“Off-White” Paper # 23 – VAR WARS 2004

This is the latest installment in an ongoing series of articles on the government reseller and PC catalog business. In several previous issues of the Amtower B2G Market Report (see list at the end of this) I have discussed the state of the value-added resellers and PC catalogers. This has evolved into a recurrent topic, with lessons for all, in a galaxy (inside the beltway) far, far removed from reality? VAR WARS Prelude Many things have occurred since the last installment (November 17, 2003) in the always-entertaining realm of the value-added reseller in the government market. Up for discussion in this update are CDWG, Dell, DLT Solutions, GTSI, Gateway, GovConnection/PC Connection, Insight, MPC (formerly Micron PC), PC Mall, PlanetGov, with references ASAP, Immix Group, Westwood Computer, and a few others. (I also advise some – see the disclaimer at the end.) As a rule, I do not include integrators, as they are rarely amusing and they do not they fit the “product vendor” category as I define it. We are discussing companies that primarily sell computer products. I know Northrop owns a couple reseller-type shops now, but they are difficult to fathom inside the behemoth. Are there other omissions? Certainly, and I do not mean to offend, but I do not know all the players. I write about the ones I know, watch, and have some knowledge of. Please keep in mind that I am a marketing guy. I am not a sales guy, nor a contract guy, nor a business development guy. I believe that good marketing helps sales, contracts and business development do their jobs. I also believe that adequate or poor marketing make those jobs more difficult. But there are instances, like DLT Solutions, where a very focused sales environment can drive extraordinary growth. The selection of the most appropriate government VAR by manufacturers, developers and others who need channel partners is critical to their success in this market. Choosing ?all of the above? (trying to work with several VARs) might well lessen the impact of a product, not strengthen it. Most manufacturers should not be selling direct to anyone, especially the labyrinthian Federal government, where mis-steps are easily made and often costly. Even experienced companies (see comments below on GovConnections) have found themselves in the proverbial ?hot water?. The primary (though not exclusive) battleground for these VARs is the GSA Schedule, and I will use the Schedule 70 rankings as the barometer. Schedule 70 (the IT Schedule) did almost $15 billion in FY 2003, and serves as a good barometer for IT sales and market recognition. Given the nature of resellers and catalogers, though, the open market plays a strong role here, as do selected other contracts, like ECS III and SEWP III, or other contracts where VARs sub-contract. While I will make no single point, I believe it is important to look at the channel a couple times each year to see who is doing what, who is growing, who is shrinking, and possibly determine some trends and maybe the reasons for the trends. I will offer some predictions. Background This is a market of incremental growth. Gorillas here got that way slowly. Some gorillas grow old and die, while others try to grow to fast and disappear. “Live hard, die young, and have a good-looking corpse.” My favorite illustration of the slow growth goes back to Bohdan, once upon a time the number two reseller in the government market (see June 17, 2003 story referenced below). Bohdan was a big Compaq partner, and they grew nicely as computers became pervasive throughout government. In the early 1990s, it was purchased by Ameridata, which felt compelled to change the name from Bohdan to Ameridata, losing the brand equity built up for Bohdan over almost a decade. Marketshare stagnated, and a year or two later, GE bought Ameridata. And GE felt compelled to rename the company GE Capital IT Federal Solutions, pronounced gee-sit-fizz. Say it with me: GEE-sit-FIZZ. GE renames everything it buys, assuming the GE brand provides value anywhere. This division disappeared as marketshare eroded. Apparently the name was too long for anyone to remember, so all the buyers went to GSTI or Falcon (which was bought by GTSI). Key players Charles Matthews (founder of IES) and Gary Newgaard (the force behind Compaq, now at Paragon) remain very active in the market. GE, however, fizzled. Say it with me: FIZZled. CompUSA made a decent run in the government market in the early-mid 1990s. With a small, talented team led by Bill Griffin, and including Jim Connal, Frank Araby, Randy Jacobs, CompUSA ramped up a $150 million presence. CompUSA was pretty innovative, too, being the first to offer IT classroom training on Schedule. Then HQ decided