For this month’s news digest, we focus on distribution and its ongoing evolution from box-shifting to the rise of marketplaces, SaaS and increasingly diverse value-added services.
In a world defined by digital transformation, few sectors have felt the impact more than the IT distribution industry. Worth an estimated $300 billion globally in 2023, the market for IT distribution is expected to see steady growth, driven by increasing demands for cloud services, digital solutions, and infrastructure needs across enterprises of all sizes. Projections estimate that the industry will grow to nearly $400 billion by 2027, underlining the essential role of distribution in supporting business innovation. Yet, even with strong growth prospects, the distribution market faces unique pressures, with major players grappling with narrow profit margins, while a shift towards digital marketplaces brings opportunities and competitive challenges alike.
This growth trajectory is beneficial for the largest IT distributors globally, such as TD Synnex, Ingram Micro, and Arrow. For these players, maintaining steady performance is a balancing act of scaling services while navigating the challenge of slim margins—a characteristic of the industry that leaves little room for error. TD Synnex Q3 fiscal 2024 results showcased solid performance, marked by a revenue of $14.7 billion while gross margin experienced a slight decrease to 6.54% from 6.96%.
SaaS Marketplaces: The Cloud-Driven Advantage
While traditional distribution methods remain essential, the more buoyant aspect of the IT distribution landscape has been the growth of marketplaces, specifically those focused on Software as a Service (SaaS). The concept of cloud marketplaces began as early as 2005 when Salesforce launched its AppExchange allowing users to directly purchase and integrate third-party applications. Over time, major players in IT distribution—such as CDW and Tech Data adopted this model in the late 2000s, gradually shifting their focus from solely hardware distribution to also supporting digital and cloud services.
Alongside the growth of SaaS marketplaces, digital innovation has introduced new dynamics in channel relationships, from partner programs to financing structures. Marketplaces are not simply content with being passive sales platforms; they actively engage partners to create long-term value. This is exemplified by Pax8, which founded in 2012 as a cloud-native marketplace focused on helping managed service providers (MSPs) to purchase, manage, and distribute SaaS offerings. VC investment in 2022 suggested a market capitalisation of around $1.7bn and its platform approach has speeded its growth trajectory.
Disruption fuels growth
An example of its disruptor mindset is its new “Voyager” partner program that redefines traditional partner structures. Unlike legacy distributors, Pax8's approach resembles a loyalty scheme that rewards partners based on their overall transactional volume across multiple vendors, rather than their spend with a single one. This revolutionary concept is especially valuable for mid-sized MSPs working with multiple vendors. Typically, these MSPs might not qualify for “Gold” or “Elite” statuses within individual vendor programs due to dispersed spend. However, under Pax8's model, a total monthly spend (for instance, €20k) across vendors could qualify them as “Titan” level partners, opening access to various perks.
The specifics of these benefits—whether free or discounted, accessible or limited—are still evolving, but the concept itself is groundbreaking. Allowing MSPs to accumulate benefits through aggregate spend could prompt some to shift away from vendor-specific partner programs. While Pax8 is the first to introduce this structure, the model’s appeal suggests it won’t be the last.
Moreover, this evolution is not limited to partner programs. Other players are also finding innovative ways to build stronger partner relationships. For instance, Exclusive Networks has taken strides with its XPS launch—a financing solution developed to tackle the financial challenges MSPs often face in accessing the capital needed for expansion. XPS addresses a core issue within IT distribution: funding and financing for smaller partners, which can be a barrier to growth in the cloud marketplace landscape. Many other traditional distribution pioneers are expanding areas such as “white label” professional services and digital market support-as-a-service to their respective partner communities.
From Warehouses to Digital Services
As digital services continue to proliferate, the industry is facing a major paradigm shift: the days when distribution was synonymous with warehouses stacked with hardware are slowly fading. Today’s distributors are increasingly focused on implementing, managing, and monetizing software solutions. This transition brings both opportunities and risks. Embracing digital services can unlock new revenue streams and create stronger relationships with channel partners. However, these services require continuous investment in technology, education, and support. If not managed properly, these added costs could strain the already thin margins that characterize the industry. As the industry transitions further into digital-first services, the need for efficiency and value creation will be paramount.
Acquisition and Consolidation on the Horizon
In our view, larger players will increasingly seek acquisitions to gain the economies of scale necessary to navigate the competitive and cost-sensitive market. By acquiring smaller companies or merging with competitors, major distributors can achieve bulk purchasing power and operational efficiencies, which are essential for maintaining profitability. Consolidation could also help established players expand their offerings and address service gaps, such as technical support and cloud expertise, that smaller partners may require.
This trend of consolidation was evident in TD Synnex’s merger with Tech Data in 2021, which created a $60 billion entity. The merger allowed both companies to leverage their combined resources to deliver a wider range of services while optimizing costs. With the industry shifting toward service-driven models and the growing importance of cloud distribution, further mergers and acquisitions could be on the horizon, particularly as larger distributors aim to consolidate their market positions and build the scale necessary to thrive in the digital age.
For those that fail to adapt, the consolidation wave could be more of a lifeline than a growth strategy. In this transformed market, the winners will be those that effectively leverage technology, deliver value to partners, and build resilient models that can withstand the pressures of an industry in constant flux.
