The days of earning healthy margins as a niche software tools distributor are over for many players, as broad-based rivals and vendors cut such companies out of the game.
When Sydney-based FirmwareDesign exited the distribution game last year, the software tools distribution market had shrunk to a point where there were very few niche players left to take on broad-based distributors and direct selling vendors.
FirmwareDesign, after 18 years in business, had been responsible for distributing software tools for vendors such as Macromedia and Connectix. But a mix of direct sales tactics and shrinking margins eventually took its toll on the business, as it has for so many others.
“The industry and nature of software distribution, with software vendors themselves largely responsible for sales and marketing activities, has changed to such an extent that we believe our era as a distributor has passed and it is time to apply our skills to other areas,” the company said.
“FirmwareDesign in the end had to change its business model or go out of business,” said Marius Coomans, former managing director of FirmwareDesign and now managing director of software vendor OfficeConverter.
One of the few niche software tools distributors that continues to defy the odds is programming tools distributor Microway. Managing director David Looke agreed that margin squeeze and direct sales tactics had wiped out most of the company’s competitors.
He said the consolidation started amongst vendors. Publishers of niche software tools for programmers and developers had generally been acquired by larger IT vendors, such as when storage giant EMC acquired VMWare, or when Microsoft acquired Connectix’s virtualisation software.
This movement led niche developer software into the mainstream channel and meant that broad-based distributors were now stocking and support more highly-technical software tools for sale into the reseller channel — products previously reserved for niche distributors.
“This makes things much more difficult for the specialised distributor,” Looke said. “It is hard for some of the smaller ones to compete once the broad-based guys get the business. We are a dying breed and I think that is a shame.”
In the aftermath of FirmwareDesign’s exit, Coomans said the issue was not whether a distributor was niche or broad-based, but rather whether it added value.
“There will always be some room somewhere for niche distribution, but it’s tough to build a business distributing low volume, vertical applications,” he said. “FirmwareDesign was always a value-added distributor. We survived longer than most [18 years] so we must have done some things right along the way. However, adding value as a wholesale distributor is tough today. Software has largely commoditised. The Internet has changed the face of support and marketing — two things that were the mainstays of value-added distribution.”
As much as Coomans gave the Australian channel credit for its efficiency and the quality of the services it provided, he has learnt to become a realist about direct sales.
“Direct sales are an efficient way to get speciality products to market,” he said. “And let’s face it — customers would prefer as few layers as possible between themselves and the software vendor.”
Looke is thankful that Microway had the 20-year history and enviable customer database to survive such challenges.
“We have always been the type of company that seeks out and is in turn sought out by companies that manufacture new tools in the software development space,” he said. “As much as other vendors would like for it not to be the case, we have the customer base and the reputation.
We are going gangbusters — even considering what has happened in the last few years, we have been having the best month ever, month after month.”
Several vendors had attempted to take the direct approach or include broad-based distributors in their channel mix, only to return to the niche distributor, Looke said.
An example he liked to promote was that Microway approached InstallShield about gaining exclusive access to its products, rather than the multi-distribution strategy it was pursuing at the time. Upon being granted this exclusivity, Looke said Microway doubled InstallShield’s Australian sales in 12 months.
“Exclusivity gave us focus — and when we focus, [the vendor] benefits,” he said. “Most of the vendors are going the other way. They need to understand that specialised products need value-added distributors. Resellers need quality pre-sales and post-sales support for these kind of products — it is the support you can’t get from a broad-based distributor.”