The 'make believe' market

What do most vendors and distributors do when a tiny Middle East reseller places an order for 10,000 software licences and offers to pay cash? They take the money, ignore the warning signs, move closer to their quarterly sales targets and hope that the deal doesn’t come back to haunt them.

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By  Stuart Wilson Published  February 8, 2005

What do most vendors and distributors do when a tiny Middle East reseller places an order for 10,000 software licences and offers to pay cash? They take the money, ignore the warning signs, move closer to their quarterly sales targets and hope that the deal doesn’t come back to haunt them.

Is this software destined for a customer in the Middle East? Not likely. And that is why a huge chunk of reported sales is nothing more than a mirage contributing to the ‘make believe’ portion of the Middle East IT market.

The scenario outlined above is nothing new for anyone that has been working in the Middle East channel for any length of time. These types of transactions have become part and parcel of the accepted business model.

In fact, this sort of activity has become so entrenched in the regional channel — at every level from the largest vendor to the smallest reseller — that it is difficult to see any real impetus for a concerted clean-up effort to begin unless it is driven by vendor management at a global level.

Here’s how it often works. A reseller, working through a middleman, unearths a big deal outside the region — could be in Europe or even the US. Let’s say it is 10,000 licences for a basic business application. The reseller contacts its distributors across the Middle East and Africa, identifies the best price he can get, places the order and pays cash. (The sort of deal no distributor wants to turn down — no credit risk after all)

The product wings its way to the reseller serving the end-user account — wherever it may be — and is installed. However, for this model to work, what we need is a difference between the Middle East distributor’s price and the distributor price in the country where the product is ending up. This is the oil that keeps the grey and parallel export-import engine running smoothly.

Some vendors still have regional pricing policies meaning that the price difference already exists. Others now have global pricing policies to stop these disparities occurring, but as always, where there’s a will there’s a way. A little bit of creative accounting with the allocation of marketing funds can make all the difference. A few made-up events or marketing activities where the actual spend is a tenth of the amount of money received and hey presto, the flexibility to get to the price needed is in place.

Going back to the theoretical 10,000-licence software deal, let’s say the official distribution price is US$5 per licence. With the marketing funds safely tucked away (as opposed to spent on what they were intended for), the real purchase price may have been just US$4.4 per licence for the Middle East reseller. He then sells this product on to the reseller outside the region for US$4.8, makes a tidy margin for being nothing more than a trader, and the product is available in that market at below the distribution cost. Genius.

I don’t want to name names in this column (yet). Suffice to say, you don’t have to look too hard to find the resellers involved and examine their purchase orders and customer details.

Some are actually proud of their innovative business model and who can blame them when the distributors and vendors above them in the channel chain appear to wholeheartedly condone their actions. Those that do look closely at this area of channel activity will find the names of some of the region’s major distributors, as well as globally renowned vendors, cropping up time and time again.

It is getting harder and harder for anyone at any level in the channel to plead innocence with regards to this grey activity. Those 10,000 licence deals are made visible to the senior executives in the region at a vendor level. Do they ask to see the tender documents to verify the end-user account? No. Do they ask any questions that may jeopardize the sale going through? No. Do they turn a blind eye? Frequently, yes.

The problem now is that the Middle East market is reaching a critical mass. As grey market and parallel export-import business grows, so too does its visibility in other regions of the world. And you can guarantee that the sales managers in Europe and the US will demand strong action when levels of grey and parallel imports cross a certain threshold barrier.

It is quite crazy when you take a step back and look at the bigger picture. There is a significant ‘make believe’ market created through these activities that the whole channel community knows about but chooses to conveniently ignore.

Call it collective suspension of disbelief if you will, but next time you see the massive growth rates for software and hardware sales in the Middle East, don’t forget to discount the ‘make believe’ market that props up the entire IT sector.

The time has come to start exposing these activities. The time has come for vendors and partners to concentrate on developing IT sales within the Middle East itself.

The ‘make believe’ market is becoming too big to ignore.

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