Cross - Where is the channel going in the future?

Schlagbaum - There are only about 5,000 telecom agents but about 223,000 IT solutions providers, VARs, MSPs, dealers and channel partners.  $480 billion of the IT channel is driven indirectly but only $10-12 billion in telecom is driven indirectly.  With regard to the channel, Cisco, Microsoft and others do more than 90% of their business through indirect channels; in the telecom space, partners represent about 30% of the total business sold at most.  However, these two channels of agent partners and IT VARs are starting to collide and will be viewed as one channel over time.  Yes, there will be pure bandwidth experts that are at the high-end and really get it.  However, partners who are just selling PRI [Primary Rate Interface] and integrated access circuits on the low end may have a lot of challenges with that model in the coming years if they don't evolve.

We also think carriers also will become MSPs over time and start selling their own managed services.  Already the world's largest channels for Cisco are the ILECs, so why wouldn't they also act as an MSP for their own customers?  That is, the carriers will have their own "silos" of an MSP business.  In fact, they already are doing to this.  The result is that both VARs and carriers will be selling MSP services to clients. 

In relation to cloud computing versus managed services, it depends on who is providing the service.  There is a murkiness to the term "cloud computing" but from the partner model standpoint the term means "we the partner are giving you Mr. Customer a managed service that you are paying a recurring fee for as opposed to paying a one-time fee for all this gear and everything else you need to deliver your services."  You effectively rent it and pay every month like you do for your telecom services. One of the interesting marketing trends is that when services are provided in the "cloud" suddenly the brand name of the hardware and software behind it becomes less consequential because the customer doesn't know which technology providers in partner's data center are driving their solution.

Now in this new model, the brand delivering the solution will be the MSP and that brand name really matters because you as the buyer of the service want to know the quality behind the service provider - for instance, are they a certified partner and what are their references?  Instead of there being physical equipment on the customer's premise, all the customer sees is the computer and a screen but they don't necessarily know the technology behind it

This has all kinds of implications for the high-tech industry.  By 2012, according to Gartner, 25% of all IT will be sold as a service - a transition from on-premise to on-demand.  For example, I know several of our partners who run their entire business off Google applications because they are cheap and easy to deploy and are paid for monthly. Salesforce.com is another example and their entire business is sold as a recurring service.

Cross - Ten years ago we has ASP [Applications Services Providers], 20 years ago we had CENTREX [Central Office Exchange]; if you had to look 10 years in the future what do you see?

Schlagbaum - I think we will evolve from selling commodities to selling more value-added services and it already is happening.  I don't know that we will be directly involved with everything; however tele-presence would be an example of a future service.  We may not offer it directly but, rather, with a partner.  Virtualization capabilities in the data center are another example.  Instead of raw bandwidth, raw voice, raw private lines and raw waves [optical fiber], it will become the applications that are provided over those transmission mediums such as storage and a variety of products and services you can access on-demand. 

We are, as you know, in a recurring revenue business.  This is a foreign notion to many companies used to selling one-time sale products and services.  I will tell you that all the high-tech companies are deeply, intimately learning the inner workings of recurring revenue models and how that will impact them based on the notion of cloud computing.  They see 3-5 years from now what the difference is going to be and they are positioning to capitalize on it. 

For example, Cisco has their own channel strategy for MSPs.  I am speaking on Channel Focus North America in La Jolla, CA in April.  The first panel after the keynote discusses the cloud and what impact it will have on their business and how a smart vendor should respond to this change in models.  Cloud computing and MSPs will be a growing entity as new services continue to proliferate.  People will pay more for value.  If you look backward, 386sx-Intel-based PCs of the late '80s wouldn't even power the smart phones we have today.   Look at what an IPhone and a Blackberry can do today.

What else is there?  What the telecom industry has not provided is what IBM, Cisco and others have demanded from their partners - certified channel partners.  To sell their products you must have a Cisco Internet engineer, IBM certified engineer and possess certain credentials and be tested.  The certification for selling carriers today needs to mature to levels like that as solutions get more complex. There have been attempts at creating a certification and there currently is a group that actually is trying to do it called the Technology Channel Association.  They are trying to institute a peer-based requirement of everyone who is selling telecom to get a baseline certification to demonstrate core competency to sell telecom services.  This eliminates the non-qualified partners selling carrier services, which gives a bad rap to other professionals.  Should a certification be developed, I think that's going to be a requisite just like it is in the VAR channel today.  That is something I think will be a standard over the next 3-5 years.

Cross - Thank you for time today.