How the Internet Distrupted the Channel

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This is the second in a series on the VoIP equipment channel designed to educate, bring transparency and inspire change for the good of all channel members. You can read part one here.

Scale.

It’s something every manufacturer is concerned with when introducing products into a marketplace. Especially those who manufacturer products for use primarily by businesses (aka prosumers).

Manufacturers need to reach and sell their product into enough businesses to reach the required economies of scale in order to turn a profit on the product. They need to do this as effectively and efficiently as possible since there are costs associated with selling.

Prior to the advent of the Internet the most effective way to do this was to build out a sales channel for the product.

This channel – at least in the telecommunications space – is most often a two tier channel. In a two tier channel there are four major players:

• Manufacturer – Responsible for product creation, global marketing, tier three support and technological innovation
• Distributor – Responsible for product warehousing, logistics, var recruitment, second level support and marketing/business development assistance.
• VAR – Responsible for integrating and or selling the product into the business or end user, as well as on-going support and maintenance.
• End User/Business – Responsible for purchasing the product.

This two tier channel model created a rather rigid and protective model.

Manufacturers sold to distributors. Distributors sold to VAR’s. VAR’s sold to the end customer.

There were of course exceptions, but in general this is how the channel operated. It was effective and efficient for almost everyone.

Then came the Internet. And with it came a new way to reach businesses.

It would be a vast understatement to simply say that manufacturers and their channel partners were unprepared  for what the Internet was going to do to the two tier channel model. Only recently have some manufacturers and channel members woken up to the realities of today.

So how did the Internet disrupt the channel? There are three primary ways:

1. Access to Information – Prior to the Internet, VAR’s and distributors controlled the flow of information about new technology and products. If a business was interested in the latest and greatest, they would have to go to their local VAR (or VAR to their Distributor). This in turn “locked” businesses in to their current provides. With the emergence of the Internet, businesses found that they no longer had to go to their local VAR or Distributor for information – it could be found freely available on the Internet – allowing more and more businesses to enter into “self service” mode.
2. New Business Models – Before the Internet gained prominence, it was rare that business centric products would be found in retail stores. The product were too expensive, specialized or required too much expertise for the average store clerk to handle. The Internet, however, provided the perfect platform for the sale of B2B products in a retail fashion as without the normal costs associated with physical space and stocking products, Internet Retailers could afford the appropriate staff to successfully sell and support business centric products. This has lead to the emergence of B2B retailers and other hybrid models that do not fit well within the traditional model, but address both the need to scale and address the current needs of end businesses.
3. Level Playing Field - One of the greatest things about the Internet is that it allows the small guy to compete with the big guy. It transcends geographies and provides a level playing field for all who participate. However the two tier channel model is not a level playing field. It is one built upon rules and restrictions (who you sell to and how you sell, etc). These were in many cases shattered by the Internet, as now all channel members – manufacturer, distributors and VAR’s – were/are in a position to compete for the same aggregate demand flowing through Internet via search, social media and other third party websites.

The net effect of this disruption was and still is immense. The Internet has disrupted the channel and has caused a number of problems for channel members.

In the next post of the series, we will take a look at the problems the Internet has caused and how to go about fixing them.

P.S. The VoIP Reseller group on LinkedIn now has over 30 members. Click here to join us!

P.S.S Part three is now up. You can read it here!

Disclosure: The views represented in this post are solely mine and do not reflect that of my employer, partners, suppliers, friends or family. They all love VoIP and everyone in it. At least that’s what they tell me.