The Impact on Sales of Computer Products Prepared for the Global Technology Distribution Council

1. The Impact on Sales of Computer Products Prepared for the Global Technology Distribution Council Distribution Outlook Richard March rmarch@cmp.com

2. Market projections are based on purchase source data from phone interviews with 4,000 North American (US and Canada) reseller organizations in July and August 2001. Data reflects +/- 1.6 percent margin of error. Product purchasing volumes are based on telephone interviews with 300 reseller organizations and 100 ASP and ISP organizations in August, September and October 2001. Combined data reflects +/- 5 percent margin of error. Reseller comments are based on telephone qualitative interviews with reseller organizations conducted in November 2001. Methodology

3. IT Products Value-Added Supply Chain IT Product Manufacturers: Computers, Software, Networking First Tier: Commercial and Industrial Distributors Second Tier: Resellers, Systems Integrators, Consultants End-Customers: Businesses, Public Sector, Consumers Note: Data in this study focuses primarily on business-to-business product purchases made by “Second Tier” organizations from “First Tier” organizations, and business issues between the “First Tier” and “Second Tier.”

4. The volume of computer product purchases by resellers in North America is estimated at $119.1 billion for the period from October 2000 through September 2001. This reflects a decrease of 8.3 percent compared to the prior annual period from October 1999 through September 2000. Computer product purchases by resellers made through distributors from October 2000 through September 2001 is estimated at $71.5 billion. This reflects a decrease of 7.5 percent compared to the prior annual period. In 2000 and 2001, the estimated volume of computer product purchases made by resellers through distributors remained consistent at approximately 60 percent of all computer product purchases by resellers. Although an economic downturn resulted in a smaller market, the overall distributor market share remained constant year to year. Market Dynamics

5. Overall value of distributors to resellers’ businesses remained consistent in 2001 versus 2000. Asked to rate the value of their primary distributor to their overall business on a scale where 1 is “No Value” and 5 is “Extremely Valuable,” resellers rated distributors’ value at 4. Market Dynamics

6. Purchases by Resellers Made Through First-Tier Distributors • Percent of total computer product reseller purchases: • 58% 60% 60% *reflects January-September for each year and October-December of prior year

7. Reseller Purchases Financed with Distributor Credit • In this $71.5 billion market,distributors financed $39.3 billion in purchases by second-tier resellersin 2001. This represents 55% of all purchases. • In 2000, distributors financed $32.7 billion in purchases by resellers, representing 42.3% of all purchases. The increased volume of credit in 2001 sought by resellers reflects a shortage of capital amid an economic slowdown and a greater reliance on distributors by resellers for financing.

8. 2001 2000 Purchases Financed through Distributor CreditWhat percent of all of your computer product purchases made from all distributors in the past 12 months were based on some form of credit extended by the distributor? Conclusion: Distributors historically have served as the financial infrastructure of the two-tier supply chain for computer products. This credit function benefits product manufacturers that are unable to administrate financing for thousands of resellers, and, in turn, benefits cash-constrained resellers with credit to fund product purchases.

9. 2001 2000 Business Value of DistributorsConsidering such issues as access to product information, credit and ordering and shipment of products, please rate the value of your primary distributor to your company’s overall business. (Rated on a scale of 1 to 5 where 1 is “No Value” and 5 is “Extremely Valuable”.) Conclusion: The value of the primary distributor to the reseller’s overall business is consistent year to year, but the sluggish economy in 2001 has led to more specific evaluation and appreciation of distributor services, resulting in higher importance and satisfaction ratings of the individual distributor services provided.

10. “Those distributor services such as product availability, logistics and support are all competitive advantages that we utilize as part of our business process. We find that product availability and the ability to provide products and support on time is something that our customers value.” “We think they (distributors) are continually improving their processes. They are doing more than they used to do. Things like on-line tracking of orders are improvements. There’s also the tech support and other services that they are adding that make a difference in our business.” “It’s service, quick response, the support on the product – all the technical support. When we do have issues, they call back in a timely response. The value to our customers is that I can guarantee I will have it (the product) to them the next day.” “Right now, product availability and tracking of shipments are the big things. Knowing when it (the product) is going to arrive so I can schedule my staff to meet it at the customer’s site is critical. I can’t afford having people sitting around.” Resellers Explain the Business Value of Distributors

