NPD Group: Channel Plays Key Role In Digital Transformation

Channel sales of software, services, and subscriptions are growing quickly as solution providers and MSPs find gold in helping their customers implement digital transformation projects, says John De Vito, executive director of product development at NPD Group.

Digital transformation has become a major IT initiative for businesses and in time has become a huge play for the channel.

That's the word from John De Vito, executive director of product development at The NPD Group, a research firm that focuses on the solution provider and distribution channel.

De Vito Sunday told an audience of solution providers and MSPs at this week's XChange 2020 event in San Antonio that NPD Group defines digital transformation as the move to use digital technologies to build better outcomes for customers. XChange 2020 is hosted by CRN parent The Channel Company.

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U.S. sales of IT products and services through indirect channels reached $94 billion in 2019, of which nearly 60 percent, or about $53 billion, was related to customers' digital transformation moves, De Vito said.

Total IT spending has risen at about a 6 percent CAGR (compound annual growth rate) for the past five years, with software contributing the bulk of that growth, he said.

"Software is where the growth is," he said. "If you are not selling software, you probably should start pushing it."

On an industry basis, about 13 percent of digital transformation spending went to professional, scientific and technical services, and another 13 percent to finance and insurance, De Vito said. About 10 percent went to manufacturing, 9 percent to public administration, and 8 percent each to information and health-care industries.

Of them, the fastest-growing target of digital transformation spending was finance, which saw 30 percent year-over-year growth in 2019. Spending in the public administration market actually fell 9 percent last year, he said.

Spending on software subscriptions grew 16 percent year over year in 2019, De Vito said. The fastest-growing portion was security information and event management (SIEM), followed by content and collaboration, monitoring and management, and business intelligence and database software, he said.

Indirect channels accounted for $5.8 billion in subscription revenue in 2019, which represented over 22 percent of total channel software sales, De Vito said. About 49 percent of software subscriptions were for one-year terms, he said.

Cloud services sales through the channel had a 28 percent CAGR from 2016 to 2019 led by Microsoft Azure, which saw revenue through the channel grow 62 percent in 2019 over 2018, De Vito said.

Short-term licenses were important to cloud services subscriptions, with one-year contracts accounting for 25 percent of subscriptions and one-month contracts accounting for 22 percent, De Vito said.

"One year is the term of choice. ... It gives big businesses the flexibility to shift from one cloud to another," he said.

Hardware sales through the channel as a whole were flat in 2019 versus 2018, but is still very important, De Vito said.

The fastest-growing hardware categories via the channel in unit shipments were all-flash storage arrays, followed by solid-state drives, desktop computers, docking stations and tablets. Hardware categories falling in sales included hard disk drives, where unit sales fell nearly 30 percent, followed by hybrid and hard disk storage arrays, inkjet cartridges, laser toner and laser printers, he said.

De Vito's look at digital transformation and the channel are all in accordance with what Brian Andersen, founder and CEO of Anaheim Hills, Calif.-based MSP broker Telecomprehensive Solutions, sees.

“It's great to see the data that supports what I'm seeing," Andersen told CRN.

The idea of digital transformation has been slung around both broadly and inappropriately in the past, Andersen said.

"But as word of successful deployments spreads, and subscription services become more affordable, awareness of digital transformation is growing," he said. "But customers are still flying by the seat of their pants. Customers are so focused on their business. But the sad part is, they don't know that digital transformation lets them run their businesses better."