Gerard Norsa recently caught up with HP’s personal systems group GM, Tony Bill, the man in charge of distribution contracts for his group and the imaging and printing group. They discussed everything from channel review to HP’s online initiatives and many things in between.
ARN: Where are you currently with the promised “thorough and ongoing review” of the channel? TB: The first round saw realignment of quite a few partners under a distribution procurement model. We are continuing to review our channel strategy and review the performance of the channel against our goals and their own goals.
ARN: Why were distribution contracts merely given six-month extensions from November 1 last year until April 30 this year? TB: There is nothing sinister in that. The reason they were only extended until April 30 is that Compaq and HP are still operating as two legal entities. We were hoping to be able to have a single contract to distributors from the new HP through this half but we weren’t able to do that. So we had to issue extensions until the end of our second fiscal quarter in the hope that when we re-issue in the third quarter we can do it under the one company name.
ARN: Does that effectively mean you are still operating as two different distribution channels? TB: Our go-to-market strategy is one. Where we operate as two different companies is from a financial, tax and legal standpoint. So Compaq is still paying taxes to the Australian government and so is HP. From a customer and channel perspective we are operating as one company. Because of the legal situation distributors do need to acquire product from either Compaq or from HP. So we need to have two separate contracts to do that. Completing all the system changeovers is an enormous task. In an ideal world that would have been a great thing to have on day one. We had hoped it would come through earlier but that has not occurred.
ARN: There were strong rumours that you would be culling the number of distributors to three? TB: We are continuing to re-evaluate the size and structure of our channel. At this stage, I do not know whether this means that we have more distributors or less distributors or different distributors or, in fact, we maintain exactly what we have got. I’ve heard the rumour of three being the number but I don’t think you can simply say a number is right for any market. There will always be specialists. It is too early for me to call.
ARN: You said last year that you were expecting some natural attrition to alleviate some of the crowding and price warring in your channel. That doesn’t appear to have happened so does that change your plans? TB: I would suggest that there are still plans afoot for consolidation within both distribution and the corporate reseller space. The timing of that I would suggest is being delayed by global events at the moment. I absolutely believe and confidently predict that consolidation will occur but it has certainly been slower than we originally thought.
ARN: There is still a price war raging amongst distributors and HP product is perhaps being sold in the channel at the lowest margins of all major vendors. What is being done to reintroduce profitability to your channel and to alleviate low margins and price-cutting? TB: We absolutely want profitability in the distribution model. How a distributor might choose to get its phones ringing is ultimately their decision. The price war is indicative of the strength of the HP product in the market place. I think that even if we had just two distributors, we would still experience fierce competition because they are selling similar products in a similar market. Price will always be one of the levers that every vendor and every partner in the market is going to pull.
ARN: There is still a lot of confusion in the channel about HP’s online initiative. What is the channel’s role in the Agency Direct program? TB: I absolutely agree that there is confusion about our agent program. In saying that, we have more than 750 registrations on the program and at this stage we have signed over 280 agents to the program so the message has got out and the value has been recognised. The program is simply defined by saying that HP and the end user customer take a transaction and then we sub-contract certain components of that transaction to a channel partner. We then pay that channel partner a fee for their services.
ARN: Is that not bypassing the distribution tier of the channel? TB: Distribution plays a role in the model around their capabilities such as giving credit, managing logistics and providing feet on the street.
ARN: Inform’s latest channel research shows that HP and Compaq brands are losing market share. Does that match your own data? TB: We had a very strong first six months after the merger but in the last few months of 2002 momentum seemed to stall on us and we lost market share across most categories. Analysts are still reporting HP and Compaq as separate brands when they are actually being sold as one brand. I think we need to combine those two and not look at them individually. Be that as it may there is still some decline in market share.
ARN: Is it true that HP may be looking to accelerate the phasing out of the Compaq brand? TB: The parent brand is HP although there is still Compaq on the box. Moving forward Compaq will continue to appear on the box. Decisions are still being made about how dominant the HP logo will appear on products. It is obviously a very expensive strategy running dual brands. You will see the HP logo becoming more prominent on the Compaq desktop advertising but the decision is yet to be made in regards to where the final branding strategy is going.
ARN: Are there any plans to further change the trading terms and conditions in the channel? TB: We look at terms and conditions of the contracts every time they are up for renewal. We look at market reaction to the previous set. Some may improve. No final decisions have been made about terms and conditions for the next round of contracts but I would not foresee any negative change.
ARN: Distributors are indicating that they have faced stock shortages? Why isn’t there enough stock in the channel at the moment? TB: Demand for notebooks in the last three months has gone through the roof. We are currently experiencing delays on certain models. Some of that is due to components shortages and others because of a change of manufacturing sites for those products. It is also to do with forecast accuracy. Product shortages will continue to be a challenge for all vendors because it depends on forecasting which is not an accurate science.
ARN: Why was HP not involved in the Centrino launch? TB: HP’s implementation of Centrino is slightly different to that of Intel. We have chosen not to put wireless in the chipset. The reason for that is that the HP (Compaq notebook) solution is a far more flexible solution. It uses 80211a technology instead of 80211b of Centrino — so it is faster. HP is not one of the initial partners with Intel. This is not because we are doing anything recalcitrant against Intel, it is just because we have a better wireless implementation than Centrino currently has. The 80211a standard is a faster technology and we will actually move into next generation and higher bandwidth significantly ahead of Centrino.
ARN: How has the tablet PC technology gone at HP? TB: Tablets have done very well. The Victorian nursing deal with BCA IT was at the time the world’s largest HP Tablet deal. That has now been surpassed but we had our moment of glory early in the product’s life. Since then we have seen a solid run rate. The challenge with these new technologies is always in the applications and how quickly the new applications come on board. At this stage there is an enormous number of developers bringing their applications to a Tablet-friendly environment. Once they arrive I think that piece of the market will go through the type of growth we are currently seeing in mobiles?
ARN: It has been claimed that Tech Pacific is doing as much as 60 per cent of sales in TPG and 50 per cent in PSG? Is it healthy within your channel to have a partner as dominant as Tech Pacific? TB: Your percentages are overstated. What you also need to look at is the breakdown of those numbers. For example, Tech Pacific is our exclusive distributor to sell our IPG products to the second tier retailers that don’t have a direct relationship with HP. They also have some exclusives with the personal systems group. If you take out that level of exclusivity there is a few distributors that are doing fairly even numbers.
ARN: Is it healthy for one distributor to have such exclusivity? TB: I believe it is because it allows us to give a single point of contact to our retailers. We are on an service level agreement with Tech Pacific around their deliveries and managing of credit. We only have to deliver those exclusive products to a single point. Because we have that SLA with Tech Pacific we can maintain a level of service to the channel. It costs us some money but we are willing to pay for it.