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2026.09.24 | TB | Semis | Arrow Electronics ECS & AI Channel

原标题：Arrow Electronics – ECS, Enterprise AI & the Evolving Channel

#semis

Third Bridge · 2026-09-24

Analyst-led • 16 Sep 2026

Companies: INGM US, ARW US, IBM US, SNX US, DELL US

Michele Stern (MS) Independent Consultant

Colin Duncan (CD) — Third Bridge Sector Analyst

Agenda

Key Insights

Introduction

CD [00:00:04]: Welcome to Third Bridge's Interview entitled Arrow Electronics – ECS, Enterprise AI & the Evolving Channel. I'm Colin Duncan, and I'll be facilitating today's Interview with Michele Stern, former Senior Business Development Executive at Arrow.

Michele, before we start today's Interview, please state I agree or I disagree to the following statement: You understand the definition of material non-public information and agree not to disclose any such information, or any other information which is confidential, during this Interview.

MS [00:00:34]: I agree.

CD [00:00:35]: Thank you, Michele. If you would, just start us off with a brief introduction of your background.

MS [00:00:40]: Yes, happy to. I'm Michele Stern. I spent most of my career, in fact, 41 years with IBM. Probably two-thirds of that time was with business partners, alliances, channel development, channel management, but channel and distribution-related jobs. My last job at IBM that I took in 2017-22 was I covered the IBM relationship on a global basis with Arrow. My only client was Arrow, and I was responsible for the IBM business with Arrow across the world for IBM. I retired at the end of '22, and I joined Arrow in March 2023, where I worked until the end of March 2026 managing a large project between IBM and Arrow. A large IBM-oriented growth project for Arrow.

Questions

[00:01:50] How is Arrow Electronics' ECS [Enterprise Computing Solutions] business organised? Where does it add the most value across technology vendors, resellers and customers?

MS [00:02:16]: Great question. Arrow ECS, it's a little bit different between North America and Europe. My Arrow experience is North America, so let me start there. The ECS business is managed this way. There's basically two major organisations under ECS. One is supplier management, which is vendor focused and the other is sales, which is business partner focused. If you're in the supplier organisation, your primary interface is to one of the vendors. If you're in the sales organisation, your primary interface is to the resellers who actually talk to the end users. Arrow ECS customers are resellers, systems integrators, MSPs, so partners who face end users directly, but Arrow ECS does not really sell directly to end user customers. It would be very unusual for them to compete with their channel. Their work with end users is typically with their channel or behind their channel.

[00:03:35] What do you think are some of the more important developments that are currently shaping Arrow's ECS business in North America?

MS [00:03:47]: There's a lot. There's technology advances, which obviously is all over everything around AI and automation. All of my comments really will be from an IBM perspective because that's my point of view and my perspective. Certainly, the development and the quick advances around AI and automation is causing a giant transformation with the business partners in terms of skill development, business development, technical skills and development. That's one thing, right, is where is the technology going? A lot of it obviously driven by AI, but also by cloud and by customers moving from large on-prem to a more hybrid environment. Market dynamics is one of the things currently shaping Arrow's business. In addition, if you look at their customers and you look at the business partners that they deal with every day, those partners are grappling with this new world of technology, but also grappling with how do I transform my business from primarily selling hardware solutions to customers, to having skills to sell software solutions to customers?

How do I deal with the financial economics of selling to a customer, a one-time deal where you earn the margins and the profit on a large hardware deal and then move on to the next one vs the economics of selling software in a world where customers are generally moving to subscription and SaaS. Crossing that chasm to the recurring revenue model and making the financials work to keep the sales reps focused, sales reps earning the commissions they're expecting to earn and being able to maintain the profit levels of the past to be able to continue to grow and continue to invest in the business. I think the two huge ones is obviously the technology and being driven by the market, but also this transformation to a subscription world that the resellers are focused on, and it's really important to suppliers also. I think IBM has very much shifted the focus in terms of incentives for the distributors and the resellers to ensure that they are taking advantage of customers' different buying patterns and buying habits and able to survive in this and thrive in the recurring revenue environment.

