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Marketplaces Are A Big Deal, With Caveats — But You Can't Ignore Them

cloud marketplaces

The importance of online marketplaces has soared during COVID-19. In the first three months of the pandemic, these cloud service-procurement portals grew more than the last 10 years combined.

That’s the word from Jay McBain, principal analyst of channel partnerships and alliances at Forrester. McBain will moderate the upcoming debate, “Are Marketplaces an Opportunity or Risk for the Channel?” at Channel Partners Virtual, March 2-4.

Channel partners need to understand the marketplace phenomenon that’s taking off in 2021, or get left behind.

Forrester's Jay McBain“Be on the forefront of this, ahead of your competitors for once,” McBain said.

But of course, you can’t know what you don’t know. To address that, McBain wants the session to give partners the insight they need to capitalize on marketplaces.

And the timing could not be more apropos.

“What had been kind of an interesting side conversation … is now front burner,” McBain said.

That means partners must keep marketplaces front and center in their minds. As proof, Forrester previously had predicted that 17% of the technology industry’s $3.5 trillion spend would go through marketplaces in 2023.

Instead, that will happen this year because of the pandemic.

And the figure will grow by double digits every year for the next decade, McBain said.

“It’s now a material thing everybody should be thinking about,” he told Channel Partners.

And it’s something many partners may fear. That’s because marketplaces join the industry transformations that spell the death of the traditional resale model. Partners still relying solely on equipment deals and percentage cuts have a choice to make: Join the cloud and services revolution, or else.

To be sure, marketplaces present “a ton of risk,” McBain said. But, he added, they also pose “a ton of opportunity.”

“The risk is the old days of transacting, taking 20% or 30% on this product, and then getting a chance on the back end for volume rebates, marketing development funds and so on,” he said.

Rethinking How to Make Money

Marketplaces, on the other hand, have companies moving away from gross-to-net structures, he said. That’s a concurrent shift from percentages to dollars, and therein lies new opportunity. And the cloud vendors themselves are on board.

“Microsoft, Google, Salesforce – they’re all starting to talk about how much the partner can make in the ecosystem and reporting it by dollars,” McBain said.

Therefore, partners have to adjust their approaches. For example, for every dollar Salesforce sells, the customer will spend almost $5 to get it to work, McBain explained.

“So in that multiplier, partners need to get obsessed about where those dollars are.”

What does that look like? Professional services. Managed services. Security. Additional hardware and software. Along the way, partners have to think differently. Per-user pricing won’t get you far.

“Any margin on $6 or $9 a month doesn’t pay the mortgage,” McBain said. “This is not the millions of dollars of funding that you used to get up front.”

The answer is to add capabilities and do more for the customer.

“How can I go make $2 for every $1 Salesforce sells, and how can I do that $2 at 75% margin?” McBain said. “It’s a completely different way of thinking economically than a percentage of the deal.”

Be aware, too, that taxation will prove significant in this brave new world. Everyone who participates in a marketplace pays taxes, and that’s the point, McBain said.

“It’s low cost to acquire a customer. Basically, leads are just coming in, and that is a really nice business to have.”

Still, none of that erases the reality that changing a business model is hard. Thing is, most channel partners have little choice at this point.

“Marketplaces might actually be the inflection point of this industry we’ve been talking about for a while,” McBain said.

COVID-19 Poured Fuel on the Cloud Fire

Consider this: During COVID-19, purchases of legacy telecom and computer infrastructure have dropped by double digits, McBain said. So has traditional consulting. On the flip side, demand for infrastructure as a service and software as a service continues to rise. Resellers who make 80% of their money on traditional technologies, and who only dip into, say, 20% of the cloud world, have to evolve.

“These facts are happening and accelerating because of COVID-19,” McBain said.

There are other influences, too. End users are changing how they buy and longtime technology stalwarts (Cisco, Dell, IBM, Hewlett Packard Enterprise, et al) are changing how they sell.

