CV_MarApr_22_2

The larger TSDs impose a sponsorship on vendors for access to partners via events that the TSDs organize. This is right out of the VAD playbook, but then the TSDs model has mirrored the model of the valueadded distributors of IT hardware and software. Both types have seen their portfolio increase significantly as hundreds of vendors have turned to “the channel” for sales during the last five years. Now the larger TSDs tout 200 plus vendors. The VADs such as TD Synnex have millions of SKUs as well. The VAD business model relies heavily on vendor marketing dollars. In fact, the person answering the phone at the desk for Lenovo, Avaya or IBM know as much about the products as a full-fledged employee of the vendor, mainly due to the sponsorship of that SME. Without the sponsorship at the VAD, there is little chance of a SME for your product. This is an old retail grocery practice where vendors pay for placement in aisles and end caps for visibility. Now IT and telecom vendors are doing something similar. There are a few things changing the channel landscape: private equity, age and technology. Private equity has been buying up IT and telecom vendors for the last few years and are now investing in the TSDs. MSPs have had years of M&A both on the vendor side and the partner side. That is now happening at a rabid pace in the telecom partner segment. Primarily what you are seeing is the maturing of the channel. Some partners have been doing this for 20 years. Some are looking for an exit. Some are investing for growth. Some are looking for a way to keep on going but with help in back office and other areas. The technology being sold has changed. It is getting more challenging to continue to sell voice and network while making a living. Not everyone wants to sell cyber-security and other services. After 20 years, do partners in their mid-fifties want to learn new tech and how to sell that new tech? Some do not. The hybrid work environment is also hitting the partners’ wallets. MPLS isn’t really needed, so those expensive networks are being replaced by much cheaper alternatives. That’s a huge cut in revenues to the Big Three ILECs and their partners. There also is an emergence of marketplaces selling technology and telecom directly to the buyers. Lightyear, Cloudscene and Upstack are trying to get traction from enterprise buyers who will procure services through the marketplaces they are building instead of through a partner. Today, more than $650 million private equity dollars has flowed into the TSD space. Partners are starting to worry about their future. Why? Where will the $1.3 billion in return on investment come from? Where is the lift? If these marketplaces are efficient, they will effectively push the partners out of the way. The lift to the TSD will come from the commissions. TSDs only have two revenue streams: a cut of the commissions that sales partners make and MDF from vendors. The cut of commissions is variable as a majority of partners are on a 70/30 split. Yet prolific selling partners can demand 85 to 100 percent of the commission and SPIFFs on some sales, especially if the TSD is anchored by a huge vendor quota. Even at 70/30, there is a problem. The ARPU from UCaaS is just under $500. That is $100 in commission on average. A 1GB Internet circuit is about $1,000; the commission is around $150. The TSD has a lot of overhead – rent, software, payroll and more – to pay from their cut. A TSD has to do a lot of volume to pay the bills. (So does the partner!) As these investments tie partners to one TSD or another, that means the other TSDs lose out on sales. Before a partner had four or four TSDs; after an investment, a majority of the sales go to one TSD. This is throwing a wrench in the growth estimates of the TSDs. Intelisys in fiscal year 2021 had net sales increase 13 percent yearover-year. Other TSDs claim 25 to 30 percent during the pandemic. Many factors are at play: pandemic, digital transformation, more vendors in the space, private equity, age and technology shifts and refresh to name a few. Will partners and TSDs be able to navigate all of this while placating the investors? o Peter Radizeski is president of RAD-INFO INC., a telecom strategy and marketing consulting agency. He is a sales trainer, writer, consultant and speaker. He is available to speak at your events on channel, marketing, strategy or sales. Mergers & Acquisitions of Telecom Services Businesses Source: FactSet Source: McKinsey & Co. $18 60 50 40 30 20 10 0 $16 $14 $12 $10 $8 $6 $4 $2 $0 Aggregate Transaction Value Number of Transactions Billion Q1 Q2 2019 2020 2021 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 52 CHANNELV ISION | MARCH - APRIL 2022 CHANNEL MANAGEMENT

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