Computers and Computer Peripheral Equipment and Software

SIC 5045

Companies in this industry

Industry report:

This industry consists of establishments primarily engaged in the wholesale distribution of computers, computer peripheral equipment, and computer software. These establishments also sell related supplies, but establishments primarily engaged in wholesaling supplies are classified according to the individual product for example, computer paper in SIC 5112: Stationery and Office Supplies. Establishments primarily engaged in the wholesale distribution of modems and other electronic communications equipment are classified in SIC 5065: Electronic Parts and Equipment, Not Elsewhere Classified. Establishments primarily engaged in selling computers and computer peripheral equipment and software for other than business or professional use are classified in SIC 5734: Computer and Computer Software Stores.

Industry Snapshot

The industry of computer and computer peripherals wholesale distribution was big business during the information technology (IT) boom of the late 1990s. However, a sluggish economy in the early 2000s caused severe downward price pressures and forced distributors to cut costs and slim operations. While fierce competition continued to push prices down in the mid- to late 2000s, distribution firms managed to grow through the middle of the decade. More than 70 percent of value-added resellers (VARs) grew by more than 5 percent each year from 2004 to 2007, according to the 2008 CMP Channel State of the Market Study, which projected similar growth in 2008.

There were an estimated 9,269 businesses primarily engaged in the wholesale distribution of computers, computer peripheral equipment, and computer software that were responsible for more than 50 percent of industry market share valued at more than $76 billion in 2009. Computer software resellers accounted for 23 percent of industry share valued at $6.6 billion.

Organization and Structure

Five distinct segments exist within the traditional electronics wholesale distribution arena: full-line distributors, technical and professional distributorships, regional and local distributorships, hardware distributors, and software distributors. The limited focus of the respective wholesaler segments distinguishes each from the mixed-sales distributor segments.

Full-line Distributors.
Full-line distributors predominate the computer wholesale industry with the broadest product and customer base. Sales in this segment represent roughly 35 percent of the total traditional distribution market and about one-quarter of U.S. wholesale computer-distribution network revenue.

Hardware Distribution.
Hardware distributors accounted for more than one-fifth of the nonsystems products. Regional and local distributors within the wholesale category emphasize sales to independent dealers and fulfillment services.

Technical Distributors.
Most of the wholesalers in this industry are in the technical distribution segment, which supplies goods to corporations. Typical product lines include disk drivers, terminals, computers, keyboards, printers, and other computer equipment. Up to 20 percent of sales in the industry are commonly filtered to corporations via systems integrators and value-added reseller channels. This segment is characterized by an overriding value-added focus consisting of integration and networking services. High-end product mixes involving complex hardware and software configurations predominate in this market.

Software-only distributors accounted for less than 5 percent of traditional distribution sales. Their primary focus was on the sale of educational and entertainment software to the mass market. They also played an important role in bringing new software products to the market.

Background and Development

A vital transformation occurred in the computers, computer peripheral equipment, and software industry during the late twentieth century. Industry standards evolved, markets solidified, and customer sophistication matured to new levels. Most significant among the changes was a dramatic shift toward complex network configurations, as a dramatic proliferation of new hardware technology emerged and expanded the functionality of desktop computers. The result was an expansion in the retail computer industry that spurred wholesale and manufacturing markets. Any doubt that the wholesale distribution segment of the industry was a powerhouse was erased in 1992, when IBM, Apple, and Compaq entered the industry. Concurrent with these developments, the larger national wholesalers formed new divisions to pursue such areas as retail sales, direct fulfillment, and emerging technologies.

Following the peak years between 1991 and 1993, there were 38,000 jobs lost in the wholesale sector. The business computer market segment became saturated at 90 percent by 1996, according to a report in Monthly Labor Review. In the face of a waning business market, distributors turned their attention to the new mass market of home consumers who were captivated by the power of the Internet. The market for home computers expanded dramatically at that time with the innovation of easy-to-use Internet software interfaces called browsers. The industry rebounded, employment increased by 4 percent, and the industry recovered 32 percent of the lost jobs. Additionally, the expansion of the home computer industry fueled a new market for prepackaged software. Advances in CD-ROM technology resulted in lower equipment prices for associated peripherals, such as optical drives and spurred sales of both hardware and software in the process.