everything should be run out of Texas. And while I like Texas (I buy my boots in San Antonio, which is why my Best Practices seminar will be there in April), you cannot run a significant Federal operation from Texas without a D.C. office. None of the DC-based CompUSA team made the Texas move, and marketshare declined. Most of the CompUSA team is still active in the market. CompUSA also bought PC Compleat in the mid-1990s. PC Compleat was a second tier but healthy PC catalog. CompUSA immediately renamed it CompUSA Direct, destroying the brand loyalty of the mail order universe, and it died. Brand management brain surgery in action. About the same time CompUSA was moving everything to Texas, EDS launched EDS Select, its reseller division. Hoping to capitalize on the growth (mid-1990s) of the SmartPay credit card program, EDS made the same mistake many others have made: assuming an announcement would create marketshare. EDS Select did not make the cut. PlanetGov is another big splash story, although the story is now a couple years old. PlanetGov was started by BTG renegades who refused to go to GTSI after GTSI bought the product division of BTG. Led by Steve Baldwin and a reputed 3-three-ring binder business plan, the group bought a small government contractor, renamed it PlanetGov, and planned (during the dot-com era) market domination by developing a web site that would be everything for government employees. PlanetGov hired the Washington Post’s long time federal employee columnist, Mike Causey, and held a huge party at the Reagan Center for the web site launch. Except the web site was not ready when the party occurred. The dot-com bubble burst, and the apparent IPO plan went into semi-permanent hibernation. But PlanetGov did not die in the process. The good news at PlanetGov is this is an incremental market, and over the past few years they have achieved a significant measure of success. Incremental growth is good. It is realistic. It is do-able. Big splashes in this market are followed by big splats, and chalked body outlines on the sidewalk. I also hear they have new management, a team that might make them a more formidable player. MicroWarehouse made a huge splash in 2003 announcing their GovEd division. First they announced they were hiring 293 people (reported in Washington Business Journal, where the VP of MW-GovEd also stated they were ramping up “because of a void in the government reseller market”). The House had a huge presence at the 2003 FOSE, and finally the fire sale to CDW. Before the sale there was a Washington Technology story announcing a Defense Logistics Agency Blanket Purchase Agreement for MicroWarehouse. The story stated “Micro Warehouse Gov/Ed Inc. was launched October 2002 as a wholly owned subsidiary of Micro Warehouse Inc. With annual sales at about $400 million, the subsidiary expects to reach $1 billion in annual sales by 2005.” Hyperbole ran rampant. The “void in the market” referenced by the Warehouse/Gov-Ed VP was in their plan: where was this marketshare they were going to snap up? So the point remains: this is a market of incremental growth. The growth goes to those who have time in the trenches, patience, skill, a good-to-great team, some contractual bandwidth and the ability to maximize the value of those contracts. Attention to details is critical. Gorillas here got to be gorillas slowly. Some grow old and die, others try to grow to fast and disappear, and still others get bigger and healthier. They understand things do not move quickly and that many things have to come together for sustained growth. Today So where are we today? The are changes occurring that will make things easier for some VARs, harder for others, and not impact another group at all. And if it is harder for the VARs, it will be confusing for the manufacturers that need the channel. One of today’s little known gorillas is facing a major hurdle. DLT Solutions, a boutique reseller, which happens to be Oracle’s biggest government reseller, experienced an unexpected change of command. The company’s new owner abruptly replaced DLT president Craig Abod. A management firm (Alvarez & Marsal) out of New York has been retained. Mr Abod was almost single-handedly responsible for building DLT, and he had a verbal agreement with the initial owner, who died suddenly. The surviving wife (apparently new wife) is responsible for the changes, which came as a total surprise to Mr Abod, and definitely to as a surprise to the DLT manufacturer partners. The manufacturers I advise hate these kind of surprises from preferred resellers. The upshot? The owner and new management team will get fast, hard lessons in the realities of the government channel, the relationships demanded by manufacturers, and