contact with manufacturers.

According to former Ingram Micro chief Braham Shnider, there is room for new business models to emerge. This is despite Shnider's own online marketplace initiative, E-exchange, closing down in December after its Singapore-based backers withdrew financial support. Shnider says E-exchange had been successful in its goal of introducing unacquainted buyers and sellers, with $12.8 million in sales generated during its six-month life span.

"The concept of a market exchange offers not just efficiencies, but what it really does is open up markets and new opportunities," says Shnider.

The ASP market in particular has failed to live up to its promise as a significant channel for software distribution, with no pure-play ASP reporting significant customer growth in 2000. According to Gartner's regional director for IT services Rolf Jester, ASPs have spent the last year refining their business models, and based on the US experience they should be in a stronger position this year.

"People are still struggling with getting their businesses off the ground," Jester says. "The reality is that the potentially big ones are at very early stages."

In search of sales

The quest now for traditional channel dwellers is how to make money from their online investments. With major distributors and many resellers now offering Internet-based ordering, this capability alone has ceased to be a differentiator.

According to Theo Baker, managing director of ASX-listed reseller and integrator Powerlan, Internet sales represent only 5 per cent of his company's revenue, with the Web site just paying its own way within the business.

"It doesn't give us any incremental benefit," says Baker. "It's a must-have, so it's not really a differentiator - everyone's got it, so you've just got to go with the times. But has it given us new customers? Absolutely not."

A study conducted by research group Inform into the opinions of channel executives and end users found channel companies are currently generating about 6.5 per cent of revenue from hardware sales over the Internet. Inform expects this to rise to 12.6 per cent in 2002.

According to Inform director David Hancock: "We're really envisaging that there is going to be an increase in transactions by channels with both customers and suppliers, and we're certainly urging channels and vendors to get strategic with the Internet. But we're also saying don't expect results, maybe for the next two to three years, before you get a return on it."

However, with IT purchasers hoping to conduct 30 per cent of their hardware purchases through resellers over the Internet by 2002, there is a clear discrepancy.

Distributor Tech Pacific's managing director David Cullen says his company's site is receiving about 1.2 million hits per week, but says Internet sales account for only 6 per cent of total business. Likewise, value-added distributor LAN Systems estimates 11 per cent of its sales come in over the Web, while for Express Data the figure is 10 per cent.

"If we didn't have it (the Web site) we wouldn't be in business," says Cullen. "It's somewhere that you have to be, but from what we've seen so far, it doesn't necessarily take costs out, because we're still getting the same level of phone traffic.

"There's greater visibility in terms of stock and ETAs that we provide through the Web site, but in general the call traffic still comes because people still want to negotiate and ask questions. I think it's another generation before we get past that."

Lack of standardisation

Cullen says that besides buyers continuing to want to deal with humans, the slow growth of Internet adoption in the IT channel is also attributable to a lack of standardisation in Web technology.

"As a broad-based distributor we represent 75 agencies, so we're running 75 businesses," says Cullen. "Every agency runs their business differently, whether it's the way they handle their promotional pricing, their government pricing, their co-ops, their rebate structures and so on. As much as possible we're trying to get a system-to-system link at a vendor level, but. Until there's standardisation in the industry, there's going to be minimal cost savings."

LAN Systems' managing director Nick Verykios says most dealers are waiting for standardisation to occur among distributors before making investments.

"Until there's a standard that allows everyone to interact properly with their own back-end systems and not have to throw away everything that they've invested in, it's going to be held back," Verykios says.


But it appears there are still some opportunities for channel companies. Express Data's managing director Ross Cochrane says his company's focus is on utilising its investment in e-commerce technology to be able to handle transactions of lower dollar-value.

"In the past the approach was to discourage those sorts of customers from dealing with you at all. Our view is there's no point discouraging customers, you've just got to find an effective way of providing the service that they need," says Cochrane. "What we're really trying to do is leverage the investment that we've made over many years in the systems' infrastructure and the physical facilities to service additional customers - those segments who perhaps in the past were too expensive to service."

One of the original pioneers of online retailing in Australia, Harris Technology is set to blaze a trail into further unexplored territory with the company's Web initiatives. Founder and managing director Ron Harris has been developing his company's ability to deal in online marketplaces, and can now publish catalogues into the Commerce One marketplace engine that has been adopted by Optus. Harris says his company will also be working with Westpac to publish into its online marketplace, and will be able to interface with the corProcure marketplace of 14 major Australian companies when it is launched early this year.

Harris says having an early start in e-commerce has provided valuable lessons. "We wouldn't have developed the core technologies in the database that drive the Web site, and I wouldn't have probably seen the importance of the emerging e-marketplaces," he says.

But even for Harris, Web sales comprise only 15 per cent of total business, with a quarter of those transactions involving a telephone call somewhere in the process. Harris doubts there will be a strong call for Web-only resellers. "I don't think it will be sustainable in a strong way," he says. "Some companies might find a formula where they exist, but they run the risk of existing at the fringes."

Such reasoning was behind the decision of Smartbuy founder Tony Gattari to switch his company's focus from Web-based reseller to one that provides e-commerce services to traditional retailers. Gattari concedes he was swept up in some of the hype that surrounded the online retail boom.

"[Online retailers] are not getting enough volume to justify their existence," Gattari says. "The difficulty of a pure-play e-tailer is we're not in America, we're not 270 million people. We're 18 [sic] million people, and although a lot of people are using the Internet, they are still reluctant about who they're buying from. [Traditional] retailers have built brand names over the last 20-odd years - you can't underestimate the value of a store loyalty concept."

Yet, there is a general optimism about e-commerce in the channel. And although the reality of e-commerce in the face of its failings is disappointing, the feeling is one of resolve. Slow, but nevertheless increasing online sales affirm that when used properly the Internet is a cheaper method of dealing with customers, and the doom and gloom surrounding dot-com stocks doesn't mean e-commerce is not here to stay.

The channel has survived. But success remains a moving target, continually redefining itself; and whether chasing it through revolution, evolution, adaptation or revision, the channel has work to do.Photograph: Brad Horwath

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