When 21-year-old MIT engineering student and Internet buff Rajat Bhargava started net.Genesis in early 1994, he says the Web consisted of about 150 sites. He and his two cofounders, also MIT students, "knew the Web inside and out," Bhargava says, and figured corporations could use help understanding the Net and getting online. They were right. In that first year, the Cambridge, Mass., start-up helped ESPN, the Boston Globe and other big firms build their first Web sites, and the business looked promising. Today, however, after a couple of rounds of venture capital financing, they're out of the consulting business. Instead, net.Genesis has become a 50-person independent software vendor (ISV). It often sells software for Web site analysis to start-up VARs that look similar to the way the company looked two years ago.

Another new-age technology, virtual reality, is at the heart of Gregory Martin's 1-year-old Streetsboro, Ohio, company, Purple Martin Technology. Martin, who left VARBusiness 500 integrator Cap Gemini to form Purple Martin, is working with world-renowned neurosurgeon Dr. David Warren to make virtual reality available to paraplegic children. Such technology can make it possible for paralyzed children who can move only their mouths to surf the Net. Kids are also the beneficiaries of another of Martin's current projects. Working with a network of partners, his company is wiring Ohio public schools to provide Internet access to every classroom by the start of the 1997 school year.

Rocket Science Computer Services got its start 18 months ago when five engineers left their employer, the University of New Hampshire, to become an Internet service provider. In the first seven months of operation, says 32-year-old president Ingo Roemer, they had sales of $250,000. Today, with an expanded staff of 13, the company is moving toward full-service reselling and $650,000 in sales. "It's an adventure," Roemer says. "We have certainly evolved from where we started."

Whether you call it an influx, a movement, an invasion or simply an evolution, those young companies epitomize the new wave of VARs flooding the industry. The trend is being driven by the rising tide of Internet, intranet, multimedia, computer telephony and other convergence technologies. Many of the VARs are young, having lived their whole lives in the digital age. Many are entering the channel from industry backwaters, such as academia, Web chat groups and creative fields, such as advertising. Many are spin-offs from traditional VARs who realized the potential of the hottest niches.

Regardless of their origins, the new VARs are poised to change the competitive landscape. Will they feed the industry's need for technical expertise, or hire all the good people? Will they remain a competitive force, redefining the term VAR, be absorbed by larger entities, or fail? Or is this trend simply the latest example of the value-added channel's ability to recognize a business need and fulfill it creatively? Time will tell, but already the new VARs are branching into different paths as they study the market with fresh eyes. Whether specializing in software as net.Genesis did, partnering with other VARs to broaden their reach as Purple Martin did, or evolving into full-service resellers like Rocket Science-the new VARs are a force to be reckoned with.

Defining the Movement

Common sense supports the idea of many new companies starting up to provide Internet services. Just search the Web for "Internet consultant" or "Internet solutions" and you'll ring up thousands of hits, all from new companies. "A great deal of money is being spent on the Internet," says Clay Rider, analyst with Zona Research, Redwood City, Calif. "When chaos reigns, consultancy thrives." And instant millionaires like Netscape's Mark Andreessen have encouraged others to take the plunge into new-age businesses. Frankly, the barrier to entry for new companies is low. "There's been so much hype about how magical the Internet is," Rider says, "but when you get right down to it, it's not magical at all. The Web is so simple-that's why it's being widely deployed." And why, with its low cost of entry, so many Internet VARs are starting up.

Beyond such anecdotal explanations, VARBusiness research points to statistics that help define the new VAR movement. Our State of the VAR Market survey, conducted three months ago, finds 21 percent more new VARs-those in business two years or less-this year than in 1995. As a result, the median years in business for all of the 748 VARs responding to the survey dropped from nine years to 8.2 years, the first drop in four years. Moreover, the survey uncovers a shortage of technically skilled employees among VARs. This shortage is being met in part by recent college graduates, who recognize that computers and communications are promising career paths. The Massachusetts Institute of Technology, for instance, says the number of Computer Science and Electrical Engineering degrees awarded in 1995-96 jumped 40 percent compared with 1991-92.

In looking at the business models of the new VARs, the State of the VAR Market survey shows that many are focusing on the Internet. But new VARs are also specializing in multimedia, network management and computer telephony. Tellingly, VAR support of object oriented technology is on the upswing because it lowers the bar of entry to application development.

The multimedia angle can be explained by a maturing of the technology. As systems become more powerful and the software evolves, multimedia becomes more viable, especially on the Internet. "You can do an awful lot with a Pentium Pro today that you would have needed a high-end Unix workstation for a few years ago. That lowers the entry into the multimedia market for VARs significantly," says Glenn Cross, senior director of channel sales at Macromedia, San Francisco. Cross also sees a lot of new VARs coming out of graphic art schools. "Their tools are video cameras and tape-mixing decks and sound studios."

