Techaisle Blog

HP has split into two – HP Inc. and Hewlett Packard Enterprise (HPE). Almost all SMB relevant products and solutions (except PCs and printers) now reside within the HPE organization. The global small and midmarket businesses, SMB (1-999 employee size) market has been the growth engine for the IT industry at large. The reason is quite simply that SMBs account for over 80 percent of businesses in any country – developed or developing. As per Techaisle, SMBs are forecast to spend US$597 billion on IT in 2015. Their IT requirements range from servers, networking and storage to cloud, mobility, analytics, managed services and collaboration solutions. Today, most SMBs are looking towards IT suppliers that offer appealing value propositions in either of three IT delivery models – traditional infrastructure built on-site from hardware and software components; hosted solutions and/or applications most often purchased on a “pay as you go” model; and, cloud infrastructure delivered on-demand.

HPE – the new incarnation of HP and its focus on SMBs with Flex solutions

Since the launch of its “Just Right IT” portfolio (September 2010) for SMBs, HPE has been striving to better serve its SMB customers by consciously lowering cost of solutions, improving agility in deployment and enabling faster time to value in managing IT assets. Just Right IT includes products, services and solutions specifically engineered for SMBs. The portfolio offers management, data protection, communications and connectivity solutions that are designed and priced "just right" to deliver affordability and value to SMBs. These solutions revolve around HPE’s core offerings of servers, storage and networking which comprises of:

• Servers: ProLiant MicroServer, ProLiant 10 Series Servers, ProLiant 100 Series Servers, ProLiant 300 Series Servers
• Networking: 1950 Switch Series, R100 Wireless VPN Router Series, Cloud Managed Networking, and 2920 Switch Series
• Storage: Solutions for the virtualization, SQL Server, Exchange, File sharing and Backup

In November 2015, soon after the split, HPE announced a new portfolio of ProLiant Generation 9 (Gen9) Servers (ProLiant DL20 Gen9 and ProLiantML30 Gen9) that are specifically engineered for SMBs to help reduce cost and complexity to run the new style of IT, web, collaboration, and business workloads. HPE is hoping that the new server portfolio advances its vision for compute and the future of data center technology.

HPE also announced its Flex solutions which bundles various services around its server, storage and networking products including support services, financial services, ISV software, distribution services, and management. It is specifically targeted at three different segments of SMB market at the low end of which are the SMBs who are “starting out” and at the high-end are the SMBs who are “expanding their business”. This does align well with what Techaisle analysts find in Techaisle’s SMB & Midmarket IT Sophistication Segmentation as shown below.

A strictly “by the numbers” review of the state of the SMB channel in the US paints a portrait of a well-balanced but fragmenting industry. Techaisle’s survey of SMB channel partners finds that revenues from products and services are approximately equal, and that services revenue are being derived from transactions that do not include products as well as from product-inclusive deals. SMB channel respondents report that 58% of revenue is attributable to services-led contracts and that a similar proportion of revenue is derived from recurring sources, vastly different from 2012, 2013 and 2014.

It is worth noting that while measures of this type provide a very useful benchmark for channel partners, some interpretation of the benchmark data is necessary. For example, the proportion of business attributable to services is only part of the issue that SMB channel management is wrestling with: what kind of services (for example, managed PCs or device maintenance?) is an important consideration in evaluating the impact of a channel services revenue stream.

Similarly, growth in services revenue is not necessarily a proxy for progress, as it can result from simple reductions in product revenue rather than effective transition to a business model properly aligned with the market as a whole. Techaisle believes that SMB channel partners that are looking to be part of the “managed services” channel should be targeting just over 20% of services revenue derived from managed services in 2016, and more than 40% by 2018.

The revenue growth expectations are also interesting. Although 63% of SMB channel partners are expecting revenue increases in the next one year, the scenario is quite dismal for VARs as compared to MSPs. 54% more VARs than MSPs are expecting their revenues to remain flat and a percentage of VARs are expecting their revenues to decline by an average of 30%. Even some MSPs are expecting their revenues to decline by an average of 20%.

However, the overall optimism for growth provides some insight into how and where the channel is growing.