suddenly eroding marketshare. There is no apparent bandwidth (read: government channel experience) for the management team tasked with replacing Mr Abod – unless they are going for a quick sale. And even then they will be sorely disappointed. Without experienced management in place (read: serious experience in the government market), and busy season coming up quickly, morale will tank and sales will erode. Any potential buyer will see that. Relationships in this town are crucial: relationships with the buyers, the contracting officers, the program managers, the manufacturers, the integrators – across the board.. Without experienced senior management in place at the top of DLT – someone with demonstrated government channel savvy – there is marketshare available. Not since GE left town has this kind of marketshare been up for grabs. This marketshare is open only to serious players that act quickly and have leverage with the companies DLT represented. Upstarts need not apply. Mr Abod will re-surface and thrive. DLT Solutions will be come a footnote in the 2005 VAR Wars. In the meantime, if I were a DLT manufacturer partner, I would be anxious to find out what Mr Abod is doing next and/or finding a new reseller willing to devote the attention to my product DLT did under Mr Abod. New entry? Apparently Best Buy will launch a government division. Bill Shafley, formerly with GTSI, CDWG and MicroWarehouse, will lead this effort. Will Best Buy find traction? Difficult to say, but more difficult to do for a consumer company. If physical presence were a factor, I might say yes. But government managers responsible for the SmartPay credit card program (probably a significant part of their go-to-market plan), might have problems with a consumer store showing up on their credit card buyers reports. Then there is the issue of Best Buy having a GSA Schedule – are they ready for a GSA audit crew to come in? And will they address this by establishing a subsidiary company? And where will the marketshare come from? This one will be fun to watch. Not enough? I hear that Circuit City may also enter the game. Is Walmart next? The Players Dell continues to dominate the GSA Schedule, and they are liable to maintain this until they make a mis-step, or series of mis-steps. It happens to almost every company. Does anyone remember WordStar? At present, though, they are truly pervasive. Dell is in consumer publications, business publications and government publications, on television, pretty much anywhere and everywhere with the “product, price, source” message. And it continues to work. The TV ads are slick and fun, and the space ads drive the product message. Dell does a ton of the tabletop events, but last year it had a very small footprint at FOSE (MPC/Micron had a bigger booth). Aggressive is one way to describe Dell, as it remains 1st on GSA with $1.6 billion and 10.5% of Schedule 70. Can you spell “wow?” GTSI is still the most recognized reseller name in this market, but it seems to have stagnated. GTSI has a broad selection of contracts, and most of its products are available on several contracts, making it easier for any buyer at any agency to purchase. This is a good strategy, but the sales have been flat. I suggest this is due to its dependence on market development funds for advertising. GSTI is going to launch a new branding campaign. GTSI has a brand and it owns a position, but over the past 20 years there has been little active management of either the brand or position. It will be interesting to watch the new ad campaign unfold. GTSI taps in at 14th with $175 million. ASAP Software, like DLT, seems to grow without lots of hoopla. This irritates me no end, as they only rarely attend my seminars, yet they continue to grow. We can safely assume Randy Lee and his team are very good at the relationship sale business model. Relationships are crucial, and you can grow your business in an “off the radar” mode if you are very good at managing relationships. I do not mean CRM, I mean real customer relationships. Coming in at the 17th position with $133 million, I think they can spell relationship. CDWG continues to grow, coming in 18th for FY 2003 with $126 million. Late last year CDW bought MicroWarehouse. After the huge splash MicroWarehouse made early in 2003 (announcing they were going to hire 293 people, raiding other companies for senior staff, spending more than $1 million at FOSE), the company tanked, and assets were quickly snapped up by CDW and CDWG. Early this year CDW bought T3 Corporation, a small business that owned a piece of the SEWP III contract. Although CDW is known for organic growth (even in the poor economy over the last three years they have grown), often the only way to expand contractual