It is just over a year since the well-publicised stoush between PC vendor giant Compaq and retail giant Harvey Norman, which ended in Compaq offerings being removed from Harvey Norman shelves.
A relatively comfortable partnership was torn asunder when Harvey Norman reacted strongly to Compaq's announcement of its planned foray into the retail sector through its own Compaq Connect stores.
When asked why he was reluctant to continue retailing Compaq PCs, Gerry Harvey, chairman and founder of Harvey Norman, responded: "Show me a retailer who is happy that its manufacturer is becoming its competitor. It's not just going to affect me - competition is competition. It's going to affect every retailer."
Hybrid sales models, where vendors sell direct to end users as well as through channel partners, are an emotion-charged issue for the channel.
While big channel players such as Harvey Norman are able kick up a fairly noisy ruckus when they are not happy about vendor decisions, smaller resellers are often left at the mercy of vendor whims.
In order to work for all parties, hybrid vendor sales models require a very delicate balance of diplomacy and respect, which vendors generally claim to have achieved. However, in an industry where size commands respect, the requirements of small channel players are easily crushed under the sheer weight of vendor expansion.
Vendors that implement hybrid sales models are quick to point out that their particular version allows them to maintain strong partnerships even with the smaller end of town. But the channel remains sceptical.
Claudio Antonioli, managing director of Sydney-based network integrator Systemcraft, posed a question the channel is forced to ask when confronted with vendors that sell both directly and through the channel: "How can you trust your supplier when they are also your competitor?" Resellers such as Antonioli are concerned that vendor presence in the end-user market takes a significant share away from the channel, thereby cutting into profits.
Vendors who implement hybrid sales models contend that they design them specifically to allow channel partners to realise the full sales potential of certain offerings. Many hybrid sales models divide markets between channel and direct sales in terms of the value, or size of the rollout. For example, vendors may deal direct with customers on large corporate contracts, but sell through the channel in the SME sector.
However, as Tony Iannuzzelli, managing director of systems integrator Vertex Technology, points out, even well-designed hybrid models are fraught with areas of sales overlap.
"A lot of customers fall into grey areas, and as part of the channel it is hard to know whether to pitch a sale or not. You might end up pitching against your supplier, who will always win on a price basis," Iannuzzelli said.
Vendors such as Acer defend their marketing approach. Acer maintains that a direct relationship with its major corporate customers is necessary because of the sheer size of the rollouts.
"Our channel is also very important," Patrick Lin, managing director of Acer Computer Australia, said.
"When it comes to rolling out several thousand, or tens of thousands, of PCs, our channel partners simply don't have the infrastructure to handle such big sales - so we go direct."
Industry analysts remain divided about whether the direct and hybrid sales trend is set to continue. The issue is complicated by advances in e-commerce technology and the resulting potential to significantly increase online sales, and the creeping phenomenon that is branded vendor retail.
According to David Hancock, director of channel research group Inform, well over 80 per cent of PCs sold in Australia come through the reseller channel, and there is no indication vendors are moving away from their channel partners.
"Despite the success of Dell's direct sales model, most vendors realise they need the channel in the Australian market," he said.
Hancock points out that the local channel model is particularly successful when compared to countries such as the UK.
"In the UK, there are only a few more channel companies than Australia - we're talking about 20 or 30 per cent more companies servicing a much larger market," Hancock said.
He believes the proliferation of local channel companies can be attributed to geographical and cultural factors. "The sheer number of companies competing for a smaller market has led to high levels of entrepreneurialism. We have an economy that depends on a large number of specialist industries that represent important verticals and we are right on Asia's doorstep."
For this reason, Hancock believes vendors lack the skills and the resources to make a significant foray into the hybrid sales model.
"Vendors simply don't have the right kind of infrastructure to sell direct - their businesses are not designed that way."
Logan Ringland, senior analyst of computing hardware at research group International Data Corp (IDC), disagrees. Ringland believes the spectre of online selling will have a major impact on the structure of channel relationships and that traditional vendor/reseller relationships are set to for a radical shakeup.
"Online selling is the way of the future, and although resellers can put their sales online, they lack the size and marketing clout to compete with vendors on this platform," Ringland said.
IDC's figures differ slightly from Inform, with Ringland claiming that 32 per cent of PCs sold in Australia in 1999 were sold directly from vendor to end user.
Although Ringland believes the proportion of direct to channel sales is set to grow, he is quick to point out that vendors have a tough road ahead in direct sales. "The vendors' power lies in their branding, and by selling direct they are putting their brands in a very risky position, because they will be judged harshly by end users if anything goes wrong," he said.
Ringland also pointed out that vendors will find most resistance not in the SOHO market but in the demanding SME sector.
"They want a relationship with their resellers - they can't just pick up a PC on the Web. They have certain expectations about what technology can and can't achieve and need to bounce their ideas off someone who is willing to put in the time to listen."
At this stage, the majority of hybrid vendor sales models segment the market according to rollout size. While they are happy to take on the larger corporate and government clients, vendors tend to steer away from the relationship sales-focused SOHO market because they lack the infrastructure required to provide appropriate SOHO services.
Nonetheless, Ringland believes the hybrid sales model will proliferate, giving vendors the ability to sell through the channel as well as form direct contacts with different end-user markets.
Hybrid sales models come in all shapes and sizes, with varying degrees of success. While direct corporate and government sales have been around for a while, one of the more recent developments is branded stores, such as Compaq Connect and Gateway stores.
Despite the row sparked by the launch of stores such as these, many resellers are particularly blasé about the threat posed by the much-publicised retail outlets.
