A Place In The New Resale Machine

• By Frank Barbetta
• Feb 05, 2008

Wisely prepared companies in the resale channel will continue to benefit from the new, emerging climate of security and IT convergence. Along the way, channel executives envision an increase in new partnerships and tighter handshakes on existing relationships among the security industry’s manufacturers, distributors, systems integrators and value-added resellers.

Security companies see their marketplace in the next two years characterized by an accelerated pace of digital information technologies (IT) and Internet Protocol (IP) networks converging into and supplanting the traditional analog systems and physical solutions business. This stands to disrupt what has been a linear and straightforward supply chain: Manufacturers sold to distributors. Distributors sold to a network of contractors, installers and dealers.

The entry of companies such as Cisco Systems, Electronic Data Systems, Hewlett- Packard and IBM, which bring their own structured channel partner networks, has sent tremors through the traditional supply chain. Established contractors now find themselves faced with the task of developing new skill sets to deal with the IT aspects of the job. The good news is that IT companies show signs of reaching out to contractors and installers of video and access related security systems.

The downside is that these established players will now be competing with the IT reseller channel and may have to share sub-contracted business with other integrators. On another front, there have been reports of distributors themselves bidding on large security projects in direct competition with their dealer base.

A late 2007 canvassing of manufacturers, distributors, systems integrators and value added resellers (VARs) strongly suggests a consensus toward a positive yet sometimes disruptive and challenging outlook within the third party channel environment as many participants position themselves for changing times.

Channel businesses may stop short of formal joint ventures and merger and acquisition (M&A) activities, but manufacturers aren’t ruling out such developments. French manufacturer Schneider Electric’s $1.54 billion acquisition of Clovis, Calif. video management system vendor Pelco this past October could be a representative pace setter.

In addition, local and regional security companies are closely watching several large diversified electronics vendors and generalist system integrators -- such as Cisco Systems, EDS, EMC, Hewlett- Packard, IBM, Science Applications International Corp. (SAIC) and Seagate -- that will be showing increased interest in the business over the next 12 to 24 months.

Meanwhile, the overriding imperative among dealers and installers is to avoid stepping on each other’s toes in competitive bidding contests and to gauge arguably threatening collisions with the national brand name vendors seeking major contracts that include security criteria. To date, however, security executives surveyed aren’t reporting any low-ball or marginsqueezed bids by such large companies.

Several security integrators, in fact, see new opportunities when IT vendors pursue multimillion dollar contracts directly with endusers.

The way the IT channel works, large chunks of those contracts will filter down to VARs,who end up in a sub-contracting role. The key for a physical security installer or integrator, then, is repositioning the business to be a credible IT VAR.

Strengthening Partnerships

Meantime, the relationship equity that security contractors and integrators have built with customers has not escaped the notice of big IT equipment distributors. The convergence trend is motivating them to beef up their security product portfolios and strengthen their integrator partnerships with sales leads and other third party support programs, says Robert Hile, vice president of business development at IT, network systems and broadband integrator Adesta in Omaha, Neb.

Among the incentives being offered to resellers are purchase discounts, longer payback periods and registries for getting inside tracks on project bids, he says.

“The IT types of distributors are adding value to spur purchases of all sorts of products,” he added. “They really are doing a good job stepping up to the plate. I don’t really see anything that would stop this movement. Traditional distributors of security products aren’t reaching out as much.”

Hiles sees an accelerating evolution in the new security IT distribution model.

“We’ll see more creative ways to help us get business and make money,” he says. “Some companies are putting feet on the street to get deals and bring in the integrators. But the traditional security guys will be the most challenged to maintain their piece of the market share.”

John Gaillard, president of security distribution at value-add distributor Scan- Source Inc., Greenville, S.C., agrees. “We are continuing to see the convergence trend move forward as we thought it would,” he says. “IP forecasts are reasonable, and we will see some big shifts in buying habits. There are lots of traditional analog systems being sold, and there are still many applications for that. But more IT integrators are seeing the IP opportunity and the future someday will be 100 percent IP, albeit not overnight.”

According to Gaillard, IT integrators bidding in the traditional security marketplace has now become “a fact of life,” although whether the IT integrators are from software, server, computer system or networking worlds may be somewhat muddled.