bandwidth in the Federal market is by acquisition. CDW has the cash to fund the acquisitions. CDWG is also pervasive in marketing. Its ads are in the right publications, it has a strong table-top and trade show strategy, it has a great stable of catalogs and other print media, it has the best product web site, and it is getting more press and doing many things right. Gateway is between a rock (Dell) and a hard place (the channel). Although it has an agreement with GTSI, it continues to sell and advertise direct. I find the advertising inconsistent at best, and often amusing, though in ways Gateway may not intend. It announced a couple nice wins lately, but in 22nd position with $115 million, they need to enunciate a clearer message, or their channel partner(s) might reevaluate the relationship. I also hear, via unsubstantiated rumor, that five-year Gateway veteran Jay Lambke is gone. Jay led Gateway’s government effort since the late 1990s. If true, this could send Gateway in a new direction. If Gateway is between a rock and a hard place, MPC/Micron might feel like a piece of hot iron on an anvil. MPC/Micron is in the 24th position with $109 million, and continues to maintain marketshare by going after more business in agencies where they are liked. They have great products, but they need more partnerships to grow in the Federal arena, either with integrators, reseller or both. They already have a relationship with CDW for the non-government world. They need to find a way to expand it to CDWG. MPC does not have the money to compete against Dell, or even Gateway, and is fighting an increasingly defensive battle. DLT Solutions occupies the 27th position with GSA sales of $103 million. Softmart is number 29 at $93 million. I do not know enough to say anything about them, except to say 29th position is very respectable. PlanetGov comes in at a very respectable 35th, with $70 million. GSA is only one facet of its government play, and it should to be watched closely by the competition and manufacturers. Westwood Computer has $64 million in sales and comes in at 37th. I see it at some trade shows, and occasionally they use some space ads, but other than that its marketing is off my radar. The Immix Group is intriguing. Technically it is a GSA Schedule consulting firm. Immix also happens to carry a Schedule, which it offers to selected clients. While not a reseller in the technical sense, it ranks 61st on GSA with $42 million. GovConnection was thrown off GSA Schedule in late 2003 for a variety of reasons. In a conference call shortly after being bounced, one of their senior people indicated it would be back on within two months. This did not happen. Going into busy season without a GSA Schedule leaves their marketshare, and some of its better sales people, ripe for picking. If other companies are really good at the relationship sale, GovConnection might want to develop a closer relationship with GSA. Then again, maybe its plan is jail time and working the UNICOR angle. In 2003 GovConnection came in 96th, with sales of $26 million. Insight seems to have taken a while to digest Comark. The acquisition initially gave them a good footprint in the Federal arena, but they seem to have done little or nothing to grow this Instead, Insight is everything consolidating in Arizona. They will be at FOSE, as most resellers will be, but other than that their ability to put a face forward in the government market has been negligible. Maybe it is indigestion. At 162nd, with sales of just under $14 million, there are no bragging rights. This leads to PC Mall, whose relatively new boss came from Comark. PC Mall is active and growing. Alan Bechara should never be counted out. And unlike some of the other resellers, I think PC Mall will concentrate on products. Although it ranked far down on the GSA barometer, they were only on Schedule for a short time in 2003, and I expect the Mall to move up close to the top 100 for FY 2004. In FY 2003 they came in 970th (not a typo) and had sales of $1.2 million. Differentiators How do these companies play in this market? Much of it depends on telesales, which I will not discuss. Ad pages anyone? Dell and CDWG lead the way in the government trade publications. Without Dell and CDWG, the federal trade publications would be hurting. IBM is represented, but not with many product ads. Gateway did a really silly space ad at the end of busy season (http://www.federaldirect.net/newsletter092903.html) – a server with an ear. Although Gateway still has significant government presence, it is little wonder founder and CEO Ted Waitt is migrating toward consumer products. PC Mall and GTSI lag behind in the space ad wars, but not by much. Others, like MPC/Micron, are there as well, but to