Computer telephony is another market populated by new VARs. The convergence of voice and data networks is prompting many PBX interconnects to enter the world of data, operating systems and application software-in other words, to become VARs. Bob Kazarian, president of research firm Charles River Strategies, Wellesley, Mass., predicts that "interconnects entering the world of VARs could swell the ranks by 10 percent."

Distributors, manufacturers and software publishers also are seeing an increase in new VARs. Ingram Micro, for instance, reports a 5 percent increase in VAR customers in the third quarter of 1996 versus 1995. Networking distributor Westcon is adding 100 new VARs a month. And Merisel reports double the number of new VAR accounts in the first eight months of 1996 compared with the previous eight.

Jay Parthemore, director of AT&T's EasyCommerce Services in Parsippany, N.J., says there are many second-generation VARs, fresh out of college, with no computer industry experience who are making "$100 an hour for Internet consulting skills." So far, he's signed up more than 600 organizations for his Creative Alliance Partner Web hosting program, which provides sales leads from AT&T's direct sales force to VARs and consultants. Over at Netscape, John Hahn, vice president of channel programs, confirms the presence of new VARs. "It's absolutely happening," he says, noting that many are entering from academia. "Even though they're young, they've been into the Internet forever." They tend to have good database skills and experience with Java and Java Script.

How big is the market so many of these newbies are pursuing? Nobody knows, really, since research firms are playing the same catch-up game as everyone else. Zona Research, formerly the Xbusiness Group, has put a stake in the ground, and come out with some huge Internet numbers. This year, Zona believes the market for Internet products and services is $11.6 billion, growing to $20.5 billion next year and $41.9 billion by 1999. Connectivity, server software and hardware, and services are key components of this growth. In server hardware, intranet implementations far outpace the Internet in potential, rising from $2.7 billion this year to a projected $13.1 billion by 1999.

"The market opportunity is growing at an astronomical rate," says Joe Firmage, 25-year-old founder and CEO of USWeb, a new Internet services franchise in Santa Clara, Calif. Firmage puts the market for outsourced client-server integration services at $20 billion this year, which he believes will be "completely recategorized" to Internet consulting within three years. Firmage hopes to cash in by setting up USWeb-franchised VARs around the country for consulting, products and services.

Exploiting the Niche?

"The goal of business is to find a niche and exploit it," says Wayne Spivak, a VAR with an academic background who started an Internet consultancy a year-and-a-half ago. Spivak's new company, sba.net.web in Bellmore, N.Y., targets small businesses for Internet consulting, a fertile territory for most new VARs. Small and midsize companies have the most to gain from an Internet presence: With a modest investment, they can appear as big as General Motors on the Web. And, of course, such firms are VARs' bread and butter because they lack in-house technology experts.

These small and midsize companies, points out Intel CEO Andy Grove, are fueling a growing market for consulting services and systems sales. "In 1996, the small and medium-sized businesses may be consuming a larger number of personal computers than the larger enterprise organizations," he says. Grove's advice to developers? "Consider targeting this business segment for custom Windows NT development."

Many new VARs are already doing so. State of the VAR Market research shows a heavy NT focus among new VARs, whereas more established VARs favor NetWare. This doesn't surprise Sam Jadallah, Microsoft's vice president, Organization Customer Unit, who says that small and midsize companies are Microsoft's top growth area. Such companies want to hear "how technology can help them grow, be more competitive," Jadallah says, and the new VARs are pitching Internet, multimedia and computer telephony to do the job.

Sales to small companies are an important demographic differentiator of the new VARs. Sixty-eight percent of their annual revenue comes from businesses with fewer than 100 employees, according to the State of the VAR Market. For more established VARs, this small-business sector accounts for 59 percent of annual sales. The biggest share of new VARs' revenue, 35 percent, comes from small businesses with 10 or fewer employees.

Analyst Kazarian sees a trend toward "one-person VAR shops, each with a set of 10 to 15 customers." They consult with their clients, recommend solutions, procure and install equipment, he says. In fact, that's the kind of VAR his company uses. Such small VARs can pack a lot of muscle, too. Though Spivak of sba.net.web runs a one-man consulting shop, he can have as many as 50 partners and subcontractors out working with clients.

Not surprisingly, the new VARs tend to be smaller than VARs in business longer, showing a median head count of 3.5 employees versus 10 for more established VARs. Annual revenues are similarly skeweD:$396,000 for new VARs, compared with $1.5 million for those in business more than two years. Ramping up to a fair size takes time, the one thing new VARs haven't had.

