Where are the profits?

Another factor affecting profitability at a distributor level is the shift to tier-1 systems, according to Altech's Hartin.

"If you go back five, six, eight years ago, the OEM market, the system builder market was significantly bigger than what it is today.

The shift from system builder to tier-1-type OEM systems has changed the profitability at a distribution level. "You can still go out there and make eight and 10 points distributing locally-built systems but I would defy anyone who's distributing an HP or a Toshiba to make more than two or three points," he says.

Nevertheless, David Dicker, director at Dicker Data, argues that while there is growth in general purpose computers unit-wise, he does not believe there is too much growth in dollars, even when the distributor provides service.

Even in growth markets, he does not believe there is a "critical mass of dollars to make them fabulously attractive.

"I think the main IT industry is suffering and has probably been suffering since 1999 since the Y2K scam and since then, all the vendors have been in denial and have tried to prop it up, and it's just steadily moved down to where it's likely to move down to," he says.

Dicker believes there "no opportunity to make a huge amount of money as a distributor".

"I think the market is ripe overall," says Express Data's Cochrane. "We've got to look at the positioning of the IT market today, the demand, the awareness, the broadband uptake - all the factors are positive for this to be a vibrant and growing industry.

"I think the opportunity is going to be there. It's about how you play in it and get the right return out of where you play," he says.

Still, the reality is that distribution is a low return business, Cochrane adds. "Open up the Fortune 500 magazine worldwide: wholesale electronics is the worst category. The returns that are made by Ingram - largest in the world - less than 1.5 percent return on sales.

"No-one would invest in distributors. Private equity firms will look at it as an on-sale. To have an operating business that's making 1.5 percent, when businesses are looking to make 10 and better, it's not the kind of business we'd all be investing our money in."

LAN 1's Lee adds that these days, the distributor has to sell more units to make the same amount of money. "Four years ago, we would ship maybe 100 DSL modems per month, we would have been popping champagne. Today, we are shipping 20,000 per month and there's still no champagne," he says.

Non-traditional mass merchants such as Target and Big W that have entered the marketplace have also had a big impact on the typical street-level reseller, affecting the distribution channel, according to Peter Agamalis, director at distributor Impact Systems.

"And you've got the simple fact that tier-1 brands have reduced their price points. Combine those together and you've got people like Altech, Impact Systems that are trying to siphon opportunities from these guys, but they are always being minimised to offering services; they can't supply product [only] because they're being beaten by the Big Ws and the Dells. The reality is that times have changed," he says.

Altech's Hartin adds that if the distributor tried to survive selling products, motherboards and video cards only, competing with the "yum cha" end of the market, it would go out of business.

"We look at niche opportunities within our product range and you have to find this balance. That balance is what gives us the ability to keep growing."

Express Data's Cochrane questions why some distributors continue to sell to resellers that are a "very low profit return" and do very low volumes of business at such aggressive margins. "The distributors have got a lot to answer for because I think that the discipline inside the distributors is poor as well.

"A lot of distributors are allowed to do deals to customers who really shouldn't be getting that price. Give the price to the small guy and you're going to have to give a better price to the big guy. They blame the customer for sending them broke," Cochrane says.

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