The office technology industry — which was initially founded on a direct-selling model in which manufacturers directly engaged the customer — has seen an extensive amount of variation throughout its history. As Xerox’s initial patents reached their expiration and new players entered the market from Japan and elsewhere, entrepreneurs across the U.S. sensed an opportunity to establish strong local businesses by representing these new market players, helping to sell and support their respective products.
As the market grew, so did the businesses of these visionaries, the names of many of which, such as Gordon Flesch, R.J. Young and Ray Morgan, remain familiar to us today. Of course, in the midst of their growth we also saw the rise, and eventual acquisition of megadealers in the form of IKON Office Solutions (formerly Alco Standard) and Danka. There can be little debate that if not for the likes of these channels, the industry would have been hard-pressed to reach its present size, and manufacturers — particularly those headquartered overseas — could not have achieved their current market standing.
The nature of the channel and its evolution has been an interesting one. At one time the channel was largely comprised of independent local businesses operating in strictly defined territories, representing one or maybe two manufacturers. As the market evolved and the territorial boundaries related to sales geography were eliminated, we witnessed a steady consolidation of channel players, first through the aforementioned IKON and Danka, then through the territorial expansion of many of today’s mega-dealers, and finally through the entry of private equity firms. As an indicator, according to Keypoint Intelligence, the number of office technology dealers has dramatically declined over the past few decades, from a high of over 7,000 in the 1980s to a total of fewer than 2,000 today. Not surprisingly, the forecast is that the number of office technology dealers will continue to decline in the years ahead as acquisitions by private equity and the contraction of the market lead to even fewer players.
From a manufacturer’s viewpoint, the evolution of the channel has been interesting. The vast majority of OEMs both cultivated and grew heavily reliant on channels as a means of reaching the customer. Some would say that the reliance on the channel was so significant on the part of some manufacturers that it exposed them to significant business risk. Having lived through the acquisitions of both Danka and IKON in rapid succession I can tell you from firsthand experience that this reliance certainly created challenges at the time.
For these reasons, and frankly for the sake of establishing a healthier business mix, many manufacturers took steps to more effectively balance the source of their revenue and profit. Manufacturers have elected to tackle this in different ways of course. Xerox acquired Global Imaging, Ricoh acquired IKON, Canon expanded its Canon Solutions America retail subsidiary and HP cultivated relationships with traditional office technology dealers. These actions don’t even take into consideration the additional attempts at business diversification such as those from Xerox (ACS), Lexmark (Perceptive), KM (All Covered), Ricoh (MindShift) — and the list goes on. The actions from manufacturers are telling, each one searching for the right balance, the appropriate mix of channel versus direct and traditional business versus new revenue stream.
Given the rapid consolidation we are now seeing in the traditional office technology channel — particularly with the introduction of private equity — you may draw the conclusion that this signals the rise of the super channel. There is some expectation that we will eventually be left with a cadre of private equity-backed “megadealers” who will crowd out the traditional independent, local providers, changing the face of the traditional channel as we know it. There is certainly validity to this hypothesis, and it is quite likely that the impact of private equity on the channel landscape is only in its infancy.
Private equity’s involvement in the office technology industry is interesting; given the nature of the market, you wouldn’t necessarily think that the industry would be highly attractive. However, when one considers the fact that traditional dealerships typically deliver steady returns and that the market in general is ripe for operational efficiency gains, one can see why private equity might have an interest in the industry, if for no other reason than to balance its portfolio of other higher-risk investments. The other key consideration for private equity is that the macro- and microeconomic environments in the industry are vastly different. On a macro level, the industry is flat to declining, while at the micro level many dealers are still capable of growing at a double-digit rate annually — an interesting result for any investor. The fact remains, however, that an exit strategy and its associated payday is expected from investors. The private equity-backed dealer will not be able to avoid the inevitable overall decline of the market. Like passengers on the sinking Titanic, private equity firms will need to determine how to get themselves in the lifeboat before having to go for a cold swim.
