Vendor lineage
ScanSource
Distributed products that were on their way to becoming commodities, and tried to arrive first.
Mike Baur and Steve Owings founded ScanSource in Greenville, South Carolina in December 1992, to distribute barcode and point-of-sale equipment. Most accounts name the two of them; one describes six founders with Baur as the architect, and both are recorded here. It listed in 1994, raising $5.5M.
Its Latin American communications business came from Network1, the São Paulo value-added distributor it agreed to buy in August 2014 and completed in January 2015. The combined operation traded as Network1-ScanSource for years, which means people who joined one company found themselves working for the other without changing desks - a rename rather than a move, and the reason both names appear in the same stretch of a single career.
The founding thesis is the part worth keeping, because it is a real strategy rather than a description. Baur's stated aim was to be a distributor of *transitional* products, and he named the two transitions he was hunting: proprietary moving to open, and high-cost moving to low-cost. The idea was to find products heading for commodity status and get there early - while a specialist channel still needed explaining to, and before the broadline distributors arrived to sell them on price.
And the arbitrage underneath it is the clearest illustration of what a distributor sells. The number of barcode-focused resellers was in the hundreds. The number of computer-focused resellers was in the hundreds of thousands. What ScanSource offered the barcode manufacturers was not warehousing; it was access to a channel three orders of magnitude larger than the one they already knew about. That is the distributor's product, stated as plainly as it ever gets.
The channel-only policy followed from the same logic: no direct sales to end customers, ever. A distributor that sells directly is competing with the resellers it depends on, and resellers can count. Holding that line is what makes the rest of the arrangement work.
The portfolio widened the way these businesses do - Catalyst Telecom for business telephony, later communications, physical security, and eventually cloud and payments through acquisitions including Imago, POS Portal and intY. It is a Fortune 1000 company today, around $3B, with roughly 2,100 staff in North America and Brazil - Brazil being unusual enough in a US distributor's footprint to be worth noticing.
Set beside Westcon-Comstor, the two make a useful pair. Both are specialist distributors rather than broadline ones, and both grew by being the people who could explain a category. But they specialised in different directions: Westcon went deep on networking and security, Comstor specifically on Cisco, while ScanSource went deep on the things that read and print - scanners, terminals, printers - and then followed its resellers outward into telephony and security. Neither tried to carry everything, which is precisely what distinguishes them from Ingram Micro and Tech Data, the broadline houses whose arrival in a category is the signal that it has finished transitioning.
The timeline
- Launched with a broadline distributor behind it
Founded on 18 December. The logistics were provided by Gates/FA Distributing, of which Owings had been a chief executive - so a specialist distributor began operating with an established broadline operation's warehousing behind it. Starting a niche business inside somebody else's infrastructure is how a small team gets to compete on knowledge rather than on capital.
- Public, and staying put
The listing, in the founder's own account, provided the capital to grow quickly and simultaneously to remain in Greenville. Distribution is a business where the head office does not need to be near anything in particular, and choosing not to move is a decision most companies of this size do not get to make twice.
- Intelisys, and the exit from inventory
The acquisition brought an agent and advisor model: brokering connectivity, cloud, unified communications and contact centre services for commission rather than buying and reselling them. It has since become one of the company's two reporting segments, and it carries no stock at all.
Flagship products and solutions
- Specialty Technology SolutionsThe original business, broadened: data capture, point of sale, payments, physical security, networking and collaboration hardware, sold only through partners.
- Intelisys and AdvisoryServices brokered rather than resold, on recurring commission. A different business wearing the same company's name, and the higher-margin of the two.
- Configuration and financingDevices staged, imaged and shipped ready to install, on terms the reseller could not obtain alone. In specialty hardware this is often the actual reason a partner uses a distributor rather than buying direct.
Key innovations
- Unique in refusing direct sales, not merely unusualThe policy the entry above describes was not one option among several at the time. Contemporary accounts record this as the only distributor in its categories that did not also sell to end users. A commitment that everybody makes is a marketing position; one that only you make is a structural choice, and it is why resellers would show it their customer lists.