a lesser degree. Over the past six years or so, DLT Solutions started and ramped up to $260 million. Right through the dot-bomb era it kept growing, without being a portal, vortal, or a significant web-presence. DLT just sold stuff, primarily over the phone. Go figure! During that same time frame (late 1990s), CDW entered the government market. It came in as CDW, then CDW GovEd, then (intelligently) CDWG. And it grew, and grew, largely because of their catalog, and working the SmartPay credit card to their advantage. And in large part because of the web, but not in the dot-bomb sense. They simply erected a very use-able, easy to navigate, informational site. It appears in several business publications each year as one of the top commercial web sites in the country. People came, and more importantly, came back. Go figure! Somewhere in that time frame, say 1997-2000, Insight came in, unannounced, and remains basically a borderline player. It bought Comark to grow marketshare, but Insight remains basically the same, somewhere in Arizona. Go figure! Chicago based ASAP Software has been there all along, growing steadily, like DLT, just selling stuff. It does not do much, if any overt advertising. Go figure! GovConnection lost its Schedule, possibly for very bad reasons. Will it come back? Probably not before the carcass has been picked over, and unless they get the Schedule back well before busy season starts, it may make Insight look good. The marketing goal for VARs involves several factors. First and foremost is being most attractive to the manufacturers that fund marketing efforts – standing out from the crowd in a positive, pervasive manner that creates, maintains and grows marketshare. Being pervasive without being invasive is a balancing act, balancing all the marketing elements into a coherent, cohesive program that gives both the resellers and manufacturers the broadest exposure without unnecessarily irritating potential or current customers. I believe the marketing balance is best achieved by catalogers as opposed to VARs who operate without catalogs. Regardless of the cost of a catalog, it has shelf life that e-communications and space ads do not have. Basic Darwin: as long as we have the opposing thumb, there will be catalogs. That being said, DLT and ASAP show me exceptions can be made by extraordinary companies with solid leadership. Predictions I do not have a crystal ball, but I have been studying this market for years. I do not know what is going to happen, but here is my best shot. My friend, Harry B Heisler, will land somewhere and make a big difference. Harry was at GTSI for a decade in the early years, as was Alan Bechara. Harry is responsible for the growth MPC experienced in this market. And he is currently an unused senior resource. As this is VAR Wars, think “Obie Wan.” GTSI needs its new branding campaign to help define, defend and grow its marketshare. If it is a nebulous or confusing campaign occurs (I hear the agency is from Arizona…), erosion on the product side of the business will follow. If that occurs, the major beneficiaries will be CDWG and PC Mall, by far the most proactive players on the product side. If GovConnection gets the Schedule back soon, it too could benefit. If they do not get it back, they will swap dollar positions with PC Mall. Dell continues, unstoppable, until it hurts itself. Stranger things have happened, and they are not universally loved. DLT needs an experienced senior person right now, or everything Craig Abod built will go away. And it may well come back in the form of his new company. MPC/Micron can continue in its current mode, but to grow, it needs partners. It might be able to pursue this as a sub-contractor to the integrator community. MPC is easy and pleasant to work with. I love the products and own several. PlanetGov continues to grow, incrementally. Maybe around that $500 million mark it can revisit the IPO plan. Immix is a cash machine for themselves and their clients. If I was not so irascible, maybe I could do something with it, but Lord knows how many people I rub the wrong way. GMR is looking for a VP for marketing. Given the right person, it could re-emerge as a contender. If it hires the wrong person (gee, that never happens!) it could be the next MicroWarehouse. My predictions for GSA standings for end of FY 2004: CDWG catches up with GTSI, ASAP stays close, and Gateway and MPC switch positions, but stay in the mid 20s. DLT drops out of the top 50. PlanetGov moves into the top 20 and Immix moves into the top 50. GovConnection, without a Schedule, disappears. If they get the Schedule back before June, they will be in the top 250. PC Mall moves ahead of Insight, which becomes an oversight. Not that I have an opinion.