For these reasons — despite the consolidation and growing size of today’s megadealers — I do not view these dealerships as the next super channel. There are, however, some significant trends that are impacting the overall industry — primarily being felt by manufacturers — that will ultimately lead to the rise of a new powerful force in the market.
First, the economics of the industry are changing. Today’s manufacturers are faced with increasing financial challenges that are a direct result of the shift from A3 to A4 technology, the decline in page volumes, a widespread reduction in average selling prices and more reliable technology. All of these factors are conspiring to create an environment where year-over-year growth is challenging to achieve, and the traditional profit sources of the industry are shrinking.
Second, while there has been significant consolidation in the channel, there has been little to speak of within the ranks of the manufacturers — some (e.g., Konica and Minolta, HP and Samsung) but not significant enough to change the economic picture previously outlined. The fact remains that manufacturers are faced with an environment where the shrinking size of the market cannot support the number of providers such that all players can prosper. The ability for manufacturers to achieve economic success is tightly linked to their rivals failing.
Third, the “technology solutions” being offered by today’s players are largely commoditized. While most of today’s manufacturers will claim their solutions have unique value and offer levels of competitive differentiation when compared to other market offerings, the reality is that customers don’t see it this way. From the customer’s perspective, the majority of offerings in the marketplace are nearly identical. This raises the question as to whether the traditional means of selling to customers is still the most effective?
Finally, the nature of the technology being offered to customers is beginning to shift. The A3 to A4 shift is not the shift in question — it is the shift from traditional toner-based technologies to inkjet. Today inkjet technology dominates the consumer space and is rapidly replacing traditional offset presses in high-end production printing environments. The flexibility of inkjet technology makes it ideal for a wide variety of applications. Outside of more niche applications like industrial printing and packaging, the virgin ground for inkjet is the office. While there have been many attempts to crack the office, traditional toner-based offerings have remained the dominant player. This is changing, and like the proverbial runaway train, there is nothing on the horizon that seems capable of stopping office inkjet momentum. Why does this matter? It matters because inkjet technology, in comparison to toner, is simple. It’s easier to implement, just as easy to manage and requires little or no service. Does it require the traditional office technology channel as a primary means of reaching the customer? Not likely.
When looking at all the trends above, I can only draw the conclusion that the internet and e-commerce will rise as the next super channel of the office technology industry. Let’s think this through.
In a market where the economics are squeezing existing manufacturers, products are largely commoditized, manufacturer consolidation is not likely, and new, less-complex technology is on the rise, should we expect manufacturers to continue to struggle financially when e-commerce could provide the revenue and profits presently being reserved by manufacturers for today’s channel?
I think there is little question that e-commerce is poised to play a role of growing importance to all manufacturers in today’s industry. Today, e-commerce is a realistic vehicle for the sale of everything from computers to clothes to shoes to cars. Is there really any reason why this will not become the dominant means of selling traditional office equipment? And with today’s industry trends, manufacturers have every reason to make this a viable channel. In fact, it may prove necessary for their very survival.
Look around and you can already see a number of manufacturers dabbling in this area, testing the waters, ultimately trying to determine the most effective means of utilizing e-commerce to reach their customers, and developing business models that simplify acquisition, deployment, service and support. It’s only a matter of time before manufacturers find the right formula and customers recognize that their buying experience is acceptable or even enhanced when compared to traditional sourcing methods. When this happens, there will be shockwaves felt across the industry.
So, as e-commerce rises to become the office technology industry’s super channel, what then becomes of the traditional dealer? Do not fret; the traditional dealer will live on! They will continue to hold a place in the office technology space for those offerings that are highly integrated or of a level of complexity that makes an e-commerce approach unviable. They will also become the channel of choice for software and services offerings that don’t fit in the off-the-shelf variety. As they have throughout their history, the office technology dealer will continue to evolve with the changing market landscape, moving up the value delivery stack as they bring more business process oriented solutions to their customers. Maybe this is the long-term appeal for private equity?
The office technology channel has run the gambit from small, local provider to the private equity-backed mega-dealer. It’s now time for the emergence of the next evolution in the channel — the rise of the super channel also known as e-commerce.