[00:06:46] How successfully are Arrow's reseller partners making the transition from one-time hardware sales towards software, cloud and recurring revenue models?

MS [00:06:59]: I'd say they're doing it really well. I think that is working. I think that's where the investment is certainly that IBM is making with Arrow. It is hard going. There's a lot of moving parts to finding the right niche, finding the right resources with the right skills and then helping customers embrace this. I think if I look roughly back when I first started working with Arrow, I would say hardware to software revenue from an IBM perspective only. This is a limited look, but would have been more, I would say, 55/45, 55% hardware, 45% software. I'm guessing on this because it's been a while. I've been out of it six months now, but I would say it's more like 40/60 the other way.

CD [00:08:04]: How does this transition change the role Arrow needs to play?

MS [00:08:10]: Yes, it's a lot, a lot. From a bunch of different perspectives. Let's start with what we look for Arrow to do, what IBM would have looked for Arrow to do here. It goes from the portfolio of partners you have, so partner recruitment to partner development, to demand generation with the partners. I'll just say, technical support for the partners. It's a different level of skill and investment required at Arrow to drive that different level of skill and investment required with the partners. Arrow does, I think, a pretty good job with two areas. One is marketing support for the partners to help them make that transition, drive demand, run campaigns, be relevant in the market. They have a very good IBM marketing organisation, I think, amazingly good actually.

From a technical support, the engineering team in the Arrow Solutions Lab, what they make available to the partners in terms of a sandbox or joint development to we'll support you behind the scenes. That's where the focus changes from hardware where we had a really strong team of people who grew up in that world and know it inside out and upside down. It's really changing the focus and the conversation within Arrow and with the business partners to be software first. Now having said that, the hardware margins and the hardware profit is really important. You can't take your eye off that ball, but you needed to celebrate the big software wins to drive the culture differently.

[00:10:28] Given the transition from one-time hardware sales towards software, how do you expect ECS's current mix of approximately 75% software and 25% high-end hardware to evolve over the next few years?

MS [00:10:37]: That is the overall Arrow portfolio when you look where they have some very large software-only suppliers. That would drive that 75/25 if what the mix is now. I would say that the software will continue to increase, but the hardware business is strong and necessary. This stuff has to run somewhere. If they're not selling to end users to run the compute segment, they are selling to the hyperscalers, to MSPs, to systems integrators and other service providers who are running it for them. The opportunity changes. Resellers will be selling to end users. The software will continue to grow and increase. The compute and the storage associated with all of this, not just AI, but with workloads running in somebody's cloud, infrastructure is required and where Arrow partners have strong relationships with those hyperscalers or MSPs or systems integrators, etc, they're continuing to sell to them. They're continuing to sell to the big names. It's more storage than compute from an IBM standpoint. I can't comment on the others. That opportunity is not going to go away. I do think the 25/75, I think it will continue to be in that… Maybe it will go to 20/80. My opinion, this is strictly my opinion is that that opportunity continues. From a supplier standpoint, it's less important. In other words, IBM will provide more incentive to Arrow and to the partners to sell software than to sell hardware.

CD [00:13:08]: Are you saying the software-to-hardware mix will be 80/20?

MS [00:13:22]: Software vs hardware, yes.

[00:13:25] Given that workloads are increasingly moving from customers' own infrastructure into hyperscaler and MSP [managed service provider] environments, does Arrow retain a similar amount of revenue and profit opportunity or does more of the spending bypass the traditional distribution channel?

MS [00:13:41]: Some certainly bypass us. Those really large… Again, this is from an IBM perspective, those really large customers. If IBM can sell directly to them, they want to. There are relationships, there are economics and there is other value that the solution providers bring to those hyperscalers. It might not be technical. It may be logistics. It may be supply chain management. There are some large resellers who are continuing to sell. It's really from my experience, it's more storage than servers, but servers also to those hyperscalers and MSPs. Do I think the opportunity will shrink and move away from distribution? If the suppliers can do it, they will. They don't want to have to provide the margin to distribution or resellers there, but there's value that those resellers bring that suppliers can't.

