Dell, Channel Growing Closer

Customer pressure driving more VARs toward Dell, and the PC giant is making it easy for them.

Dell and the channel are secretly growing fond of each other. VARs, indifferent to shrinking hardware profit margins and prodded by price-sensitive customers, say they are buying Dell computers for their clients. Meanwhile, resellers said the Round Rock, Texas, PC maker has embraced them by granting them sales support, hardware discounts and visits from account representatives.

That Dell is growing fonder of the channel runs counter to its direct-sales mantra but should be no surprise. Some industry insiders estimate that 20 percent or more of Dells revenue is derived from the channel.

VARs offer the PC maker business opportunities it may not have had on its own. Dell can also fill those orders using its traditional direct-sales mechanisms to provide hardware to the VARs while it wrestles with slowing unit shipment gains amid lackluster PC market growth and competition from rivals Hewlett-Packard and Lenovo Group.

"[Dell will] never admit it or make [the channel] a formal program," said one analyst who asked not to be identified. "If you look at Dells stock versus [HPs], part of the difference has to do with Dells reputation for owning the customer. Theres a sense they own the entire margin and have higher profits because they sell directly. It makes them appear more valuable to Wall Street."

VARs, however, said they are selling Dells portfolio because their customers seek savings on hardware. They said Dell is treating them to discounts equal to its competitors, usually between 1 and 4 percent. Those surveyed by eWEEK expect the trend to continue, particularly since Dell needs to find a way to keep growing. Dell announced May 8 that it will report missed Wall Street forecasts with first-quarter revenue of $14.2 billion and earnings of 33 cents a share. Dell had projected revenue of between $14.2 billion and $14.6 billion and earnings ranging from 36 cents a share to 38 cents a share.

Dell representatives would not confirm any arrangement with individual VARs, saying only that the company does not differentiate between customers and resellers.

"I think they are recognizing that the channel is the best leverage into the market," said MJ Shoer, president of Jenaly Technology Group, a Portsmouth, N.H., reseller serving small and midsize businesses in the New England area. "Theyre great at getting into NASA and Boeing, but theyre not so good at reaching the CPA firms and law firms where so much opportunity lies. Its more efficient for them to send a representative to meet with me a few times a year and let us reach hundreds of customers every day."

Shoer said he now has regular contact with Dell sales personnel and presales help arranging specifications and quotes.

The Dell Solution Provider Direct program, launched in August 2002, provides volume discounts but claims to be primarily a streamlined source of Dell products, leaving time and energy for "high-margin, value-added activities," according to Dells Direct site, which said it doesnt pursue VAR customers for direct sales but will not turn away inbound requests.

The arrangement leaves many asking, "How is this not a channel program?"

Martin Brys, president of Brys Consulting, in Holbrook, N.Y., who said he is selling more than $600,000 worth of Dell hardware annually, proclaimed Dell a better channel partner than HP, which he said had too many qualifications and requirements to make its program worthwhile. Brys said he gets 90 percent of his revenue from services.

For most resellers, the decision to sell Dell products is less their own than their customers. "Sometimes, we just cant match [Dell with another vendor], and they say, Ron, bring in Dell," said Ron Cook, chairman and CEO of Connecting Point Technology Center, a Las Vegas reseller. "When that happens, I get them what they want. Im not making anything from the margin selling boxes anyway."

One Connecting Point customer, which Cook declined to name, recently switched its $35 million annual spending on PC hardware from HP systems to Dell systems, Cook said.

Resellers care more about getting their foot in the door with a customer than what type of hardware they sell, said Tiffani Bova, a Gartner Group analyst based in Sherman Oaks, Calif.

"If VARs have opportunities where customers are requesting or demanding Dell or it is the only solution fitting the price, theyre probably inclined to sell Dell to protect the relationship," Bova said. "Theyd rather sell what they have, to keep a competitor out, and make their profit on the services."

For Dell, the decision to work with resellers isnt a bad deal, either. The channel could give the company, which saw its first-quarter unit growth slip, a way to boost market share. Dell, which has historically grown unit shipments faster than the market rate, stumbled in the first quarter.

The company continued to lead in shipments with a market share of between almost 17 and 18 percent. But its unit shipments increased by about 10 percent versus the market rate of about 13 percent, according to preliminary figures released on April 19 by IDC and Gartner.

"For Dell to deliver above-market growth, it needs significant market share gains, which we believe are increasingly difficult in the current environment given the improved flexibility of its competition," wrote Robert Semple, an analyst with CreditSuisse, in New York, in a May 9 report.

During the first quarter, worldwide PC unit shipments grew 13.1 percent, Gartners figures show. Dell grew shipments 10.2 percent, compared with rivals such as Acer and HP, whose shipments increased by 45.5 percent and 22.3 percent, respectively, Gartner said.

IDCs figures showed a similar trend, with Dell growing its shipments by 10.2 percent compared with a market rate of 12.9 percent.

"The growth engines in the market are the areas that [Dell] doesnt play in," said Richard Shim, an analyst at IDC, in San Mateo, Calif., referring to the channel, Advanced Micro Devices-powered PCs, emerging markets and retail sales.

"Its not like [Dell] is dying. Its growing at the industry rate. But thats significant in that its the first time it hasnt grown above the average. It seems like theyve got to start addressing [the channel]," Shim said.