11. Product Purchase SourcesConsidering the following purchase sources, what percent of your company’s computer product purchases (including systems, software and networking hardware) were actually made and ordered from the following sources in the last 12 months? • Distributor telesales rep • Distributor Internet site • Direct through product manufacturer rep • Local Reseller (Gray Market) • Online retailer/catalog Internet site • Product manufacturer Internet site • EDI-based or XML-based distributor order Conclusion: Although purchases through telesales reps account for the highest percentage, more than one-fifth of purchases are now made through distributor Internet sites. This is consistent with distributor efforts to encourage Internet purchases. Also, purchases made through online retailers and catalog sites reflect significant volumes of products sourced by these online retailers and catalog sites from distributors.

12. Product Purchase Sources – ISPs/ASPsConsidering the following purchase sources, what percent of your company’s computer product purchases (including systems, software and networking hardware) were actually made and ordered from the following sources in the last 12 months? • Distributor Internet site • Distributor telesales rep • Direct through product manufacturer rep • Online retailer/catalog Internet site • Local Reseller (Gray Market) • Product manufacturer Internet site • EDI-based or XML-based distributor order Conclusion: The volume of products purchased by ISPs and ASPs from distributor Internet sites and distributor telesales reps is nearly equal, reflecting a higher reliance on e-business processes by ISPs and ASPs compared to traditional resellers.

13. Pre-Sales Information SourcesConsidering the following sources of information related to purchasing, which one of these is your primary source for pre-sales product information in the purchasing process? • Product manufacturer Internet site • Distributor telesales rep • Distributor Internet site • Product manufacturer rep • Online retailer/catalog Internet site Conclusion: Product manufacturers are developing their reseller-dedicated sites as product information sources. Distributors, conversely, are regarded as purchase sources by resellers.

14. Pre-Sales Information Sources – ISPs/ASPsConsidering the following sources of information related to purchasing, which one of these is your primary source for pre-sales product information in the purchasing process? • Product manufacturer Internet site • Product manufacturer rep • Distributor Internet site • Distributor telesales rep • Online retailer/catalog Internet site Conclusion: These findings are consistent with the reseller segment: Product manufacturers are developing their reseller-dedicated sites as product information sources. Distributors, conversely, are regarded as purchase sources by resellers.

15. Product Category PurchasesConsidering the computer products purchased by your company for resale to end-customers, what percent do the following product categories represent of your company’s total dollar product purchases in the last 12 months? • Hardware systems • Components (e.g. memory, boards, cards) Conclusion: Hardware systems are by far the the most frequently-purchased product category. The sizable percentage of component purchases, however, indicates that a portion of resellers’ customers are upgrading systems at the component level instead of purchasing new systems, which is related to the recession.

16. Product Category Purchases (continued)Considering the computer products purchased by your company for resale to end-customers, what percent do the following product categories represent of your company’s total dollar product purchases in the last 12 months? • Network hardware • Printers/monitors/projectors • Application software (incl. Internet Tools) • Systems software such as network OS • Storage Products

17. Product Category Purchases – ISPs/ASPsConsidering the computer products purchased by your company for resale to end-customers, what percent do the following product categories represent of your company’s total dollar product purchases in the last 12 months? • Network hardware • Hardware systems • Components: memory modules, boards, cards • Application software (incl. Internet Tools) • Printers/monitors/projectors • Systems software such as network OS • Storage Products Conclusion: Connectivity infrastructure needs among emerging ISPs and ASPs drive their purchases of network and system hardware. As a result, ISPs and ASPs represent a separate customer segment for distributors with product and support requirements that are different from resellers.

18. Distributor Importance RatingsConsidering the following reasons as to why your company purchases computer products from distributors, please rate the importance of each reason on a scale of 1 (not important at all) to 5 (most important). • Ability to determine product availability, shipment • Lowest price compared to other sources • Relationship/trust with distributor sales rep • Post-purchase logistics (order tracking, etc.) • Ability to aggregate purchases • Pre-sales information on a variety of products • Post-sale tech support on multiple products • Credit extended by distributor • Marketing and sales tools from Internet Conclusion: The high importance ratings of core business-to-business services provided by distributors are related to the economy. Because of the slowdown, resellers are seeking greater efficiencies in costs and operations to remain competitive. As a result, they are placing high values on services that help achieve these objectives.