[00:14:54] How do you think Arrow's position in the cloud and infrastructure relationships differs from broader distributors such as TD Synnex or Ingram Micro?

MS [00:15:05]: I don't really have a good answer for you on that one, Colin, because I'm not close to Ingram or TD at this point. What I would say is Arrow has very strong relationships, probably more with Microsoft than with AWS. Their investment in technical support and engineering around Azure is strong. I think they're very well positioned there. I can't really comment too much regarding Ingram or Tech because I just don't have the experience. From an IBM programme standpoint, IBM had started down this road of including the distributors in marketplace sales. If an end-user customer had a committed spend to AWS or Azure, IBM had worked a programme where the distributors could play there. A reseller could go through the distributor to sell the software licences or subscriptions that would burn down that committed spend. I believe that IBM has backed off of that and has cut distribution out of that and goes directly through resellers. There was an opportunity that I thought would grow with distribution and IBM has backed off of it. I think it's something that they now have IBM's direct partnership with those hyperscalers and is… I'm not sure that they're disintermediating their resellers, but they are disintermediating distribution.

[00:17:25] Where are enterprise customers today in terms of moving from AI experimentation into meaningful production deployments?

MS [00:17:33]: Large enterprises are going first. I think there's been more testing and proof of concepts than production. There's a production areas we all are familiar with around call centres, etc. Large enterprises are going first, gradually going to mid-market. Where I see opportunity because I think everybody's word. IBM and other suppliers look for distribution and resellers to reach market that they're not reaching. Sometimes some vendors refer to it as mid-market. IBM refers to it as select, but it's not the top Fortune 500. It's probably everybody else. I think where the opportunity there is strong for the automation part of the platform. Automating through AI, but also through like automation software, the IT optimisation and IT operation, I think in mid-sized enterprises that we are seeing customer adoption there and customer savings there. That's where I would say that you see AI and AI agents helping drive that transformation in the mid-tier accounts. I'm not talking little mom-and-pops. I'm talking under the Fortune 500, 300, something like that.

CD [00:19:25]: Are you saying that Fortune 300 and 500 companies are already there and the opportunity lies in mid-sized enterprises?

MS [00:19:34]: I'm saying for distribution in those top accounts that vendors will take that direct. There won't be a partner play there as much as in the mid-size. I think in that next tier down, there's a lot of opportunity there, but I think the starting point, again, my opinion, but where I saw success there was very much around automation.

[00:20:03] What parts of the IT infrastructure do mid-sized enterprises need to modernise before they can deploy AI at scale? Which of those areas create the largest opportunity for Arrow?

MS [00:20:21]: This probably get more technical than I am. What I saw was enterprises automating their IT operations. To do that, they need to be, obviously, current around their server and storage technology. There's a lot of automation around connected to software-managed storage. If you think about it, the customers, probably the biggest gap they have right now is getting their arms around the data. That whole data management and data science is probably the biggest obstacle to getting started for those mid-sized customers.

[00:21:25] Why does a company such as IBM use Arrow rather than selling entirely through its own organisation or directly to resellers?

MS [00:21:40]: To offset costs for sure. Arrow and the other distributors, TD and Ingram assume a lot of the back-end office, financial management that IBM and other vendors, it's very, very costly for IBM to do that. When IBM moved to distribution or started to move to distribution 30 years ago, it was very much to offset the costs around customer fulfilment and customer management, so AR, orders, collection, etc, etc. What it evolved to, though, is you look at it from the… What's expected and where IBM would say we see a lot of value in a partner like Arrow. What's expected around partner recruitment, around those partners selling to mid-market, around fulfilment is one side of the table.

