Brocade: The Cloud is a channel opportunity

Network supplier Brocade believes that a services-based cloud distribution model is just what its channel partners want.

At a Brocade Tech Day in London, Marcus Jewell, UK and Ireland country manager for the data centre switch specialist spoke to TechWeekEurope editor Peter Judge  about the companies plans to compete with Cisco (reported over on TechWeekEurope) before he spoke about the future of the channel:

The cloud can drive out inefficiencies. But in the eyes of customers, channel margins could be seen as inefficient. Will the cloud changes things?
The channel is very resilient. Other industries look at the IT channel and model their own growth on it. Because we are in it, we think it is inefficient, but actually it is incredibly efficient.

If you look at all the inefficiencies in the world, say buying tyres for your car, you are probably paying 80 percent more than the manufacturerfs are getting, because it goes through a mass distributor, then a local distributor, then to a local garage. That industry has been around since cars were invented. Why has no-one driven efficiencies in that?

Channels will always have a part to play in localisation. What will need to change is that channel resale models tend to be built along capital business. That is, they buy something for cheaper than they sell it and they then have a maintenance agreement which gives them an annuity supporting that solution.

What will need to change is that channel organisations will go to recurring revenue and services, and less towards capital intensive solutions. Our VCS [fabric switch] solution  is  available to the channel. So we can accredit the channel to be the provider of that subscription service, and they would then make a fee per month.

At our channel conference in Frankfurt, we said to them that maybe their revenues might drop overall, by 30, 40 or even 50 percent. But their net profitability  would probably double in the same phase. Because these guys have to work extgremely hard to retain margin.

If channel players’ revenue is going down, but their profitability is going up, where are they saving money? By employing fewer people?
No. I think they will employ more people. These businesses run on very slim margins, and managing the cash flow is the most difficult thing.

If a channel partner makes ten percent margin on a product, and sells a great many in a quarter, it might use up all of its cash reserves, just to fund that. It is typically not going to get paid by the user until the system is in and working – plus a 30 to 60 day delay on capital. so funding cash flow is a difficult thing. What they try to do is fund their capital business by recurring revenue streams, which used to be maintenance agreements, maybe using their own data centre.

We don’t see a trend for the mega data centre to come in and sweep these people away. By their very nature they won’t be able to offer bespoke local services.

If things move to a subscription model, and the channel can get some of that, they would prefer it. We are a big fan of the channel. We wish to sell  exclusively through the channel for all of our IT products. We don’t do any direct selling, we are backing that model a hundred percent. We are actively supporting and recruiting in the channel.

So the answer to the question ‘who loses in the transition?’ is the big incumbent player [not said out loud but we obviously mean Cisco]?
They always do. In any transformation, the incumbent player loses. The first to market with the new idea gets a major share shift.