Merdad Shetab, managing director of Computer Interchange, which runs a series of retail outlets in the Sydney region, is unconcerned about the growth of vendor stores.
"Competition in this market changes all the time. I am now seeing less smaller retailers, but I doubt that the vendor stores will affect the market significantly," Shetab said.
According to Shetab, Computer Interchange has focussed on developing markets and building customer relationships.
"We wouldn't survive if our customers came in, bought stand-alone PCs and never came back. I don't think that large companies have the ability to foster that," Shetab said.
Recent Inform results bear out this opinion. According to Inform research manager Chris Herbert, the performance of the Compaq Connect stores has been lacklustre.
Understandably, Compaq is far more interested in talking about its partnership models than its direct sales model.
Richard Sumich, Compaq's partner marketing manager, claims the situation is "more complex than a simple hybrid model". According to Sumich, Compaq puts a lot of energy into channel sales support, and will often engage the end user on behalf of its channel partners.
Sumich said the decision to launch the Compaq Connect stores in Australia was predominantly due to a perceived need to make the Compaq name more visible.
"As a vendor we need to get our brand out on the streetscape. We have no intention of cannibalising our channel - quite the opposite - our channel partners stand to gain significantly from a higher Compaq profile."
In addition, as Sumich points out, Compaq's Connect stores have fulfilled a need for branded stores. "Some people want to buy a Compaq computer from a Compaq store."
What is interesting about the Compaq model is that franchise stores will make it possible for the channel to participate in vendor streetscape branding.
However, vendor-branded franchises have come under fire from channel sources, with computer interchange's Shetab claiming they detract from the role of the channel. "Branded stores will be restricted as to the products they can sell, so they won't be able to provide their end users with the service end users expect from resellers. How can you be honest about which brands are the best for the end user if you are in a branded store?" Shetab asked.
Inform's Hancock agrees, pointing out that the average reseller in Australia can sell through up to 30 or 40 different product lines. He believes that the channel is important, not only as a sales point but also because it can provide advice about a range of different products.
"Branded stores compromise [the channel's] ability to advise the end user," Hancock said.
Gateway is another vendor with a strong branded retail presence in Australia. However, according to Paul Heath, the company's Australia/New Zealand MD, Gateway is steadily implementing a channel approach to retail.
Gateway embarked on its branded stores when it severed ties with many Australian retailers in November last year, complaining of poorly trained staff and support for its offerings.
However, the stores' failure to reach certain markets forced Gateway to rethink its branded store strategy. "Retail in Australia and New Zealand has been incredibly successful," Heath said. "However, we decided to take on some channel partners under some very specific conditions. We need them to complement our retail market presence and not compete with us, so we are very selective," Heath said.
Heath explained that Gateway's sales model divides its market in terms of demographics, and that the company selected its channel partners on the basis that they could sell into a demographic that Gateway was unable to reach, either through its retail or e-tail representation.
"For example, David Jones is a retail operation skewed towards females - we found that our own stores were not reaching the female market, so we pursued a partnership," Heath said.
While Gateway's channel classifications have avoided conflict thus far, they have failed to include a broad-reaching channel presence, with the vendor focussing on larger retail players.
"The idea fundamentally is to sell PCs to people the way they want to buy them. In New Zealand, we are rolling out a lot more through the channel because it is more suited to that market. In Australia our direct sales are going well, so we don't have a compelling reason to change our model."
Online sales and the fuss being made about B2C e-commerce is perhaps what concerns the channel most when it comes to hybrid, or direct sales models.
While, on the one hand, the success of Dell has the channel concerned that vendors may be attracted to going direct via e-commerce channels, on the other, channel players throughout Australia are making online sales work, through innovation and familiarity with their local markets.
As far as Inform's Hancock is concerned, resellers are well positioned to quickly incorporate online sales into their own models, thereby making vendor moves in this direction largely redundant.
The recent launch of bponline.net (see page 48) testifies to the opportunities available to the channel through e-commerce. Queensland-based reseller Byte Power is one channel player who has used its local goodwill to launch an online service which allows its customers to access online sales and financing arrangements.
According to Alvin Phua, managing director of the Byte Power Group, bponline.net's strength lay in the site's bricks-and-mortar backbone.
Although bponline.net is in its fledgling stages, the measured success of companies such as Computer Source, whose online PC sales have increased 500 per cent in the last month, provide a testimony to the ability of the channel to harness the power of the Web.
Inform's Hancock believes that even on the Web there will be a call for relationship selling which will remain firmly in the hands of the channel, regardless of flashy online vendor ventures.
Rollout size is still the most common way to divide up markets for hybrid models, and while the channel is not entirely accepting of the practice, it is certainly resigned to its existence.
While most vendors provide extensive sales support, especially for larger clients, some overstep the boundary and take over the sale entirely.
However, Acer's Lin defends the practice, pointing out that, apart from logistical concerns, the channel would be hard pressed to engage in high-level dealings. "When you are talking about these really big deals, the margins can get squeezed down to tiny amounts. As the vendor, we have bargaining power and experience at this level. Even if the channel had the infrastructure to get involved, it would not be worth its while because of the margin squeeze," Lin said.
It would seem that in the same way that the SME sector is set to remain in the domain of the channel, large rollouts continue to be largely the domain of direct vendor sales.
What remains is a challenge for vendors to carefully manage their partner relationships when crossing uneven hybrid sales terrain.
As John Slack-Smith, Harvey Norman's general manager, computers and communications, points out: "When vendors go direct as well as selling through the channel, they send out confused messages about what level of commitment they are willing to put in to their channel relationships."