On the other side of the table is the value that they have evolved to bring to the partners that is really important to IBM. Obviously, the partner recruitment, but then the partner enablement. If we have 500 business partners who can sell hardware, can we get 250 of them to sell the first software thing. Partner enablement, demand generation with or on behalf of partners lead passing. Then the other one is obviously this technical pre-sales, which is very much valued by the partners and that IBM would not want to invest in the resources to do that, I guess, is a better way to put it. They don't have the resources and they're not going to build up a staff of people to do that when they have distribution to do it for them. It's a little bit of a mix between offsetting costs, but also adding incremental value.

[00:24:01] Which specific back-office responsibilities does Arrow take on? Which of those create the biggest value for IBM and its reseller partners?

MS [00:24:17]: I wouldn't say it's value as much as necessity. Arrow is responsible for ensuring orders to get placed on time. They're responsible for ensuring that their business partners get billed and pay them. They're responsible for helping the business partners find financing for those end-user customers to make the purchase. That's the back office nitty-gritty stuff, contract renewals. It's the software licence expiration or hardware maintenance contract expiration. This is the back-office stuff that is not easy. It's some complex processes that there are people at Arrow who are experts and do that all day, every day on behalf of IBM. Would IBM put high value on that? No. Is it a necessity that IBM can't afford to do themselves just because of cost structure? Yes. That's the nitty-gritty stuff that nobody likes to give the distributors credit for, but when it comes right down to it, there is economic value in that for IBM.

[00:25:40] How are vendor-funded growth programmes generally structured, and what determines whether they create durable growth after the initial investment ends?

MS [00:25:57]: I'm going to be vague on this because these are confidential agreements. I'm very familiar with what IBM did. Here's the gist of it. What IBM wants is for Arrow and the other distributors to grow faster than the market to drive exponential growth. If IBM expected Arrow to grow at 5%, they create a special programme where we set a target of more, let's say, of 10%. They're not the numbers, but that's just as an example of what does the vendor want from it? What IBM wants from it is hyper growth in the areas of the business that are strategic. Read that hyper growth in software. To do that, some people will say it's a give to get, it's a growth initiative, but IBM will invest in a number of ways, headcount, so resources that IBM covers the cost, or I should really say partial costs, IBM doesn't cover the whole cost, but partial cost of the resources who are dedicated to the programme. Dedicated to IBM, dedicated to whatever, to software, if it's a software program. IBM, it's the resources, it's marketing dollars and I'll say, incentive dollars, so profit opportunity. IBM invests there. In return, Arrow commits to a growth target.

[00:28:08] How do Arrow's economics differ between distributing IBM hardware and managing the software, the subscriptions and the cloud-related offerings?

MS [00:28:18]: It's really evolving. It's really evolving. It's abundantly clear that IBM… Again, I'm only going to speak about IBM, but that their focus is on the distributors investing in more software-oriented resources dedicated to IBM software and their incentives are shifting from being rewarded for hardware growth to more incentive on software growth. Not that there's not incentive on hardware growth, but the dollars that are coming into the programme or into these specific growth programmes are going to be around software and cloud. It's really the focus is on subscription software and SaaS.

[00:29:27] What determines whether a vendor expands its relationship with Arrow, adds another distributor or moves its business elsewhere?

MS [00:29:44]: For a vendor to add another distributor, this is, again, my experience is a huge thing. It's a disruptive thing to add a new distributor. I always say start-up is hell. It takes a couple of years to get a distributor if things are firing on all cylinders to get a distributor to be successful with that vendor to establish a presence in the reseller market to recruit resellers to get them enabled, get them selling. It's a major decision to add a distributor. The reason a vendor would do it is, one, if there's some speciality distributor like, for instance, and IBM to not do this, but they're like a security… A distributor who really focuses on cybersecurity or some technology or a distributor who focuses on a market like federal government. It would be a market need that would have a vendor recruit a new distributor vs investing in one that they've already gotten up and running.

[00:31:06] Given that Arrow recently ended a vendor relationship that represented approximately USD 700m of annual revenue, how difficult is it for a distributor to replace the revenue and the gross profit associated with a relationship of that size?