Schedule 70 Rank Company Sales Marketshare %
1 Dell $1,594,864,684.00 10.59%
14 GTSI $175,230,924.00 1.16%
17 ASAP $133,226,890.00 0.88%
18 CDWG $126,827,381.00 0.84%
22 Gateway $115,238,319.00 0.77%
24 MPC-G (Micron) $109,810,895.00 0.73%
27 DLT Solutions $103,983,972.00 0.69%
29 Softmart $93,521,705.00 0.62%
35 PlanetGov $70,205,453.00 0.47%
37 Westwood Computer $64,154,007.00 0.43%
61 IMMIX Technology $42,552,026.00 0.28%
74 SOFTCHOICE $35,618,625.00 0.24%
96 GOVConnection $26,471,866.00 0.18%
100 GMR $24,386,854.00 0.16%
112 MicroWarehouse $21,410,746.00 0.14%
152 CompUSA INC $14,403,053.00 0.10%
162 Insight Public Sector $13,967,927.00 0.09%
244 World Wide Tech $9,767,341.00 0.06%
970 PC Mall $1,256,520.00 0.01%
Background reading for those not tired of this. http://www.federaldirect.net/newsletter081902.html Battle of the PC Catalogs, August 19, 2002 In the first issue of the Amtower B2G Market Report (8/19/02), I discussed the state of the Reseller wars in Battle of the PC Catalogs. I discussed the personnel changes at Insight, Comark, MicroWarehouse, PC Mall, CDWG, GTSI and PC Connection/GovConnection. http://www.federaldirect.net/newsletter041103.html FOSE and the Battle of the Bags, April 11, 2003 The battle of the resellers at FOSE; who did what, who paid what, and ultimately, who cares. http://www.federaldirect.net/newsletter061603.html VAR Wars, June 16, 2003 The first real “VAR Wars” article, some historical perspective, and commentary on the (then) current scene. http://www.federaldirect.net/newsletter070803.html VAR wars, part 2, July 8, 2003 Discusses the rise and fall of CompUSA as a government VAR, and lessons from same. http://www.federaldirect.net/newsletter111703.html VAR Wars (continued) November 17, 2003 Discusses the market consolidation and survivors. In the August 26, 2003 issue of Washington Technology (http://www.washingtontechnology.com/news/1_1/daily_news/21536-1.html), Joab Jackson wrote about an Input report saying more than 50% of all PCs bought by the government were purchased off the GSA Schedule. ?The report identified Dell Inc., Round Rock, Texas, as having the largest percentage of government computer sales with 17 percent, followed by Northrop Grumman Corp., (8 percent), GTSI Corp. (6 percent) and IBM Corp. (5 percent).? DISCLAIMER: I do advise CDWG and a variety of other companies. I used to advise GTSI and MPC/Micron in the recent past. And long ago, I advised Dell and Bohdan. If you know me, you should realize that being a client or former client does not exempt you from the Amtower microscope and it does not guarantee positive coverage. I say what I think. I have advised GTSI on three occasions since Dendy Young took over several years back. I advise a number of other companies not mentioned, but which do business through the channel. Most of the companies mentioned in the article speak with me on a regular basis, and most have attended my seminars. About Mark Amtower Mark Amtower is the founding partner of Amtower & Company, of Ashton, Maryland. He is recognized as a leading authority on Federal marketing and consults with senior management in several companies on their government marketing programs. He currently sits on the Advisory Boards for software developer PestPatrol, the Federal Business Council, and the American Consultants League. Since 1985, Amtower & Company has been providing critical marketing information to companies selling to the Federal government – both novices and experienced marketers alike looking to create, maintain and grow marketshare. Services from Amtower & Company include government mailing lists and targeted database development, consulting, in-house seminars, strategic corporate introductions, and competitive assessments. Amtower & Company partners with a select group of companies as necessary for particular clients. Each year Mr. Amtower advises a carefully selected group of CEOs and other top managers at government contractors, manufacturers, and B-to-B catalog firms on matters concerning government marketing. Mr. Amtower is a frequent contributor to national business publications, having written more than fifty articles for Catalog Success, DM News, Federal Computer Week, Government Executive, Government Technology Reseller, MC (Marketing Computers), Reseller Management, Target Marketing and others. His e-newsletter, The Amtower B2G Market Report, is widely read by both the direct marketing and Federal marketing communities. He is frequently quoted in the Federal trade press and other business publications on matters relating to government marketing. He is a popular speaker at various industry events, including the Axciom/Direct Media Business Coop, Business Mailer’s Group, Direct Marketing to Business, Federal Channels, Grant Thornton’s CEO Government Roundtable, HighTech Direct, MacWorld Summit, MeritDirect B-to-B Catalog Coop, TechExpo, and several others. The premier Amtower & Company seminar, Government Marketing Best Practices, launched in March 2002, has been attended by more than 500 companies. Government Marketing Best Practices tours the United States each year, visiting 8-10 cities. Amtower & Company also produces the annual B2G Catalog/DM2G Summit, held in Chicago every November. More than 7,000 professionals have attended his presentations since his first public session in 1991. Mark Amtower is widely known for his candor in his articles and presentations. Amtower & Company was founded in 1985. Mr Amtower resides in Highland, Maryland with his wife and two children.