Comstor.net Hooks Future on Networking

By Richard McCaffery, Staff WriterLinking its fortunes to market leader Cisco Systems Inc. and other network vendors by specializing exclusively on networking gear and services should give Comstor.net an edge against competitors like Ingram Micro Inc. and Tech Data Corp., a top company official said."It was easiest for us to differentiate ourselves on networking products," said Barry Culman, president of Comstor.net, a distribution unit of General Electric formerly known as Comstor. "We saw what was happening in the industry." What has been happening is a lightening bolt called Dell Computer Corp. of Round Rock, Texas, which altered the landscape with its build-to-order and direct sales model. By cutting distributors and resellers out of the picture, Dell and its followers changed the way many computer products are bought and sold.Falling computer prices, competition and shrinking margins added to pressure in the sales channel, leaving companies like Comstor.net scrambling for ways to add value to the products they sell. "Things have changed so much in the last year," said Culman, who has been with the Chantilly, Va.-based company since 1995. Founded in 1986, Comstor.net started out as a full service distributor serving government resellers. An ambitious plan to grow to a $1 billion distributor by 1999 changed when Comstor was bought by General Electric Co. of Fairfield, Conn., in 1996, and became part of GE Information Technology Distribution Group, the distribution arm of GE. As a result of its switch to networking products, Comstor.net is no longer part of GE's distribution group, said Culman. It now falls under the umbrella of GE Capital IT Solutions of Newport, Ky.The IT Solutions unit sells IT products and services to customers in North America, Latin America, Europe and Asia and has annualized sales of $6 billion, according published reports. Comstor.net does about 40 percent of its business with federal resellers like Federal Data Corp. of Bethesda. Md., and Intellisys Technology Corp. of Fairfax, Va. Besides the Chantilly unit, Comstor.net has offices in Boulder, Colo., and Dallas.Though Comstor.net topped $400 million in sales last year, up from $270 million the year before, Culman did not expect its good fortune to continue in a market under siege. The company could not compete in the long run against companies like Tech Data, which sells more than 75,000 products, Culman said. "We were trying to be all things to all people, trying to follow what the big guys were doing," he said. Even large distributors have struggled during the past year. Ingram Micro of Santa Ana, Calif., Tech Data Corp. of Clearwater, Fla., and virtually every other major distributor in the industry announced weak earnings the last two quarters, plunging the sector into a tailspin. Ingram, Tech Data, Merisel Inc. of El Segundo, Calif., and Inacom Corp. of Omaha, Neb., recently hit 52-week lows. So April 1, Comstor changed its name to Comstor.net and switched its business focus to networking. It now sells strictly networking products and services, specializing on equipment made by Cisco of San Jose, Calif. It sells networking products made by 20 vendors. Comstor used to be a full-line distribution company, selling about 3,000 computer products made by 100 vendors."It's real nice to be able to explain to someone who we are and what our expertise is," Culman said. "I'm also comfortable we picked a part of the market that's growing."Comstor.net formed a partnership with Cisco in 1996 and has grown its Cisco sales every year since. About $100 million of its 1998 sales came from the Cisco line, up from $50 million in 1997, Culman said.Comstor.net, Ingram and Tech Data are the only distributors licensed by Cisco to sell its products to government resellers. Culman said Comstor.net should be able to compete against the big distributors now that it is better focused. Paul Cantwell, Cisco's director of federal channels, agreed. "The value Comstor brings to that scenario is they probably have more expertise and can really hold the reseller's hand," Cantwell said. "They also focus more on the high end."Distributors are critical to Cisco's success in the federal market because more than 95 percent of its government sales go through the channel, Cantwell said. "The government wants to buy from people they trust and are familiar with," he said. "We can't get to all those [resellers]. Comstor.net has a model that works very well."Cisco's model has worked pretty well, too. The company sells routers, switches, hubs and other networking products that are used to direct the flow of information on computer networks. Cisco has acquired more than 30 companies since 1993, controls two-thirds of the market for routers and had sales of $8.5 billion last year, up more than threefold from $2.2 billion in 1995.Other distributors have done well linking their fortunes to successful vendors. Westcon Inc. of Eastchester, N.Y., for example, has developed a specialty selling networking products made by Bay Networks, now owned by Northern Telecom Ltd. of Brampton, Ontario. Westcon, a small distributor owned by Datatec Ltd. of Johannesburg, South Africa, uses its understanding of Bay products to help its resellers excel.Kristi Thiese, research analyst at Raymond James & Associates of St. Petersburg, Fla., said there is a growing market for niche distributors. "I think the [distribution] market will segment into two groups, large broad line distributors and smaller value-added players," she said. Comstor.net opened a Cisco lab at its Chantilly headquarters last August that is used to train employees, test product compatibility and help resellers work with their customers. The company is opening up a second lab at its Boulder office later this year.