MS [00:31:21]: Very difficult. It's very difficult. Because it takes a long time to grow it and it will take a long time to to recoup the margins associated with that business, the revenue and the margins, but that's a big one. It's quite difficult. Now there are new entrants in the market. There are new software companies who are looking for distribution. There is opportunity there. There is opportunity. I know what we're talking about here, and there was a heritage, a long, long heritage there that it will take strategic investment in acquiring new, and it will also take strategic investment in exponential growth of existing to close that gap. There is opportunity. I wouldn't look at that and say, "Oh, boy, there's no opportunity here." There's opportunity.

CD [00:32:25]: Arrow's management said that the loss should have no impact on ECS revenue or profit because partners can purchase alternative solutions through the company. Based on how these relationships work, how realistic do you think that expectation is?

MS [00:32:45]: I think there's an opportunity there, but I don't think that's a, again, this is my opinion. I think that's a heavy lift. If you have a partner who's got a Dell business, and they've been selling Dell for 30 years, getting them to shift to sell instead of selling the old EMC storage, instead of selling Dell storage to sell IBM storage is, it's hard. That's a big one. However, I would expect… I don't know this, but I would expect that there is a tremendous focus on doing just that, on helping partners shift their business to vendors they have. I think, again, this is me speaking. That's going to take time is the best way I can put it. It's going to take time.

CD [00:34:01]: What would be a realistic period for Arrow to rebuild the lost revenue and profit?

MS [00:34:07]: I don't know. I don't think I can answer that one.

CD [00:34:19]: Do you think the gross profit would be even more difficult to replace than the revenue because Arrow might need to discount or heavily invest to move partners towards some of these alternative products?

MS [00:34:31]: No, I don't. I don't think that's going to be as much of an issue because I think where they… Yes, they'll have some customers who may sell IBM storage instead of Dell storage. I think where they're really focus is driving new business around software and software solutions and storage… Software-driven storage solutions, etc, and the margins there are pretty healthy.

[00:35:01] Arrow reported USD 5.9bn of ECS billings, but only USD 2.6bn of net sales in Q2 2026. Why is so much of the business recognised on that net basis? Which measure best reflects its underlying growth and economics?

MS [00:35:29]: When I read your question on that, I wasn't clear on what that backlog was. All right. Now the way you just worded that, I suspect it's because of the recurring revenue. Revenue in quarter. It's booked recurring revenue in terms of maintenance or in terms of software subscriptions, et cetera. It's booked. It's got the business, but like customers will sign a two-year contract or a one-year contract. The revenue is booked in Q1, but is actually recognised in the out quarters. I don't know for sure the answer to that because I've gone from Arrow in terms of what's in the backlog, but that would make sense to me.

[00:36:23] Arrow's Q1 2026 ECS billings increased by 39%, benefiting from additional shipping days and stronger hardware demand before growth moderated to 14% in Q2 2026. What underlying growth rate best reflects the health of the business?

MS [00:36:55]: To be honest, I think both of those growth rates are pretty high, YoY, very high, higher than I've seen. I'd be interesting to see if it was driven more in Europe than in the US. I would say, honestly, that 14% is I think, again, this is… I have IBM experience. That feels high to me. I don't know the answer in terms of what growth rate is best reflects the health of the business. In my experience, if I had growth of 15%, I'd be happy.

CD [00:37:40]: Do you think 14% is potentially too high?

MS [00:37:48]: Potentially.

CD [00:37:54]: Arrow's Q2 2026 ECS billings grew by 22% in EMEA but only at a mid-single-digit rate in the Americas. Does this regional split help explain the 14% consolidated growth?

MS [00:38:08]: Yes, it does.

CD [00:38:09]: What is driving Europe's stronger performance?

