There's no secret that the software reseller channel is consolidating. But the move towards bigger and bigger players is gaining steam.
Over the last year, many small VARs have combined to form operations with $3 million to $8 million or so in annual revenue. But dealers haven't come together to bring us new players in the $20 million to $50 million range.
That's likely to change. The need for growth was expressed by Scotte Hudsmith, CEO of Nashville-based LBMC Technologies. Earlier this year, he said his organization needs to reach the $25 million to $30 million range in two years because of Microsoft's move into software as a service.
LBMC hasn't made any moves lately that suggest it's going to grow dramatically--this year. But don't be surprised if we see three or four organizations in that range by 2008, and perhaps one or two this year.
There are reasons for this growth that involve the dynamics of the low end and high end of the market.
Products like Intuit's QuickBooks Enterprise Solutions are going to cut off the bottom of the market, rendering it difficult for full-fledged VARs to operate there. Larger resellers won't be able to compete at that level any more than they could sell Microsoft's Small Business Financials (the earlier name Small Business Manager) in that arena. They are limited by their cost structures because license fees for these products are too low while the potential clients who can afford the products at this level don't want to pay for the services, which is the source of the profits. And conversely, QBES could pull accounting firms back into reselling at a level of sophistication they can handle.
The standard wisdom is that it's easier to move up market than down and Intuit is in a position to dominate the low-end of the mid-market. Meanwhile, the more robust VARs will move upstream for the same reason--they have an increasing price performance advantage over the enterprise packages.
And the enterprise players have nowhere to go. This is the factor that fueled Oracle's acquisition of PeopleSoft and JD Edwards, so that out of the JBOPS, the only independent companies left are the O and the S (Oracle and SAP.) The market isn't big enough for that many Tier 1 players.
The leading VARs, the ones who regularly win awards and who are recognized for their skill, are move upstream. The top Sage resellers are making their money on the higher-end MAS 500, not on the staple MAS 90, which is vulnerable to QBES and NetSuite. Sales of Microsoft's Dynamics AX is likely to accelerate for the same reason.
As these resellers become more specialized, more focused on niches, they will be mining larger geographical areas and recruiting expertise. All these factors propel growth and acquisition is the quickest way to gain the scale needed.
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