19. Distributor Importance Ratings (continued)Considering the following reasons as to why your company purchases computer products from distributors, please rate the importance of each reason on a scale of 1 (not important at all) to 5 (most important). • Outsourced service for logistics and delivery • Online configuration tools • Training and certification • Lead generation • Ability for on-line invoicing • Outsourced configuration and assembly • Ability to provide an “electronic storefront” • Joint sales calls Conclusion: Services such as on-line invoicing and providing an “electronic storefront”are somewhat less important than the core business-to-business services identified in the prior slide. Also, the highly publicized failures of “dot.coms” have reduced the motivation among resellers to radically transform their businesses into e-commerce operations.

20. Importance Ratings:Pre-Sales Services Provided by DistributorsRate the importance of each reason on a scale of 1 (not important at all) to 5 (most important). • Lowest price compared to other sources • Relationship/trust with distributor sales rep • Pre-sales information on a variety of products • Credit extended by distributor • Marketing and sales tools from Internet • Training and certification • Lead generation • Outsourced configuration and assembly • Joint sales calls Conclusion: In a sluggish economy the ability to provide competitive prices becomes more important. Business relationships and trust also increase in value as resellers become more competitive through stronger partnerships with their distributors.

21. Importance Ratings: Logistical Support & ServicesProvided by DistributorsRate the importance of each reason on a scale of 1 (not important at all) to 5 (most important). • Ability to determine product availability, shipment • Post-purchase logistics (order tracking, etc.) • One-Stop Shopping, ability to aggregate purchases • Post-sale tech support on multiple products • Outsourced service for logistics and delivery Conclusion: Distributors have become service sources as well as product sources for resellers. The combination of product purchasing, logistics support and outsourced services allows resellers to strengthen their balance sheets and focus more on their core competencies such as solution sales and support.

22. Importance Ratings:E-Commerce Services Provided by DistributorsRate the importance of each reason on a scale of 1 (not important at all) to 5 (most important). • Online configuration tools • Ability for on-line invoicing • Ability to provide an “electronic storefront” Conclusion: With the collapse of “dot.coms,” e-commerce services for many resellers are not as important as core logistical and support services. An exception are large Internet-based resellers such as CDW, Insight and PC Connection that rely on electronic storefront and virtual warehouse capabilities of distributors to meet end-customer purchasing needs.

23. Financing TermsWhat credit terms are used by your company to purchase computer products? • Net 30 days • Credit card • Cash on delivery • Net 15 days • End-user financing (through distributor) • Net 45 days • Net 60 days or more • Escrow Account • Other Conclusion: Use of a variety of financing terms reflects constrained cash-flow and reduced access to capital among resellers related to the economic slowdown.

24. Number of Distributors Used for PurchasesHow many distributors or wholesale companies did your company purchase computer products from in the past 12 months? Conclusion: The number of distributors used for purchase is directly related to credit issues discussed in the prior slides. As reseller needs for credit increase, they may exceed credit limits set by existing distribution partners, which will force resellers to open accounts with new distributors.

25. Role of Primary DistributorWhat percent of all of your total purchases through distribution are made with your primary distributor, the distributor used most? Conclusion: Although credit needs may require resellers to increase their number of distribution partners, the majority of purchases by a typical reseller organization are made through one primary distributor. Business relationship issues such as trust between the reseller and the distributor sales rep, as noted in a prior slide, are the key drivers in determining the primary distributor.

26. Distributor Satisfaction RatingsHow would you rate your company’s satisfaction with your primary distributor in the following areas, where 1 is not satisfied at all and 5 is extremely satisfied? • Timely info on product, pricing, availability • Timely order confirmation and tracking • Accurate and on-schedule shipments • Aggregation of multiple products and brands • Ability to handle product returns • Access to necessary credit terms • Access to informed account rep Conclusion: Satisfaction ratings with core, business-to-business services provided by distributors are closely linked to the high importance values that resellers assign to these services. The ability of distributors to provide timely and accurate order and shipping information are critical factors in helping resellers retain customers in a challenging market.

27. Distributor Satisfaction Ratings (continued)How would you rate your company’s satisfaction with your primary distributor in the following areas, where 1 is not satisfied at all and 5 is extremely satisfied? • Pre-sales technical information • Post-sale technical support • Navigation, information and functionality of site • Outsourced logistics and delivery of products • Marketing and sales tools from Internet site • Outsourced systems configuration & assembly Conclusion: The increasing complexity of solutions such as voice/data and storage area networks (SANs) that are sold by resellers require technical information on a cross-platform and cross-product basis in pre- and post-sale environments. As distributors become the aggregation point for purchase of these complex technologies, they also become the source of tech support and information.