MS [00:38:25]: I don't know. I don't know because my business at Arrow at the end was all North America. Where my experience when I was at IBM managing both geos, what was different between, obviously, between Europe and North America. One is you'd have strong countries and weak countries, but you could find a balance. You had a little bit of help there. Also Europe had a head start on North America with the channel in, I'll say, the services space like with MSPs and service providers and with the mid-market. If they're seeing growth, in that MSP space, in the build space, right, where partners are actually building solutions, embedding IBM technology. Europe was always ahead of North America on that. That's not new. When I was at Arrow, the last few years, we did see stronger growth on a smaller number in Europe vs North America.

CD [00:39:57]: Could the Americas realistically close the gap?

MS [00:40:02]: Yes. I am actually really bullish on Arrow and on the investments they're making and the clarity of focus that the senior leadership team has brought down to the troops. Do I think they can close that gap? They can, but I don't think it will be in the same way that Europe did it. Because that ship has sailed. That ship has sailed. It's going to be a new opportunity.

CD [00:40:36]: What do you think the new opportunities would be?

MS [00:40:39]: AI and automation. Arrow is making some pretty significant strides and investments in their Arrow Solutions Lab there with engineering skills. I forget if that's what they're calling now the centre of excellence, but that goes across all suppliers. I do think that the moves they're making are the right ones, and they need to move faster.

[00:41:13] Arrow's ECS backlog increased by more than 75% YoY in Q2 2026. How much confidence do you feel investors should have in the conversion of the backlog?

MS [00:41:30]: No, again, when I read the question, I was a little unclear on what's in that backlog. If it's subscription and SaaS contracts not yet but, high level of confidence. I know in Q2, there was some hardware unshipped unfulfilled backlog because of supply constraints, I would say high level of confidence that will be pent-up demand and customers will be looking for that technology. I would not feel overly concerned that they would not convert that backlog, but I'd need a better understanding of what's in it. If a customer has placed an order with a partner who has placed that order with Arrow, it would be very unusual in my IBM experience for that order to go away.

[00:42:40] Which parts of Arrow's ECS portfolio do you think need to perform particularly well for low-double-digit billings growth to either remain sustainable or increase over the next 2-3 years?

MS [00:42:57]: From a vendor product standpoint, I think as I've said many times here, it's the recurring software revenue that has to… Listen, we love one-time-charge software, too, but that's not how customers are buying now. To get ahead of the customers' buying patterns, that's where they need to… That's the number one priority in terms of the products. Servers and storage are the cash cow. They're cyclical based on product life cycle and product development. Customers continue to have the need for efficient infrastructure. The other areas of the portfolio, though, that are not… I'll say, not vendor product, but things like their services coming out of the Arrow Solutions Lab and some of their other Arrow Capital and other value that they bring to their partners to make their businesses more successful, also contribute to that profit picture.

CD [00:44:25]: You mentioned that servers and storage are the cash cows for ECS. What makes them cash cows? Is it the recurring replacement cycle, the amount of associated software and services or the economics of the hardware itself?

MS [00:44:57]: It's largely the hardware cycle. The need for storage devices and software-driven storage solutions that's being driven by AI and this need to harness the data.

[00:45:22] Given that recurring software is the priority, what does ArrowSphere allow resellers to do that would be difficult through traditional distribution processes or competing platforms?

MS [00:45:40]: Yes. What ArrowSphere does is mask the complexity of managing a portfolio of subscriptions for the business partners. It allows them to easily do billings and renewals, etc, etc. ArrowSphere is a fabulous tool for the resellers who are selling to service providers to manage that and service providers, but to manage that billing and especially the renewals, that's a huge value to say, "Okay, this licence is expiring, go on here, click, click, click and renew," vs a very manual back-end process.

CD [00:46:35]: Once a reseller uses ArrowSphere to manage subscription billing and renewals across the customer base, how difficult is it to move that activity to another distributor or platform?

MS [00:46:44]: Very difficult. I believe Arrow is leading the others in this area. I know Ingram has a good platform and work closely with IBM, too. Based on the experts that I worked with at IBM, they were. I think you would see a strong vote for the Arrow platform.

CD [00:47:11]: Does Arrow primarily monetise ArrowSphere through direct platform fees or is it higher transaction volumes, renewal rates?