“Those companies drove about 80% of the server era,” McBain said. So, he added, “as 76% of the industry turns into this consumption mode, with metering and subscriptions, that will all land on cloud marketplaces. … And the average cloud deal has seven services involved.”

Handling that complexity is where partners, including resellers, need to land.

“They will be forced into other parts of the value chain to make money,” he said.

Be aware, however, that putting together those seven services will look very different that it might have even five or seven years ago.

“None of these things are products in themselves. They’re not skewable products master agents will sell,” McBain said.

Rather, in next-generation scenarios, partners will “skew up seven technology layers. Here I need a platform, some artificial intelligence, data, continuity, security … and I’m going to bring those in via marketplaces. When I add a user, I only have to click one button.”

This means resellers who have shied away from the cloud have to renew efforts to develop a services model.

“The ability to resell will be diminished because the customer is going to question you if you’re not doing configuration, pricing, quoting, invoicing, etc.,” McBain said. “If you’re not participating in any of that cost, they’re going to question why you should be getting a cut. … So, yes, resellers are going to be highly, highly disrupted as this grows. But I’ll say that most partners moving into managed services and deeper-level, customer-focused value, will hit a home run. 

Not Everyone Sees Marketplaces the Same Way

Not everyone may agree with those assertions, and that’s part of what McBain plans to showcase in the marketplaces debate.

“I think there’s some friction here and some tension that I’d like to bring out,” he said. “I don’t want a panel that just kind of reinforces that marketplaces are important … There’s a buyer side and a supplier side.”

To that end, the session will feature representatives from CloudBlue, ImageNet Consulting, Pax8 and Vendasta. Each of these companies comes at marketplaces from a unique perspective.

“We’ve got some good spread of opinions of builders and sellers, and of how this is probably going to play out for the next decade,” McBain said. “We’ve got the right people on the panel … to drive this conversation forward.”

A Flurry of Cloud Marketplace Activity

Marketplaces that channel partners may turn to for customers’ cloud services seem to have multiplied over the past year. That happened as COVID-19 forced organizations to support remote work. Marketplaces proved a simple, affordable way for partners to procure and support platforms for their clients — and, at the same time, to build that coveted recurring revenue base. The resulting demand has translated into marketplace vendors’ own activity.

For example, Pax8, which will sit on the March 2 panel, has made strategic moves just within the last couple months. The cloud services distributor offers MSPs, VARs, agents and other partner types access to services and platforms including Datto, Acronis, Zoom and RingCentral. It recently landed a $96 million funding infusion, bought a cloud host/consultancy in the U.K. and imprinted its footprint in Europe. All that activity came because the pandemic brought the “customer of 2030” a decade early, Robert Belgrave, CEO of Pax8 UK told Channel Futures in January.

As another example, Vendasta and multinational distributor Tech Data last fall launched a marketplaces partnership. The idea was to get Vendasta’s security solutions out to more SMBs, while giving Tech Data partners more platforms to sell. Participating partners “are unlocking 4 million potential opportunities through our marketplace,” said George Leith, chief customer officer and EVP of sales at Vendasta, at the time. Leith will take part in the upcoming Channel Partners Virtual debate about marketplaces.

“They are also being presented with the opportunity to scale their sales, marketing, and project management capabilities using the Vendasta platform,” he added. “Technology and service needs are changing all around the world, whether it’s demand for remote business operation tools, or robust data security requirements, or products that help companies better reach end users.”

And as a final example, last summer, Check Point Software Technologies debuted a cloud distribution marketplace program with Arrow and Ingram Micro.

“For MSPs, having the ability to quickly and effectively deploy and scale cloud services, especially when it comes to security solutions, in real time, is critical to the customer experience,” Eric Kohl, Ingram Micro’s vice president of security, said in August.

Cloud marketplaces give partners new options and capabilities. But as with every advancement, there are considerations to weigh. Watch the session, “Are Marketplaces an Opportunity or Risk for the Channel?”, on Tuesday, March 2, starting at 11:20 a.m. Eastern.

Jay McBain, marketplaces, Channel Partners Virtual