- Answering the question the broadline houses are still askingDistribution's defining problem is that it ties up capital in stock. The escape route usually proposed is a platform or a cloud marketplace, bolted onto the existing business. This company took a different route: it bought a business that had never held inventory and ran it as a separate segment. Whether that generalises is doubtful - the margin structures are wholly different - but it is the clearest example on this timeline of a distributor actually completing the transition rather than announcing it.
- Following the resellers rather than the productsThe expansion from scanners into telephony, security and payments looks like category drift and was not. Each move followed the same partners into what they were being asked to install next. A distributor that expands by product category is guessing; one that expands by watching its existing customers is being told.
Main markets
Value-added resellers, integrators and managed service providers in North America and Brazil, at around $3B of sales, with technology advisors as a distinct and growing customer type that did not exist when the company was founded.
It competes with the broadline distributors when a category matures and with other specialists before that happens - which is the whole content of the transitional-products thesis the entry above describes.
Analyst standing
- The measure worth watching is the split between the two segments. Hardware distribution is high revenue and thin margin; the advisory business is small revenue and high margin, and recurring. A company reporting strong cash generation in a year of lower sales is showing the effect of that mix rather than of the volume.
- The strategic read is that this is a distributor with a hedge against its own industry. If specialty hardware distribution continues to compress, the segment that brokers services rather than stocking goods is not exposed to the same compression. Very few companies on this timeline own a business that profits from the decline of their original one.
Acquisitions
1993 Alpha Data Systems
A ten-year-old company in Marietta, Georgia, bought in May 1993 - months after ScanSource itself was founded.
Early scale in the AIDC business, and the first of a long line of tuck-in acquisitions.
2011 CDC Brasil
Then the largest value-added distributor of commercial automation in the region. ScanSource's entry into Brazil.
The first half of a Latin American business assembled by purchase rather than built.
2015 Network1 (Intersmart) R$156,928,000 plus EBITA-linked earn-outs over four years
A leading Brazilian value-added distributor founded in 2004, operating across Brazil, Mexico, Colombia, Chile and Peru with ~400 staff, 8,000 customers and 60+ vendors. Announced 15 August 2014, completed January 2015 - the largest acquisition ScanSource had made to that point.
Network1-ScanSource, and ScanSource's Latin American communications business.
Bought THROUGH CDC Brasil, the subsidiary acquired in 2011 - so one acquisition was the vehicle for the next.
- Network1 acquisition - announced 15 August 2014, completed January 2015; traded as Network1-ScanSource
- Channel Futures interview with Mike Baur: the transitional-products thesis - proprietary to open, high-cost to low-cost, 'catch them early' - the 1994 IPO raising $5.5M, and the arbitrage between hundreds of barcode VARs and hundreds of thousands of computer-focused VARs
- Company Histories: formed at the end of 1992 to serve POS and AutoID resellers; the May 1993 purchase of Alpha Data Systems of Marietta, Georgia; Catalyst Telecom and the move into telephony
- Encyclopedia.com: the AutoID and POS product range, and Ingram Micro and Tech Data moving into the POS arena as broadline competitors
- Greenville Business Magazine: Baur as co-founder in 1992, president from inception to 2000 then chief executive, and the company at roughly $3B with 2,100 employees in North America and Brazil
- PortersFiveForce: founding on 18 December 1992 in Greenville by Baur and Owings, the channel-only policy with no direct sales to end customers, and the Imago, POS Portal and intY acquisitions between 2014 and 2019
Secondary summary. Used for the specific founding date, the channel-only policy and the acquisition list; the founder count here agrees with the majority account.
- MatrixBCG: an alternative account describing six founders led by Baur, and the value-added distribution model built on technical services, training and financing rather than competing with resellers
Minority account on the founder count, recorded because it differs from the majority rather than because it is preferred.