The
End Of AVCOM: The Threat To The High-Value Channel
When it isn’t profitable any more to
provide valuable services to good customers, something must have
changed. Brad Bishop of
AVCOM announced on January 31 that his company, for ten years one of
the fastest growing businesses in the Silicon Valley, would close
its doors. After
delivering more than a billion dollars worth of goods and services
over two decades the VAR finds that their business model, investing
in the skills to deliver high-end technical advice and services,
just isn’t viable.
Referring to what happened to AVCOM as
“A Perfect Storm,” (see below) Bishop told us that they were
accustomed to putting in a lot of up-front investment in design and
architecture to help customers figure out what they needed before
placing equipment orders. It
was a true value-added model, but it demanded $150,000 a year
engineers working on customer requirements and as business slowed
and the gray market became a factor, the risks outweighed the
benefits.
“There
were too many VARs chasing too few customers, and as a
national provider there are requirements from each vendor to have a
minimum number of engineers on board.
We just couldn’t size down to a profitable size,” Bishop
said.
Bishop
said that AVCOM could have survived month to month, but the job is
to look after the interests of the shareholders and they couldn’t
see improvements for at least several years. (Some believe the
Silicon Valley, where AVCOM’s headquartered, won’t recover until
2011.) The AVCOM board decided to liquidate the company because there was no upside
opportunity.
AVCOM
partnered with a number of prime IT vendors including Sun, Cisco,
Veritas, and Hitachi. They
don’t want to blame anyone – except the business climate – for
what happened, but clearly the need for partners to take more
business direct was an issue. Unfortunately, vendors take the
biggest and most financially stable accounts direct, leaving the
channel to take the burden of the less financially stable accounts
and their bankruptcies.
AVCOM
did not negotiate with partners before making their decision.
Sun, for example, was disbelieving, especially given AVCOM’s favorable position in the marketplace.
We asked Sun for an official statement and they replied,
“AVCOM is considered one of the nation's top Valued Added
Resellers of enterprise-class systems, and Sun regrets the loss of a
valued business partner. The
business climate is a difficult one for both vendors and partners
right now. Many vendors
in the industry, including Sun, are in the process of redefining
their business propositions to address the volatile market
conditions.”
Bishop has heard from
hundreds of VARs. Of
course they’re happy to have the opportunity AVCOM’s leaving the
market provides, but they’re distressed, too, by AVCOM’s fate.
VARs he doesn’t know write to say they know how he feels
and they’d like to do that too – if they could.
AVCOM’s physical assets
are being sold at auction, at what Bishop calls “e-Bay prices.”
Less tangible assets such as customer data bases and sales leads are
being sold to continuing businesses.
AVCOM has IP in the form of copyrighted methodologies which
they hope to sell to multiple buyers.
Brad Bishop’s Definition Of A Perfect Storm
In The IT Business
Down economy,
especially in the IT space Gray
Market isn’t being addressed
effectively End-user bankruptcies
hit the Channel (who makes single-digit margins) vs. the vendors who
are in the 50% margin zone. The Channel's requirements for high-end
engineers, at $150k/yr, (by customers and vendors) are outpacing the
margins available to the Channel Venture Capital (and other
investments which spur growth) are turned off a
good "Registration" Process with Vendors is way over-due
the financial benefits of being Vendor-centric (e.g. Sun-only) are less
than the opportunity-loss of being Vendor-centric being
in the middle of the hour-glass is the death zone ... consultants at
one extreme and box-pushers at the other.
AVCOM Isn’t Alone
Unfortunately, AVCOM isn’t alone.
In fact, they were in relatively good shape, with many years
of good business and sound management.
They could choose to get out of business in an orderly way.
Others will be much more disorderly, simply
running out of money and time and leaving their customers without
the support and expertise they were counting on.
For example, UK and European VAR Morse noted
recently that its Sun hardware sales were down 36% for the second
half of 2002 (they’re Sun’s biggest European VAR) and its HP
sales were down 32%. Overall
infrastructure sales for the period were down 52%.
IBM sales were up 3% and service sales are growing, but not
enough to make up for slumping HW sales.
Nevertheless, Morse managed to produce some net cash for the
period.
We’d guess there are a lot of systems
integrators, VARs and consultants out there with crossed fingers for
a better 2003.
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