28. Distributor Satisfaction Ratings – ISPs/ASPsHow would you rate your company’s satisfaction with your primary distributor in the following areas, where 1 (not satisfied at all) and 5 (extremely satisfied)? • Provides timely order confirmation & tracking info • Provides timely info: pricing, availability & warehouse location • Accurate and on-time shipments • Ability to handle product returns • Provides aggregation of multiple products & brands under single order • Provides access to necessary credit terms • Provides access to informed account rep • Provides necessary pre-sales technical info – compatibility & support requirements Conclusion: High satisfaction ratings with distributor services signify an increasing reliance by ISPs and ASPs on distributors as business partners, which is reflected in the high importance values that ISPs and ASPs place on these services. This indicates that distributor services are diversifying to meet needs from new business models such as ISPs and ASPs.

29. Distributor Satisfaction Ratings – ISPs/ASPs (continued)How would you rate your company’s satisfaction with your primary distributor in the following areas, where 1 (not satisfied at all) and 5 (extremely satisfied)? • Navigation, info & ordering functionality on Internet site • Post sale technical support • Ability for distributor to outsource - logistics & delivery • Marketing and sales tools from distributors Internet site • Outsourced configuration and assembly Conclusion: The reliance of ISPs and ASPs on Internet-based sources for information and purchasing places more of an emphasis on the usability and navigation of Internet sites. The satisfaction ratings imply that distributor Internet sites are meeting the increased demand from ISPs and ASPs.

30. Satisfaction Levels:Pre-Sales Services Provided by DistributorsHow would you rate your company’s satisfaction with your primary distributor in the following areas, where 1 is not satisfied at all and 5 is extremely satisfied? • Access to necessary credit terms • Access to informed account rep • Pre-sales technical information • Navigation, information and functionality of site • Marketing and sales tools from Internet site • Outsourced systems configuration & assembly Conclusion: Distributor services such as access to credit and information are important to resellers in building bids and responding quickly to business opportunities. The distributor’s ability to aggregate access to these services saves resellers time, which is reflected in the satisfaction ratings.

31. Satisfaction Levels – ISPs/ASPS:Pre-Sales Services Provided by DistributorsHow would you rate your company’s satisfaction with your primary distributor in the following areas, where 1 (not satisfied at all) and 5 (extremely satisfied)? • Provides access to necessary credit terms • Provides access to informed account rep • Provides necessary pre-sales technical info – compatibility & support requirements • Navigation, info & ordering functionality on Internet site • Marketing and sales tools from distributors Internet site • Outsourced configuration and assembly Conclusion: The venture capital funding that was plentiful for ISPs and ASPs in prior years dried up in 2001, putting more cash-flow pressure on these emerging business models and emphasizing the importance of access to credit through distributors.

32. Satisfaction Levels: Logistical Support & ServicesProvided by DistributorsHow would you rate your company’s satisfaction with your primary distributor in the following areas, where 1 is not satisfied at all and 5 is extremely satisfied? • Timely info on product, pricing, availability • Timely order confirmation and tracking • Accurate and on-schedule shipments • Aggregation of multiple products and brands • Ability to handle product returns • Post-sale technical support • Outsourced logistics and delivery of products Conclusion: As noted earlier, the high satisfaction ratings on logistical topics such as ordering, tracking and shipping emphasize the critical role that distributors play in resellers’ customer-retention efforts.

33. Satisfaction Levels – ISPs/ASPs:Logistical Support & Services Provided by DistributorsHow would you rate your company’s satisfaction with your primary distributor in the following areas, where 1 (not satisfied at all) and 5 (extremely satisfied)? • Provides timely order confirmation & tracking info • Provides timely info: pricing, availability & warehouse location • Accurate and on-time shipments • Ability to handle product returns • Provides aggregation of multiple products & brands under single order • Post sale technical support • Ability for distributor to outsource - logistics & delivery Conclusion: The ISP and ASP markets continue to mature and develop into secondary sales channels for computer products. As a result, the importance and related satisfaction ratings with ordering, tracking, shipping and other logistics are high.

