Santa Ana’s Ingram Micro is in a review by big source of business, Microsoft Corp., which si looking to cut one of its top three distributors in Britain.
In industry speak, the effort is known as “channel rationalization.” It’s a trend among technology companies across operations in Europe, where distribution is more fragmented and spread out.
Hewlett-Packard Co., Oracle Corp. and Acer Inc. cut from their European distributor ranks last year.
The goal is to cut costs and boost efficiency by paring down the number of companies that distribute products to technology service companies and retailers.
“It is costly to manage an overabundance of distributor relationships,” said Andrew Hargreaves, senior analyst at Pacific Crest Securities Inc. in Portland, Ore. “Microsoft will say, ‘We have 50 distributors, but really we could have three and have the same amount of money coming in.'”
Early last year, Microsoft said it planned to do an internal review of its top three U.K. distributors, Ingram Micro, Bell Microproducts Inc. and Computer 2000 Distribution Ltd., the British arm of Clearwater, Fla.-based Tech Data Corp.
The weakest link is set to lose authorized distributor status.
The review started in January and is set to end in June, according to a report from industry publication Computer Reseller News.
Last year, HP dropped Ingram Micro from distributing its server and storage products in Britain, according to MicroScope, a trade publication by Reed Business Information.
HP stuck with distributors that brought in the most revenue, according to the report.
Microsoft likely will use similar criteria to figure out which distributors will stay, industry watchers said.
The Microsoft review was announced after the company added half a dozen companies to its stable of distributors in Britain in the run-up to the release of its Vista operating system last year.
Ingram Micro, Computer 2000 and Bell Microproducts were in “frantic talks” with Microsoft shortly after the announcement was made, according to Computer Reseller News’ British edition.
Bhavesh Patel, a commercial director at Ingram’s U.K. office, hinted that the company wasn’t going to be axed, because it had worked closely with Microsoft on the Vista release and a recent Office rollout, according to CRN.
Microsoft declined to comment on the progress of its review for this story.
A spokesperson for Ingram in Santa Ana said the company “had nothing further to report” on its involvement with the review.
The company is the largest distributor of computers, software and other tech gear to stores and service companies, with $31 billion in yearly sales.
The biggest challenge for Ingram is squeezing profits out of narrow margins. Its business, on average, nets about a penny on a dollar.
In recent years, Ingram has made a push to diversify and now distributes consumer electronics for Sony Corp. and Apple Inc., which came to the company when it wanted to boost iPod sales.
Ingram doesn’t break down its sales by supplier, except for HP at about 20%. No other company, including Microsoft, is more than 10% of yearly sales.
Sizable Business
Still, industry watchers say Microsoft makes up a sizable part of Ingram’s business. Work for Microsoft also could be more profitable.
One the one hand, Ingram delivers Microsoft software to retailers such as Best Buy, just like it would computers from HP or gadgets from Sony. Profits there likely are slim, with warehousing and shipping costs on Ingram’s end.
But there’s more money to be made in managing licenses for Microsoft. Ingram also manages and distributes Microsoft software electronically, keeping track of licenses for the company. The cost of that business with Microsoft is lower.
The distributor cull may have to do with more lucrative licensing, according to analysts.
Having fewer distributors means “it’s simpler to make sure you are getting accurate tracking data in terms of the licenses that are out there,” Hargreaves said. “For Microsoft, that has become more pressing of an issue. Now that the actual penetration of their product can’t go any further, it’s a must getting people to pay for and use licenses.”
Ingram shouldn’t be worried about its place in Microsoft’s food chain, according to Hargreaves.
“Ultimately the distributors provide very legitimate value to the channel,” he said. “It’s hard for the vendors to get to the scale they want without a middle man like Ingram.”