In 1995 computer manufacturers began to encourage competition among wholesale distribution channels by opening the market to unhindered competition. The practice, called "open sourcing," absolved dealers from the requirement to contract exclusively with a specified wholesaler. "Second sourcing," a modified version of open sourcing, limits competition by permitting no more than two wholesalers to enter the channel. As a result of open sourcing policies, competition increased within the industry. Wholesalers were forced to compete and flourish or else to withdraw from the marketplace. Between 1992 and 1995 the number of wholesale distributors dropped from 300 to less than 180.

Likewise, software distributors encountered new challenges in the mid-1990s. In response to the burgeoning popularity of the Internet, some software manufacturers established online outlets and sold products directly to consumers over the World Wide Web. The new online method of distribution enabled the $30 billion software industry to distribute their product directly to a rapidly expanding Internet consumer market and bypass the wholesale industry entirely.

In 2001, sales for all U.S. merchant wholesalers amounted to $2.7 trillion. With sales of $146.2 billion, computer and computer peripheral equipment and software accounted for around 5.4 percent of this total. Annual industry wholesale levels, which amounted to approximately $142.1 billion in 1997, achieved healthy increases through 2000, reaching $165.2 billion. However, sales fell in 2001, as economic conditions worsened.

The terrorist attacks against the United States on September 11, 2001, had a negative impact on already declining economic confidence levels. Widespread layoffs and the possibility of war with Iraq continued to affect the consumer and business outlook into 2003. Virtually every product segment within the computer industry was affected, in business and consumer sectors alike. On the corporate side, a temporary slowdown in technology spending occurred, as companies waited for better times. In addition to spending delays, some analysts cited other factors that attributed to the industry's slowdown. Among these were year 2000 "Y2K"-related new equipment purchases that took place at the end of the 1990s, as well as the availability of quality used equipment from bankrupt Internet companies in the early 2000s. A similar delay in discretionary technology purchases took place in the consumer sector.

Computer equipment distributors responded to these challenging economic conditions in a number of ways. By late 2002, industry leader Ingram Micro was in the process of laying off workers and implementing other measures to reduce expenses as its revenue slipped. It also evaluated credit lines with customers and made a series of adjustments. The largest distributors also began targeting small businesses in the early 2000s. As large corporations tightened their technology purses, small businesses--many of which were in the position to upgrade older equipment--presented distributors with other sales opportunities. Citing research from Roper NOP, Computer Reseller News revealed that in 2002, this market segment represented more than 80 percent of all U.S. businesses and was expected to spend $243 billion on technology purchases.

Although the industry's distributors focus primarily on computers, computer peripheral equipment, and computer software, personal computer (PC) supplies represented yet another niche revenue source during challenging times. Although corporations were holding back with large capital purchases, such was not the case with supplies. Therefore, distributors looked to PC supplies as one way to help offset losses in other product segments. In 2001, industry heavyweight Tech Data created a division devoted to marketing supplies. As of 2003, Ingram Micro also was concentrating in this area.

In addition to economic challenges, computer equipment distributors also struggled with "channel conflict" in the early 2000s, as manufacturers employed sales forces to directly reach end-users, bypassing the reseller or "solution provider" layer of the industry. To offset this competition, resellers were leveraging things like better pricing, the ability to bring end-users combinations of solutions from several different manufacturers, and more personalized service. In addition, distributors like Ingram Micro and Tech Data were investing in technology centers that their reseller customers could use for learning about the latest products, demonstrations, training, and more.

The "Big Three"--Ingram Micro, Tech Data, and Synnex--continued to dominate the broadlines market during the mid-2000s. After suffering through the downturn in the information technology industry in the early 2000s, which came on the heels of the rapid expansion of the late 1990s, the computer wholesale market began to grow again. By the end of 2004, distributors found themselves on more solid ground. After posting a net income of just $6 million in 2001, and a net loss of $275.2 million in 2002, industry leader Ingram Micro rebounded to report a net profit of $149.2 million and $219.9 million in 2003 and 2004, respectively. Similarly, Tech Data lost $199.8 million in fiscal 2003, but was able to post a net income of $104.1 million and $162.5 million in fiscal 2004 and fiscal 2005, respectively.

