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Channel conflict set to intensify in the cloud, warns Forrester

Microscope contributor

Resellers that are building hosted and managed services are heading for conflict with technology vendors amid predictions that fierce competition in the market could force up to 15% of channel firms out of business.

This is according to a Forrester survey of 165 channel execs in 39 countries, which claimed that although 60% of IT industry revenues are transacted by partners, some vendors had overlooked historic loyalties in the rush to build a cloud business.

"Many tech vendors have forgotten that ever-critical customer relationship vehicle, the channel. Or, if they haven't forgotten it, they have coaxed channel partners with the pat mantra, 'do more consulting'," said Forrester analyst Tim Harmon.

Resellers and other partner types sell to small and mid-market customers that vendors deemed unreachable but the cloud would "significantly alter channel structures by facilitating direct - and profitable - service links" between vendors and users.

Harmon concluded that traditional dealers and distributors will be hardest hit by the adoption of cloud technologies, however many are "putting fewer eggs in the product reseller basket" and planned to offset hardware/software declines with services.

He added vendors had fixed channel conflict in products reselling but "re-introduced" the issue in the managed services space as they built their own versions to overcome mistrust in partners' ability to deliver adequate services levels to uphold the brand.

"The problem is that many vendors have not set the lines of customer demarcation between their channel partners' and their own MSP businesses, or they have set the lines very low," said Harmon.

The report showed more than half of respondents were interesting in managed services but the barriers to entry remained clear; the high cost of building and maintaining a cloud infrastructure, skill shortages and uncertainty over business model transformation.

Harmon said that as telcos sold cloud technologies, a few resellers repositioned themselves as MSPs and vendors built direct sales, "a potentially large number of channel partners will be forced to exit through M&A or by shuttering their doors".

"Forrester anticipates a 12% to 15% washout rate in the number of channel partner companies. M&A activity in the MSP market will swell, and acquisition price multiples will fall dramatically," he added.

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