We’ve all been staying close to home for far too long during the pandemic, but over the past few weeks, I’ve made up for lost time by attending two separate Informa tech shows,
Enterprise Connect in Orlando, FL, and
Channel Partners in Las Vegas, NV. Jumping back into business travel has been a shock to the system, but the routines came back pretty quickly, and before I knew it, every waking minute was filled with meetings, one on one meetings, panels, keynotes and receptions.
Going to these events back-to-back provides a broader-than-usual perspective on our industry, and I have some takeaways to share here. Reflections on Enterprise Connect have been posted
here and
here, so I’ll focus primarily here on Channel Partners. While the collaboration vendors and cloud providers maintain a large presence at both events, very few analysts attend Channel Partners, and I’ll try to bridge those worlds here.
The World of Channel Partners: Very Focused on the Fundamentals of Digital Transformation
Analysts are from Venus and agents are from Mars. I knew this going into Channel Partners, and not surprisingly, most attendees along with those in the exhibit hall have no idea what analysts do (many booths are staffed by different people than at Enterprise Connect). So, without batting an eye, they’ll ask me questions about SIP trunks, who I’m selling now, how many customers I have, etc.
These vendor queries provide a fascinating window into a world us analysts don’t spend much time with. This event is where the business of cloud, UCaaS and CCaaS happens, and they’re not much interested in my thoughts on industry trends. While analysts get excited about cool stuff like AI, analytics, speech recognition, digital assistants, virtual reality, holograms, etc., there wasn’t much of that going on around at Channel Partners.
The Channel Partners world is very much about the nuts and bolts of moving customers off premises-based phone systems and contact center and moving them along their cloud journey. To analysts, that’s so 2020, and it’s easy to forget that most of the market is just getting to first base with digital transformation. Of course, that’s what keeps analysts gainfully employed, and as long as technology keeps changing, we’ll be busy.
More importantly, when taking in the vast show floor, it becomes very apparent just how many players there are for each link in the value chain. The sales world is very hierarchical, and that structure really isn’t that different from the vendors, with a handful dominating the top and an ever-widening base as you move down the pyramid. We all know this is a massive market but being here makes you realize just how many people are selling largely similar products and services.
This is a natural by-product of the cloud, where anybody can offer anything, and as analysts, we make passing references to how this leads to commodification. We’re certainly seeing this with UCaaS, and CCaaS won’t be far behind. This can make the space seem a bit boring for us, and being creatures of habit, some analysts will simply move on to emerging spaces that look sexier.
That’s easier said than done for channels, as this is their livelihood, and the communications space has never been more crowded. With so many offerings to choose from, channel providers can barely keep up, and it’s not surprising that the financial structure of this space often drives the business. While the currency of analysts is objectivity and critical thinking, the channel world lives more by commissions and quarterly quotas and is driven more by closing deals today than what’s coming from the AI world down the pike.
The tech world has always been this way, so there’s nothing new here. Now, if you can just hold that thought, I’m going to add another layer that might be new. Sometimes we don’t notice change until it’s too late, and that could be happening right now in the channel.
Is the Channel Gambling With its Future? Our Future Too.
While Vegas is the natural home for sales conferences, I found the irony striking for this particular event at this particular time. We’re all quite familiar with the ongoing consolidation happening with vendors and cloud providers, and it happens to all sectors when they reach a certain stage.
Most of the shakeout with UCaaS has happened, and it’s pretty clear who the alphas will be. We’ll still see some jockeying among Tier 2 and 3 players, but the ruling class is now well-established, with the likes of Microsoft, Cisco, Zoom and RingCentral, among others. The CCaaS space is one to two years behind, and will follow suit, with the wildcard being where the pure plays end up. CPaaS is still developing, but within maybe two to three years, most of the shakeout there will have played out as well.
This is all to be expected, and we’ve seen it with other technologies. Once things settle, there will be less competition, but still a healthy mix of very good offerings to choose from. There will be solid solutions for every type of buyer, and the principals of efficient markets will largely be upheld.
That’s all well and good, but most of the sales come through channels, and guess what? They’re going through the exact same shakeout cycle right now, and that’s something we should all be paying attention to. For me, this was by far the biggest takeaway from Channel Partners, and it’s not a stretch to say it’s become an existential issue for that space. One speaker aptly described this as being a battle “for the soul of the channel.”
Mergers and acquisitions was a strong theme at the conference, and the private equity players have now gotten religion about the roll-up opportunities. This has been happening for a while now –
BCM One is a great example – but the market has now evolved to the point where big money sees more reward than risk.
As an aside, I’ll share my take on why this is happening. When hardware ruled, the channel business was a great business, as channels made large sums upfront – but not so much after that. As long as customers kept buying hardware, that really didn’t matter. All that changed with cloud and SaaS, where those big payouts were replaced by the dribs and drabs of monthly recurring revenue (MRR). Channels didn’t embrace this initially, as it didn’t appear financially viable. Now that MRR is the norm, those streams add up, and most channels have made the transition.
That’s the proof of concept that private equity investors were looking for. The annuity model that life insurance is built around becomes a gold mine over time, and that’s the opportunity they’re seeing now for cloud services. The sweat equity has been dispensed, and with a lot of risk and uncertainty now removed, the time is right for private equity to enter and scale MRR to levels the current players couldn’t possibly achieve without funding.
While mostly anecdotal, it seems like many of these sales agencies, VARs, distributors, etc. have had offers to sell to private equity investors. For some, it’s their once-in-a-lifetime exit opportunity, and they’ll gladly take the money. Others, however, see this capital as a way to invest in their business for new growth. After all, the theme of the conference was “The Best is Yet to Come”, as the promise of AI, 5G, IoT, hybrid work, managed security, etc. offers exciting potential beyond phone systems and ACDs. This show definitely represented a crossroads moment for many.
The fundamental concern is that the channel industry is built on the entrepreneurial spirit of small players who simply love this business. I learned that many of these people came into the space to break away from working for big OEMs and monopolistic telcos (some by choice, and some not), and gain the independence of being on the sales side of things. The 1984 breakup of AT&T got the ball rolling, and the industry has been in a continuous cycle of innovation ever since, where the rising tide has lifted all boats.
Now, as private equity firms make offers that are too good to refuse, the exits will accelerate, and the channel space will risk coming full circle. Instead of being dominated by big telecom, big money will become the industry driver, and that’s not a good thing. The cash grab will certainly be alluring, but make no mistake, PEs are doing this for a return on investment – not to provide broadband for all, or delight every customer with a great customer experience. If things go too far down this path, earnings and margins will drive the business, leaving little room for entrepreneurs or grass roots innovation.
Nobody is holding a gun to the channel providers’ heads to sell, and that was an important message from speakers who really care about this space. Collectively, if these players look at the bigger picture, they can still keep some semblance of the status quo they seem to love so much; otherwise, if there’s a rush for the exits, control will be pass from the owner-operators to big money. Big money may end up running things more efficiently, but maybe not so much to the liking of vendors and cloud providers. There’s a lot at stake here. Welcome to fabulous Las Vegas, indeed.
