It has been going on for several years now but market consolidation in IT is beginning to take clear shape. Where Internet Service Providers (ISPs) and Data Centers have taken the lead, we now see Managed Service Providers (MSPs) joining forces.
In the process, larger and larger players are emerging. Good examples in the Internet Service Provider market include Broad Horizon, Sentia, Team.Blue and TWS. In the Managed Service Provider or combined market, we see Arcus IT, Hello, Interstellar, Techone and many others. Whereas for years this market was characterized by fragmentation, we now see more and more parties coming together (market consolidation). And that development does not seem to be over.
But why Market Consolidation?
But why are these parties going together? Are they no longer managing on their own? Or are there other forces at workwhy this market is consolidating so strongly?
To properly answer why we see market consolidation, we use Porter’s 5 forces model(competitive-forces model). This model, developed by the Michael Porter, determines the profit potential of a market/industry. The profit potential of a market is directly linked to the return you can realize. A good return facilitates opportunities to borrow money (bank) or attract investment (investors).
The following forces we will deal with for market consolidation:
- Supplier Power , what is supplier power?
- Buyer power , what is buyer power?
- Alternatives Force , what alternatives or substitutes threaten the market?
- New entrant force , can new entrants easily enter the market?
- Competitiveness, are there many or few competitors within the market?
We will address these various forces individually to reach a conclusion for consolidation in the IT market in the Netherlands but also beyond.
1. Supplier strength
Within supplier power, we look at the power that suppliers can exercise over the buyers of services. When we talk about power, we mean that suppliers can, for example, raise prices, lower the quality of service or even keep out customers for no apparent reason.
In the MSP market, we see a number of key vendors. These include the hardware vendors (Dell, HP, etc), software vendors (Microsoft, VMWare, Citrix, etc), Cloud & Data Center vendors (Microsoft, AWS, Equinix, etc). What stands out about these parties is that they are major international players. The number of suppliers is quite limited, the ability to switch to another supplier is limited due to limited choice and high switching costs. And in addition, we see further vertical integration of a number of parties. For example, Microsoft which has started to offer services (Office365) in addition to software (MS Office).
Thus, vendor power is relatively BIG within the MSP market.
A glaring example of this is: Linkedin Post from an ISP
2. Buyer power
Within buyer power, buyer power is considered. To what extent can they make demands on the service provider. How easy is it for buyers to switch to and other provider and how important is the product to the buyer.
Cloud services are becoming increasingly important to the customers of Managed Service Providers. The customer sees Cloud as an increasingly important outlet for its own services, and service delivery to its customers is also increasingly taking place via the Web. Also the new way of working by COVID makes the importance of the MSP for its clients very high. The buyer is happy if she can find an MSP that fits her needs. Switching costs for a buyer are very high.
The power of the buyer is relatively SMALL within the MSP market.
3. Aternatives force
Within the force of alternatives, we look at the possibility of using an alternative to the services offered in the market. An example is Streaming Music Services as an alternative to buying a CD, for example.
The cloud service industry is booming. In part because of all kinds of new products and services and on the other hand because of vertical integration from the vendor, Microsoft offering Office365 instead of MS Office, for example. From a customer perspective, these innovations are not really an alternative. Products and services are still widely purchased through the same channel. You also used to buy the CD of MS Office through your IT vendor just like Office365 now.
We expect that within 5 to 10 years, due to rapid technological developments, the way we work will have changed dramatically. MSPs will need to stay on top of these developments to avoid falling behind. The same is true of the way we currently take in knowledge through the Web. Through speech technology, artificial intelligence and machine learning, among other things, information will be consumed differently. The question is what this will mean for today’s Web and ISPs.
The alternatives force is relatively SMALL within the MSP market
4. Newcomer Power
Within the newcomer strength, the degree to which it is easy to enter the market is considered. Simple can be approached in different ways, such as the investment you have to make to get started. Think of a Data Center, if you want to start that you will have to make a big investment to build the data center. Regulation of the market is another issue being looked at. Also whether you gain big advantages you are a bigger player in the market.
If you want, you can start in the market tomorrow as a Managed Service Provider. It is fairly easy to enter the distribution channel, and the government also has few specific rules for getting started as an MSP. The market is quite fragmented so branding is not really of decisive effect either.
The alternatives force is relatively SMALL within the MSP market
5. Competitiveness
Within competitiveness, the amount of providers in the market is considered. Also important is whether these companies compete with each other.
Many companies operate in the MSP market (according to CBS, 66,085 companies). And the differentiation within the market is quite limited. Many MSPs boast that they are delivering THE Modern Workplace (Read our article on the MSP’s DNA), when in fact that is a Microsoft term, and those parties cannot provide a particularization of this service. How many providers today provide Teams, with ever new, Microsoft developed, features?
The alternatives force is relatively BIG within the MSP market
