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The Global IT Infrastructure Topography – Introduction

The global IT infrastructure industry is massive. Learn about the players, their business models and politics.

Most of you reading this have a relationship with IT infrastructure – otherwise, you wouldn’t be here. And if I were to guess, many of you are the IT professionals buying and managing technology hardware in one way or another, on behalf of your organizations (you sit in the CIO business unit). No doubt, you’ve got a challenging job at hand – working with a fragmented set of vendors to manage the procurement to installation process for your organization’s critical hardware. Based on my experience you have no shortage of pitfalls and problems.

The perspective lens through which I view this landscape comes from my experience as an international supply chain professional and my personal studies in macro economics and business. Over the last 4-5 years, I have specialized in enterprise technology hardware and its interplay within the global infrastructure operations space. Needless to say, I see and understand the challenges many face as well as the opportunities to do things better. 

Over the next 6 posts I would like to share with you how I view each of the major vendor categories that IT professionals hire when supporting their global IT infrastructure: OEMs, Distributors, VARs, Data Centers and “rest of” firms. 

If we’re able to contextually understand WHO the companies in this industry are and WHAT they do, we can learn a lot. We will be able to decipher WHY the market builds its services, and products in the way that it does. 

You don’t need me to tell you that this industry is massive, with many estimates valuing it at 1T+ per year. To us, this makes sense, right? Data is the new oil, every company is a tech company, we’re going to the edge, and all the other clichés… With the massive amount of people working in this profession and all the vendors selling into this space, this must be an incredibly complicated marketplace, requiring decades of experience to navigate, right?

In my opinion no, this is wrong!

Let’s start with the below major channel company categories that directly create, finance and sell you technical hardware and its corresponding software. The OEM/manufacturer, Distributor and the VAR (we’re leaving the data center and “rest of” categories out for now). The graphic below shows that the OEM is clearly the most valuable and thus powerful. This fact becomes very important later in the story.

IT Infrastructure Valuation Metrics

For decades, buyers have been led to believe, by suppliers and internal stakeholders, that the IT supply chain, its corresponding business relationships and power dynamics are immensely complicated in the “channel”. To better clear this obstructed view, let’s look at the what the major players in this ecosystem do:

  • OEM/Manufacturers: Original equipment manufacturers, unsurprisingly, manufacture IT products — including hardware and software —  and ultimately, capture most of the value. Cisco is a prime example of this with a market capitalization of 241B, revenue of 49.8B, and a profit margin of 21.3%.
  • Distributors: These companies finance the OEMs & VARs (see below) and little value is awarded. A common misconception is that distributors manage global supply chains and are expert logistical organizations. An example of this is Arrow with a market capitalization of 8.18B, revenue of 28.67B, and a profit margin of 2%.
  • VARs: Value-Added Resellers sell and account manage for the OEMs. Little value is awarded. Insight is an example with a market capitalization of 3.64B, revenue of 8.34B, and profit margin of 2%.
  • Data Center Firms: These are specialty real estate companies known for building and operating highly secure data centers. Differentiators can be – interconnection, energy access etc… Moderate value is awarded. Equinix is an example with a market capitalization of 71.91B, revenue of 5.96B, and profit margin of 6.2%.

Using the example companies (seen below that have been selected for their size and popularity), you can see that an astonishing 84% of the profit is captured by the manufacturer. 

Teaser – Distros and VARs do not find themselves in a position to represent their clients (the buyers) best interests. We will explore this more later. 

Profit Capture of Cisco, Arrow and Insight Infrastructure

There are of course additional channel companies, providing services and selling products on behalf of vendors, which include:

  • Integrators: Cat wranglers and financial modelers
  • IaaS firms: Purchase and manage computing resources, turn CAPEX into OPEX
  • MSPs: They manage your stuff for you or sell you their stuff and manage that as if IaaS.
  • Cloud and Edge: Provides on-demand cloud computing platforms sometimes near where your clients are geographically. 

We will look at the above company categories later in the series but the first three will be pieces on: the OEMs, the Distros, and the VARs.

In this first piece, we’ve simply observed the landscape from 30,000 feet so that we have someplace to start. That said, we can already glean some basic information about the multi-tiered IT infrastructure sales and distribution channel. There is much more to come.

In the next piece in this series, we’ll take a much deeper dive into OEMs, how they operate, make money, and work within the “channel.”