34. Distributor Role in Business DevelopmentWhich of the following services provided by distributors does your company use to help increase sales and/or enter new technology markets? (not asked in 2000) • Phone or e-mail access to technology solutions specialists • Local Seminars or technology product demonstrations • Internet-based seminars and/or discussion groups • Subsidies or co-op money for technical training • Subsidies or co-op money for sales training Conclusion: As distributors extend their service offerings, they are taking an active role in helping resellers expand into new technology markets. Typically, distributors provide resellers with a multiple-product “solutions view” of new technologies, which helps resellers build their overall businesses. This, in turn, raises reseller sales volumes, benefiting the manufacturers.

35. Primary Customer BaseWhat size company makes up your company’s primary customer base in terms of largest percentage of sales in the last 12 months? • One to 20 employees • 21 to 100 employees • 101 to 500 employees • More than 500 employees Conclusion: Historically, small businesses (100 or fewer employees) have been the primary customer base for resellers. Small businesses represent a more stable market for resellers because the reseller typically acts as the outsourced IT department, which leads to a high incidence of repeat business. Additionally, when the economy rebounds from the sluggishness of 2001, computer product manufacturers expect small business will be a key segment to lead the recovery.

36. Conclusions

37. Although purchases through telesales reps account for the highest percentage of product bought by resellers, more than one-fifth of purchases are now made through distributor Internet sites. This is consistent with distributor efforts to encourage Internet purchases. Also, purchases made through online retailers and catalog sites reflect significant volumes of products sourced by these online retailers and catalog sites from distributors. The volume of products purchased by ISPs and ASPs from distributor Internet sites and distributor telesales reps is nearly equal, reflecting a higher reliance on e-business approaches by ISPs and ASPs compared to traditional resellers. Conclusions

38. Distributors have become service sources as well as product sources for resellers. The combination of product purchasing, logistics support and outsourced services allows resellers to strengthen their balance sheets and focus more on their core competencies such as solution sales and support. Distributors historically have served as the financial infrastructure of the two-tier supply chain for computer products. This credit function benefits product manufacturers that are unable to administrate financing for thousands of resellers, and, in turn, benefits cash-constrained resellers with credit to fund product purchases. Conclusions

39. Although credit needs may require resellers to increase their number of distribution partners, the majority of purchases by a typical reseller organization are made through one, primary distributor. Business relationship issues such as trust between the reseller and the distributor sales rep are the key drivers in determining the primary distributor. As resellers assign high importance values to distributor services, their satisfaction ratings with these services are also high. The ability of distributors to provide timely and accurate order and shipping information is critical in helping resellers retain customers in a challenging market. Conclusions

40. The increasing complexity of solutions such as voice/data and storage area networks (SANs) that are sold by resellers require technical information on a cross-platform and cross-product basis in pre- and post-sale environments. As distributors become the aggregation point for purchase of these complex technologies, they also become the source of tech support and information. The ISP and ASP markets continue to mature and develop into secondary sales channels for computer products. As a result, the importance and related satisfaction levels with ordering, tracking, shipping and other logistics are highly rated by ISPs and ASPs. Conclusions

41. The value of the primary distributor to the reseller’s overall business has remained constant throughout 2000 and 2001. But the sluggish economy in 2001 has led to more specific evaluation and appreciation of distributor services, resulting in high importance and satisfaction levels with individual distributor services provided. The high overall business value of distributors to ISPs and ASPs reflects the ability of distributors to address the information, purchasing and service requirements of these new businesses. As ISP and ASP business models mature and their market share increases, distributor-based financial and e-business services are likely to increase in value to ISPs and ASPs. Conclusions

42. As distributors extend their service offerings, they are taking an active role in enhancing resellers’ operating models by enabling expansion into new technology markets. Typically, distributors provide resellers with a multiple-product “solutions view” of new technologies, which helps resellers build their overall businesses. This, in turn, raises resellers’ sales volumes, benefiting the manufacturers. Historically, small businesses (100 or fewer employees) have been the primary customer base for resellers. Small businesses represent a more stable market for resellers because the reseller typically acts as the outsourced IT department, which leads to a high incidence of repeat business. Additionally, when the economy rebounds from the sluggishness of 2001, computer product manufacturers expect small business will be a key segment to lead the recovery. Conclusions