Video security is the priority for newcomers, he said, with some interest in access control systems likely to follow.

“A full suite of security will be the eventual goal, and the smart ones are looking to IT for all this,” Gaillard maintains. “The pace is being set by end-user bids for computers, telecom and such -- with security being added. Some traditional security dealers are struggling with all this and not getting the bigger picture, but the risk is that if they don’t migrate, they lose the ability to sell to the customers. For the most part, IT integrators understand what will be happening.”

More Integration

“Where we’re going a couple of years down the bend -- as so much depends on cost as physical security migrates over to IT -- is to better reposition physical security in relation to IT,” said Art Morrison, operations manager at value-add distributor ProTech Security, North Canton, Ohio. “The vendors with the best toys will sell the sizzle and show how it can be done. People will find the money because they want good working systems. As cameras get smarter and have more features, as access control gets bigger and as smart analytics increasingly surface, we’ll see more integration.”

Morrison said he is looking to public address intercom, speaker and paging systems for mass alerts as another potential up-and comer for the IT/IP/security convergence mix. He also foresees more competition among smaller companies from both the physical security and IT sides of the fence.

An Increasing Skills Mix

“We’re starting to see an increasing mix of security people and IT/networking types getting involved in physical security and surveillance,” said Robert Lecher, owner and president of value-add distributor RepLogix LLC, Shelby Township, Mich.

“There are also people from the automation business starting to look at this market as a potential growth area.”

Lecher sees a continued repositioning and re-education among manufacturers, distributors and resellers alike. “This is part of the challenge that will continue with the existing security base,” he said. “I see people with the knowledge of IT technology move into the physical security space and see that transition being easier than the traditional security people learning IT.”

For ioimage, a maker of digital signal processor (DSP)- based video surveillance devices, encoders, IP cameras and analytics software tools, distribution is paramount in its effort to reach mid-range markets, said Dvir Doron, marketing vice president with the Herzila, Israel, headquartered company. With U.S. offices in Denton, Texas, ioimage has reps, integrators and distributors in its U.S. lineup, including e-Convergence Solutions of Centreville, Va.; Northern Video Systems of Rocklin, Calif.; and most recently, Supercircuits of Austin, Texas.

Doron says the companies need the ability to reach mass distribution markets, but he adds that large systems integrators are in the field with direct end-user bids at the high end of the market. It remains questionable whether either approach will emerge as dominant within the next two years, but right now the overall value proposition offered by IT/IP and security keeps competitive price, margin and shakeout pressures at bay.

One of ioimage’s distributors likens the current security environment to the voice business’s early digital technology migration, culminating with the voice over IP (VoIP) invasion.

“The data VARs got it but for many of the voice VARs, it was ‘never the twain shall meet,’ right?” remarks Joseph M. Heinzen, president of e-Convergence. “Now much has changed in the market due to that conversion mix and migration. The transition is similar with adding physical security and video to IT and IP.”

“There could be a shakeout of distributors and resellers relative to sales strategies and IT knowledge, and this could impact manufacturers also,” Heinzen continues. “What ends up winning is the best channel program regardless of technology. I think it’s going to happen quick, with video now following the pattern of VoIP [Voice over Internet Protocol].”

‘Lines In The Sand’

Channel executives, however, don’t foresee formal joint ventures and M&A maneuvers among their peers -- IT distributors, integrators and resellers.

“The lines in the sand are still clear enough for most of our businesses that we don’t have to share investments and revenues in a true JV,”Adesta’s Hile remarks. “The models are still very different. And I think the manufacturers will stay away from integrators to avoid end user bidding conflicts.”

Gaillard also warns of end-user bidding conflicts if competitors blur the distinctions between distributor, installer and integrator.

“These can be disruptive strategies within the channel,” he says. “The classic supply chain views each party as having a role to play. If everyone does their work, the supply chain works.”

Heinzen of e-Convergence said past instances of security distributors selling against their VARs were “horrible” developments, but he foresaw future corrections of such practices. “There’s a conflict if distributors sell direct to end users, and such companies eventually can be out of business,” he adds.