Despite the upswing in the industry, competition remained fierce, and, although industry executives stopped short of pointing fingers to blame one another for creating and perpetuating a destructive price war, competition clearly kept prices low and forced distributors to work hard to earn contracts. Peripheral sales, including printers, were especially cutthroat, and even though distributors did not want to chase after business below a certain price-margin point, the leaders also stood the chance of losing market share to their closest competitors.

Synnex, which increased its revenues by about 22 percent during 2004 after completing its initial public offering in 2003, continued to offer the lowest prices, but denied the desire to create a price war in its chase after its bigger competitors, Ingram Micro and Tech Data.

Ingram Micro reported a total net income of $265.8 million in 2006 to continue its growth from the low point of the early 2000s. Even so, price wars have squeezed channel margins and made business difficult for smaller operations.

"Margins and sales are an issue and profitability is not as easy as before," David Pattison, a senior analyst at Plimsoll Publishing, told Computer Reseller News in October 2005. "Some companies have suffered low profitability for years. As customers get used to paying less they are the ones who benefit." Pattison said resellers have offered bundles and extra software packages to secure business, but that has resulted in excessive end-user demands and reduced profit.

The outlook for 2008 suggested VARs would safe from an economic slump despite the thin profit margins. Even with the possibility of a recession, VARs could offer customers help with financing solutions for services and products, according to Steve Tepedino, co-founder and president of Channel Savvy, a Scottsdale, Ariz., consulting group.

Current Conditions

In one survey released by industry analysts Comp TIA and ChannelForce revealed the bulk of value added resellers were not able to bypass the economic downturn during 2008. More than three-quarters of those queried admitted the recession affected their bottom lines either "significantly or moderately." However, they were able weather the storm by keeping in close contact with their customers and investing in new products and services.

In another survey of 177 solution providers conducted by Everything Channel found 63 percent of those surveyed felt their market would grow by not less than 4 percent during 2009. Adding to their customer base was viewed by 39 percent of participants as their growth engine. Another 17.5 percent perceived managing their cash flow vital for success, while 74 percent revealed customers just weren't spending and those that did make that purchase were sluggish in paying, which in turn led to yet another dilemma surrounding cash flow.

Despite one of the worst economic downturns, "IT solution providers and VARs fared better during this recession than the one that followed the dot-com/Y2K boom and bust," CEO Greg Spierkel of Ingram Micro told the Channel Insider in an interview in February 2010. Research firm IDC projected the industry would climb between three and four percent for 2010, however, Spierkel tended to be more optimistic suggesting even larger gains.

Ingram Micro's revenues did in fact climb 20 percent during the first-quarter of 2010 compared to the same time in 2009. PCs, servers, laptops, and networking experienced the largest gains of more than 20 percent with software, keyboards, and monitors not far behind. The company's net income reached $70.3 million, up from $27.5 million reported for the first-quarter 2009. "I don't think there's a recession on anymore...," Spierkel told the Channel Insider in April of 2010.

Industry Leaders

Leading the wholesale industry in the mid- to late 2000s was Ingram Micro, Inc. of Santa Ana, California. A public company, Ingram was the world's largest wholesale distributor of computer products, with 2006 sales of $31.36 billion. Its 159,000 reseller customers worldwide include CompUSA, Wal-Mart.com, Staples, and Office Depot. The second-largest company, Tech Data Corporation of Clearwater, Florida, reported $21.44 billion in sales in 2007. Other significant businesses included Avnet, Inc. with $15.68 billion in 2007 sales; Arrow Electronics, Inc. with $13.58 billion in sales in 2006; and Synnex, Inc. with $6.34 billion in sales in 2006.

Ingram Micro, Inc. reported revenues totaling $29.5 billion in 2009, in which 60 percent were derived from the international market with 13,750 employees. Tech Data Corporation posted $22 billion with more than half generated from sales overseas and 7,600 employees in 2009. Avnet, Inc. generated $19.1 billion in sales in 2009 with 14,200 employees. Arrow Electronics, Inc. reported revenues of $14.6 billion in 2009 with 11,300 employees. Synnex Corporation had sales of $6.8 billion in 2009 with 83 percent generated in North America with 7,320 employees.

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