The VAR is dead

At ARN-hosted functions in Melbourne and Sydney, Inform's research director, David Hancock, observed that falling product margins and the rise of mainstream retailing mean many VARs need to refocus on software development and/or other services.

Hancock was referring to the European Information Technology Observatory's (EITO) definition of VARs, which includes businesses deriving a sizeable proportion of their revenue from services (up to 49 per cent) with the resale of third-party products making up the balance of their revenue.

"The businesses under threat are very much sitting in both camps," said Hancock. "Services represent a large part of their revenues including tailored or customised turn-key software solutions but they are still relying on sales of popular hardware to generate the business."

Tony Finnemore, managing director of Sydney's Micro Office, a VAR "of sorts" implementing Microsoft solutions, said the obvious demand is in services.

When he finds that he can't buy products like Office much cheaper than consumers, he considers commoditised products - and that is now a broad range - to be just "cream".

Software development

"We have moved into software development and have now got another business aside from Micro Office concentrating on that. Micro Office does the VAR-type NT support and sells hardware and software. There are still plenty of customers wanting everything supplied from one source," said Finnemore.

Demonstrating the proclaimed wisdom of an expanded services focus, Finnemore finds he can't keep up with demand on that side of the business.

"There is definitely no decline in the demand for custom development stuff. We are booked up until Christmas and get requests through our Web site from the US because there aren't enough developers over there either," he said.

"Niche markets which need to be serviced still exist for VARs and they can be quite profitable. But the basic hardware stuff has gone into decline for value-added resellers."

John Latreille, the managing director of Sydney-based VAR Lake Corporation, agreed that increasing numbers of businesses would not be able to survive on a 50-50 products and services revenue balance.

Lake Corporation deals in call-centre solutions and holds some exclusive product distribution rights, so will always have a product component to its business. However, Latreille confirmed Lake has been consolidating a business model involving increased service and support with less reliance on product margins.

"In the majority of cases we see, one of the most important factors in a potential customer's decision-making process about a change or upgrade in their call centre is from the value added services we can provide," said Latreille.

"If they weren't totally confident in the support we supply they wouldn't buy the equipment."

While this is the trend, Hancock also indicated there will still be some businesses that survive as traditional VARs, while others will be able to refocus without too much drama. "My message is that there is a migration of businesses to other core competencies, not a rash of companies going broke. The channel is a dynamic place," he said.

"We are seeing the number of VARs dropping on our Inform database while software developers and other service providers are increasing".