Profitability is another matter, though. Median pretax operating profit for new VARs is a healthy 19 percent, 58 percent higher than VARs in business more than two years. Part of the reason is that smaller shops have less overhead, but the mix of products and services tells an interesting story. New VARs generally start out to provide more profitable consulting and application development services, so they rely less on hardware than older VARs. That's why more profits go to the bottom line.

"Before we get any business, we have to consult," says Robert Preville, a partner in Adtell, a new VAR in College Park, Md. "So consulting services are half of our business." Adtell was founded eight months ago by four classmates at the University of Maryland and is just now lining up customers, mostly from word of mouth and a home page that lists startlingly low prices for Internet services.

What's Your Value-Add?

Even though they're just getting started, the new VARs show no shortage of business smarts. Many are already planning an exit strategy from the start-up phase into more viable, long-term businesses. Most seem to recognize the need for a specific value-add to differentiate them from the hordes of competitors who are charging rock-bottom prices.

Adtell, for example, wants to stick with the Internet, helping companies market themselves on the Web. "Just as there are ad agencies that specialize in print today," says Preville, "there will be a need for companies that specialize in the Internet, and we plan to be one of them."

Similarly, Internet Resources, Ingram, Texas, is building a Web-centric business, but around a different value-add. Though his firm provides general Internet consulting and Web hosting, president David Hughes creates regional home pages to funnel users to his customers' sites. One of his sites, www.texashillcountry.com, is used by thousands of tourists monthly, who then link to the sites of area businesses. Hughes, a veteran hacker with a creative bent, realizes he's already "living on the bottom" in terms of his services, which is why he puts so much effort into marketing customer sites.

Also sticking with the Web is net.Genesis, but CEO Bhargava decided early on to get out of consulting to produce software. "It's hard to build a large consulting company," he says, "but we all knew how to build software." The result? Today the company sells net.Analysis and two other software packages for tracking Web usage.

Such a niche approach is one way to go, but even the "nichiest" of new VARs realize that IT solutions take teamwork, a mix of disciplines, such as consulting, software developing, connectivity, and back-room services, such as Web hosting. Many businesspeople deplore leaving money on the table. And, often, customers want a single point of contact for their solutions. Thus, many new VARs are recognizing the wisdom in the remark of Microsoft's Jadallah: "You either partner or compete [with traditional VARs]. You just can't do it alone."

Scott Frederickson, area VAR director of Adobe Systems, Mountain View, Calif., agrees. "There's a danger if you don't expand and make sure you have network integration expertise," he cautions, citing pressure from ad agencies on the design side and from network VARs that are hiring staffs to design and build Web sites. "If the new VARs don't expand or broaden their capabilities, there's a real danger that the larger, more established folks could squeeze them out."

One new VAR that's partnering with peers to help offset these competitive pressures is CyberWare in Diamond Bar, Calif., an Internet VAR started six months ago by four graduates of Don Bosco Technical Institute. They met in a C++ class, learned Java on their own and started an Internet consulting business. President David McClusky realizes that Web consulting already is a crowded field. "It could start getting hard to survive on just that," he says. To expand its reach, CyberWare partners with Highway Technologies, (www.hway. net), an ISP in Boca Raton, Fla., that takes care of the back end at a good price. They're also dipping a toe in full-service reselling: One of the founders is taking his CNE training to add network infrastructure skills to the organization. And they're considering becoming outsource providers to other resellers, kind of an Internet gun for hire.

Going further toward full-service reselling is Rocket Science Computer Services. This ISP-turned-reseller hopes to add $250,000 per month to the top line by reselling network hardware. "When selling services, you go from job to job," says president Roemer. "Having a product line will help give us a steady cash flow."

As these and other new VARs struggle with such milestones as defining their value-adds and growth strategies, the bigger issue remains: What impact will the new VARs have on the value-added channel and the industry in general?

"Within 10 years-no, less-Internet access will be just another business tool, like the telephone or fax machine," says analyst Rider of Zona Research.

For now, it appears that the new VARs are fulfilling a critical business need. Certainly their technical skills and enthusiasm for convergence technology make them formidable competitors to more established organizations, but many industry observers don't see them as a threat. "It is not new VARs coming in and displacing old VARs," says Macromedia's Cross. "It's new VARs coming with new ideas on how to use new technology. It's incremental business into the industry."

In that light, new VARs represent rich partnering opportunities for older VARs. Plus, new VARs offer young technologists a chance to hone their skills. "It's easier for traditional VARs to hire creative people," says Microsoft's Jadallah, "than it is for creative sorts to learn the network infrastructure skills."

Perhaps the best advice on how to handle the influx of new VARs comes from one of their own, 23-year-old Bhargava: "Be open-minded and flexible. Things are changing quite rapidly."

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