VARs: Increasing Margins through Free Software

From resellers to solution providers, today's VARs are bringing Linux solutions to the world of application service. “It was the best of times. It was the worst of times.” --Charles Dickens

The above is a statement well-known throughout literature and throughout evolving societies. In this ever-changing, pervasive Internet society, such times are felt in all aspects of business. The Internet has shifted the power of presence and acquisition and is beginning to shift the power of commerce. Many value-added resellers (VARs) have recognized this shift and have been able to change with the new economy. They are deploying solutions that take advantage of this new market, a market that provides more margins in service than in products. Now and in the future, service margins will be “king”.

In fact, VARs are suggesting that their business is not even associated with the process of being a “reseller” of products, but a seller of services. These services include messaging, commerce, maintenance, support, software and hardware leasing to name a few. Quoting Scott McNealy of Sun Microsystems,

Five years from now, if you're a CIO with a head for business, you won't be buying computers anymore. You won't buy software either. You'll rent all your resources from a service provider.

Many of the services can be made available because of the Internet and the low costs associated with its pervasive presence. Titles such as Internet Integrators, e-Solution Providers (eSP), e-Business Integrators and Application Service Providers (ASP) are now being declared throughout the channel. While the ASP market will continue to define itself, the one thing projected among all analysts is that this market is going to explode over the next two to five years. Analysts such as IDC project the ASP market to be in excess of eight billion dollars, while Dataquest put this market in excess of 20 billion dollars during the same time period. However, the solutions these providers offer must allow customers to take advantage of ever-increasing Internet services that can be customized and based on a scalable and stable platform.

In addition, Linux is causing another market shift. Linux is being seen as a real business solution and is one of the fastest-growing server solutions in the industry. Examples of these solutions are being found in all sizes of corporations. The market conditions required for Linux to succeed are coming into focus. Some of these market conditions include industry leaders porting their software packages to Linux, hardware vendors' platforms being “certified” on Linux, Microsoft being declared a monopoly, users seeking viable software alternatives that do not crash and those who want to take advantage of the Internet's pervasive presence. Those solution providers who adapt their business models to provide such services and solutions will tap into a multi-billion-dollar market.

By combining customizable, extremely reliable and stable Linux-based solutions with the exploding ASP market, opportunities of service and product revenue abound for serving the largest to the smallest corporation. In a recent survey conducted among VARs, one-third stated they already support some type of Linux solution, while one-quarter will utilize Linux to deliver e-business solutions via the Internet. In other words, solution providers must recognize that they need to “deliver E or be Eaten”; Linux is a platform which can deliver the “E”.

A question that solution providers constantly ask about the Linux model is, “How do I make money?”. The answer is the same whether the operating system is proprietary or open—sell solutions, not simply a software package! However, Linux solutions are generally open for customization, are extremely stable and are low-cost by nature. Because of these qualities, service margins are increased. Linux was created on the Internet, by the Internet, for the Internet, and is optimized to work in this environment remotely. With such benefits, solution providers do not need to make on-site visits for service offerings such as configuration, deployment, diagnostics or administration.

As many solution providers begin to realize they can take advantage of Linux-based solutions, analysts and others are predicting revenue opportunities in the Linux traditional and specialized server markets.

A Dataquest study suggests that Linux servers will “represent approximately 3.4 percent of traditional server revenue or $1.9 billion ... by 2003.” Recently in Caldera Systems' “Tell All and Win Solutions” contest, some of Caldera's e-Solution Providers (eSPs) described how they deployed OpenLinux as a traditional server by completely replacing NT servers. Some eSPs leverage OpenLinux by providing add-on solutions. For example, one client needed to upgrade to NT from NetWare 4.11 and ran low on disk space. Unfortunately, the client could not afford to add disks to the NT server, so they utilized their old NetWare server, OpenLinux 2.3 and Samba to create a software repository to solve the problem. Other providers utilize Linux as an Intel UNIX alternative and re-deploy their Intel UNIX applications for their clients.

Quoting from the same study regarding server appliances, “Dataquest believes that Linux servers will represent approximately 24 percent of server appliance revenue, or $3.8 billion... by 2003 ... The key trend is optimization and it is occurring on the software side and the hardware side.” As the Server Product Matrix in the study indicates, optimization will be critical for those servers in the future. Having open-source software allows for optimization.

These server appliances, or “specialized servers” as they may be called, will be deployed by solution providers and ASPs. Examples of these solutions from eSPs include Internet servers, file servers and backup servers, to name a few. The reason? These low-cost, specialized servers allow a client to continue using their existing hardware while increasing functionality. In addition, the cost to deploy such servers is minimal.

As for Linux client solutions, many eSPs are utilizing OpenLinux Desktop for Internet access devices. For example, one eSP utilizes OpenLinux Desktop in a library setting to provide kiosk security that was cost-prohibitive utilizing Microsoft Windows. Through OpenLinux Desktop, the eSP was able to provide a web browser on the desktop that offered Internet access and access to CD-ROMs available from the library. Another client solution involved leveraging OpenLinux and Sun products for creating “powerful solutions” for Java programs.

The solutions mentioned above solved real-life problems. The solutions were not cost prohibitive, but actually reduced short- and long-term costs to the customer while increasing margins to the solution provider. It is not a matter of “if” solution providers will be providing Linux-based solutions, but “when”.

While the Internet is creating the “new economy”, Linux is enabling customers to experience it. Some customers receive these solutions by having solution providers deploy them in-house, while others are leveraging the ASP model.

Indeed the times continue to change. For those prepared to accept the opportunities by integrating Linux into solutions, it will be the best of times. For those who continue to hold on to the old paradigm and refuse to embrace new opportunities, it will be the worst of times.

email: dean.taylor@calderasystems.com

Dean Taylor (dean.taylor@calderasystems.com) has been with Caldera Systems for over four years and is currently Vice President of Marketing. He holds a bachelor's degree in business from Brigham Young University and has been involved in the computer industry for over 15 years, with emphasis on building channels and launching new technologies in the computer field. Dean's main area of expertise involves educating the Value Added Reseller (VAR) Channel on new product benefits. His Channel experience includes working for companies such as Sanyo/Icon, SoftSolutions, WordPerfect Corp. and Novell Inc. He is co-author of the book Learning StarOffice for Linux in 24 Hours.

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