India is witnessing unprecedented growth driven by favorable demographics, a young working population, rising income levels, urbanization and growing brand orientation. India’s retail industry has emerged as one of the fastest growing industry and is projected to grow almost to US$1 trillion by 2020 from the present market size of US$600 billion in 2015 driven by income growth, urbanization and attitudinal shifts.

However, it must be said that Indian retail is still dominated by unorganized sector. Organized retail penetration is just 8%. The biggest challenge facing the Indian retail sector is the lack of efficient supply chain. Within retail, India's IT hardware market includes many product segments such as desktops, laptops, phablets, tablets, printers, and other peripherals.

Techaisle team has been tracking the channel market and specifically sales out of various IT products in India for a decade. At last count, Techaisle India channel census data shows that there are over 30,000 channel partners in India. Supporting this vast channel network are eight national distributors and 159 regional distributors. Techaisle research shows us that there are typically four types of retailers.

With a country so large with varying maturity of IT adoption and number of distributors and retailers/resellers it is but natural to see a very complex PC distribution flow. Techaisle team tracks the percent units that flow through various intermediate channels from the OEM to the end-customer.

It is common knowledge that India’s e-commerce market India is still in nascent phase, yet it is growing rapidly but IT hardware sales through e-commerce websites or through the company's own website are still in the single digit-range as percentage of total sales because most of laptops, desktops, and tablets sales are still sold through bricks and mortar shops. In order to expand in India, large technology companies have been increasing their focus on smaller towns and non-tier 1 cities. For example, by end of 2015, Dell plans to more than double the number of its stores (named Dell Exclusive) in India to 825. In 2014, Dell had already doubled its number of stores to 400 from 2013.

Organized retail started more than a decade ago and significant growth has been achieved. However, most of the retailers have struggled to achieve a desired level of profitability. Leading retailers are now putting profitability at the top of their agenda. Croma was the first multi-brand store to sell consumer electronics among other retail products. Today, major retail players include Reliance Retail (Reliance Digital – 151 stores), Pantaloon Retail Ltd (eZone – 92 stores and Electronic Bazaars), Videocon (Next Retail Ltd – 144 stores), Tata Sons (Croma – 101 stores), Sumaria Appliances and Vijay Sales (54 stores).

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Table of Contents

• Indian IT retail landscape
• Major IT retail hubs in India
• Distributor and Retailer count
• Increasing focus on OEM branded stores
• Leveraging distribution and sales networks through strategic partnerships
• Types of Retailers
• Complex PC Distribution Flow
• Pain points of smaller retailers
• Explosion in E-commerce and M-commerce retail channel
• Overcoming inefficient supply chain management
• Overcoming logistics and warehousing challenges of Indian e-commerce
• Organized retail sector competing with online retail
• Brick-and-mortar retailers warming to E-commerce

Data gathered through the Techaisle SMB Channel surveys in US, Europe and Asia/Pacific shows that half of channel firms that have launched cloud businesses are primarily focused on “cloud builder” activity, which in many cases is an extension of existing resale business, and which is leading the channel partners down the path of specializing in virtualization and converged infrastructure. This naturally bodes well for channel partners of Dell, VMware and even Cisco although it must be said that VMware SMB channel strategy is yet to take center stage and Cisco is most famously focused on midmarket customers.

The three approaches to establishing a channel cloud business covered in Techaisle study include:

1. “Cloud builders” who are typically engaged in creating private clouds for customers,
2. “Cloud resellers” who resell third party cloud capabilities (often, SaaS applications), and who may also integrate multiple third party offerings, and
3. “Cloud providers” who have built their own infrastructure and are selling access/capacity to SMB customers

Cloud builder, cloud reseller and cloud provider approaches to building cloud practices within SMB channel businesses all address common SMB customer needs, but have unique challenges. Survey data also reveals that cloud optimism and success is highest among cloud builders.

“Cloud resellers” is the second largest cloud business approach. About one-third of US & Europe SMB channel partners with cloud businesses are primarily focused on reselling cloud capabilities but the proportion of “cloud resellers” increases to 39 percent in Asia/Pacific. However, many cloud resellers are still not very successful (see figure below) in their cloud endeavors, again proving the fact that simply reselling cloud solutions is not a viable long-term business.

The third approach, “cloud provider”, chosen by less than 1/5th of SMB cloud channel partners, offers a high degree of control but requires reserves of investment capital and operational expertise that are beyond many channel firms.