Market Consolidation

It has been going on for several years now, but IT’s market consolidation is beginning to take precise forms. While the Internet Service Providers (ISPs) and Data Centers have taken the lead, we now see the Managed Service Providers (MSPs) joining forces.

This is leading to the emergence of increasingly larger players. Good examples in the Internet Service Provider market are Broad Horizon, Sentia, Team.Blue and TWS. In the Managed Service Provider or combined market, we see Arcus IT, hallo, Interstellar, Techone and many others. Whereas this market was characterized by fragmentation for years, we now see more parties coming together (market consolidation). And this development does not seem to be over yet.

CBS - Fusies en overnames IT Sector - Market Consolidation

But why Market Consolidation?

But why are these parties merging? Are they no longer managing on their own? Or are there other forces at work that this market is consolidating so firmly?

To give an answer why we see a market consolidation, we use Porter’s 5 forces model (competitive-forces model). This model, developed by Michael Porter, determines the profit potential of a market or industry. The profit potential of a market is directly linked to your investment return (ROI) that you can realize. A good return makes it easier to borrow money (bank) or attract investment (investors).

We will deal with the following forces for market consolidation:

We will address these different forces individually to conclude the Netherlands’ IT market consolidation and beyond.

Marktconsolidatie - 5-forces-of-Porter

1. Bargaining Power of the Suppliers

Within the Bargaining Power of Suppliers, we look at the power that suppliers can exercise over the buyers. When we talk about power, we mean that suppliers can, for example, raise prices, lower the quality of the service or even exclude customers without any apparent reason.

In the MSP market, we see some important suppliers. These include hardware vendors (Dell, HP, etc.), software vendors (Microsoft, VMWare, Citrix, etc.), Cloud & Datacenter vendors (Microsoft, AWS, Equinix, etc.). What stands out regarding these parties is that they are large international players. The number of suppliers is relatively limited; switching to another supplier is limited due to the little choice and high switching costs. Also, we see further vertical integration of several parties. For example, Microsoft, which is also software (MS Office), has also started to offer services (Office365).

The power of the suppliers is thus relatively BIG within the MSP market.

A shiny example of this is this Linkedin Post of an ISP.

2. Bargaining Power of the Buyers

Within buyer power, we look at the power of the buyers. To what extent can they make demands on the provider of the services. How easy is it for customers to switch to another provider, and how important is the product to the customer?

Cloud services are becoming increasingly important to the customers of Managed Service Providers. The customer sees Cloud as an increasingly important sales channel for its own benefits and the service provided to its customers also increasingly takes place via the web. Also, the new way of working by COVID makes the MSP’s importance very high for its customers. The customer 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. Threat of Substitutes

Within the Threat of Substitutes, the possibility of using an alternative to the services offered is considered. An example is Streaming Music Services as an alternative to buying a CD.

The cloud service industry is in a state of flux. New products and services are developed quickly and vertical integration from the supplier, Microsoft offering Office365 instead of MS Office. From a customer perspective, these innovations are not really an alternative. The products and services are still mostly purchased through the same channel. You bought the CD of MS Office at the same IT supplier where you buy Office365 nowadays.

We expect that because of the rapid technological developments, within 5 to 10 years, the way we work will have changed dramatically. MSPs will have to keep up with these developments in order not to get left behind. The same applies to the way we currently acquire knowledge by the web. Through speech technology, artificial intelligence and machine learning, among other things, the information will be consumed differently. The question is what this will mean for the current web and ISPs.

Today the alternatives force is relatively SMALL within the MSP market.

4. Threat of New Entrants

Within the Threat of New Entrants, the degree to which it is easy to enter the market is considered. Easy can be approached in different ways; for example, the investment you have to make to start. Think about a Data Center; if you want to start, you will have to make a large investment to build it. The regulation concerning the market is also looked at and whether you gain significant advantages if you are a more prominent player in the market.

As a Managed Service Provider you can start in the market tomorrow. It is relatively easy to enter the distribution channel. Also the government has few specific rules to start as an MSP. The market is quite fragmented, so branding is also not really of decisive effect.

The force of alternatives is relatively SMALL within the MSP market.

5. Industry Rivalry

Within Industry Rivalry, the amount of providers in the market is considered. Also important is whether these companies compete with each other.

There are many companies active in the MSP market (according to CBS 66,085 companies). And the differentiation within the market is quite limited. Many MSPs claim that they deliver the Modern Workplace (Read our article about What is your DNA Service Provider), while that is a Microsoft term. Those parties cannot provide differentiation of this service. How many providers deliver Teams today, with ever new features developed by Microsoft?

The power of alternatives is relatively BIG within the MSP market.

If we look at Porter’s 5 forces model we see the following values:

  • Bargaining Power of Suppliers – BIG
  • Bargaining Power of Buyers – SMALL
  • Threat of Substitutes – SMALL
  • Threat of New Entrants – BIG
  • Industry Rivalry – BIG

We see that the overall IT market continues to grow steadily, read our background article on the ABN AMRO survey.

What can you do?

As an MSP, you would need to guard against the 3 forces in the model: Suppliers, New Entrants and Rivalry. But how?

Bargaining Power of Suppliers

To reduce this, you must become more important to the supplier and use different suppliers. To do this, you must become more prominent. Become a player that grows substantially faster than its competitor (i.e. grows faster than the market) and is large enough to run multiple technologies side by side. So, to achieve both, you need to grow very fast in a short period.

The threat of New Entrants

How can you reduce this power? First of all, you can ensure a strong brand within the market. A customer chooses a brand because it inspires trust and many other parties have chosen and would like to choose this brand. Another way is to make sure that the customer has all kinds of service requirements, making it more costly for newcomers to enter the market. Both come with high out-of-pocket costs.

An example in the MSP market are ISO27001 standards. Almost all existing parties have such a certificate or are in the process of obtaining it. As a result, the customer knows that it is better to choose a party with an ISO27001 standardization. Therefore, new entrants will first have to obtain such certification before a serious customer will do business with this party.

Industry Rivalry

By differentiating, you bring distinction to your services so that a customer finds your service more valuable because it better matches his perception of value. You can differentiate, for example, by focusing on the market you serve (healthcare, education, etc.). The region in which you operate (Randstad, Brabant, 50km around Leeuwarden, etc.). This requires a straightforward market approach and adaptations of a products and services catalogue and knowledge of the market where you want to focus. Want to read more about this? Read the article: Make Meaning – What meaning do you have?

Force21 can help you with this. Do you want to know more? Please make an appointment for an informal talk.

Force21 Tip:

Of course, what also can be done to decrease competitiveness is to reduce the number of competitors

Conclusion

As an MSP, you should do several things to solidify your overall market position despite the booming market. The easiest way to do that is by merging with competitors. If you do that you become a more important party for suppliers, more decisive against New Entrants and reduce the Rivalry. That’s three birds with one stone.

This, together with the strong recurring nature of cloud services and the growing market, makes it an exciting market for wealthy parties (investment companies). That is why many MSPs are looking for each other, and market consolidation will continue. The market consolidation will allow MSPs to occupy a better position in the market collectively.

Our question is: What will be the next step after the market consolidation? Ultimately, the customer will have to be enticed to purchase the service from you. What will you do? Compete on price or convenience, or…. looking more for added value for the customer.

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