MS [00:47:20]: I don't know the answer to that.

[00:47:23] Are there any metrics that would show that ArrowSphere is becoming more valuable? Would it be through platform adoption or renewals?

MS [00:47:33]: Exactly what it would be. Yes, it would be platform adoption, how many transactions? How many partners and how many transactions would be the metrics I'd start with.

[00:47:48] What is driving consolidation among resellers, system integrators and managed service providers?

MS [00:48:05]: Again, let's put it in my IBM experience. The reseller channel for IBM for years was a lot of firms led by or owned by an individual who started… Largely, they started in an IBM, maybe they were IBM salespeople who left and went and established a business or had some relationship and experience selling IBM, who started these firms, and that was 30-35 years ago. Those firms grew and they expanded beyond IBM. Those owners are all ageing out. Maybe five years ago, when we started to see this consolidation accelerate, it was that model where one firm had the approach to buy out… To drive their growth by buying out many of these traditional resellers. That's number one. The owners are ageing out. They want to sell. We have some firms that are building their business by consolidating these little firms together. That's probably the biggest driver of this consolidation in my experience.

CD [00:49:44]: As these resellers become larger, how does this change their bargaining power with Arrow and other distributors?

MS [00:49:52]: A lot. This creates a pain point for the distributors, obviously, because they have more buying power. They have the economics that they're very, very important to that distributor. It becomes a very quick negotiation each contract at the time of each contract on margin. They become very powerful. It's a pain point from that standpoint, but it's also a huge positive in terms of revenue.

CD [00:50:41]: Where does this pain point show up most clearly? Is it in pricing and margins?

MS [00:50:49]: There's two areas where there's a pain point, Colin. Yes. Number one is pricing and margin. Now these big firms have this buying power and the threat to leave Arrow or one of the others and go to… I'm going to take my business to Tech Data. This is, again, IBM discussion. I'm going to take… Arrow or whomever would be highly pressured to provide, to give on the margin each contract year. Number one is economic pressure on the distributor from a margin standpoint. The upside of that, the flip side is from an IBM standpoint, it's a model where the resellers have a contract with a distributor. It's not easy just to take your business from A to B. It's on a specific time in the calendar where you can do that based on your contract. It's a disruptor to your business to do that, but to move. The pain point is one, the threat of the margin give because if not that, they'll lose the business. The upside is if you have a firm, let's use a real-life example, like Mainline, who was acquired by Pellera. Mainline, they had this consolidation, put the business out to bid. They moved their business to Ingram from Arrow. Arrow lost the Mainline business, which was a huge many, many years, very, very, very good relationship, totally on margin. Total margin discussion. They moved their business to Ingram. That's the other pain point is losing… In this consolidation, you could either be a winner or a loser as a distributor.

[00:53:11] When a large reseller maintains relationships with several major distributors, what determines how much business it directs towards Arrow?

MS [00:53:22]: From an IBM standpoint, you can't move your business around. In other words, you sign a contract with Arrow, you buy through Arrow. If you want to move your business to Ingram, and I'll come back on this in a second. If you want to move your business to Ingram at contract renewal time or to Tech Data, they always put their business out to bid. They get three prices from the distributors, and they'll make a decision to stay or go based on the contracted margin agreements. Did that answer that question? What determines it is you make your decision once a year with IBM, who you're going to buy from and that's who you buy from. Having said that, it's not like you can't buy from the other ones, but the economics don't work for you. It's not a restraint of trade situation where IBM says, you can't buy. It's just the economics won't work.

CD [00:54:42]: Do you have a sense of what typically causes a multi-year beyond distribution agreement to underperform and how Arrow is able to protect itself when volumes or costs or partner priorities change?

MS [00:54:54]: I don't. I don't. The only thing I would say on my knowledge of that one is if it would underperform would be if something changes in the market related to that supplier. That's probably as far as I'd take it. Either customer demand decreased or the supplier changed the strategy somehow that… I wouldn't put that on something on the distributor. I would say that's more a market dynamic.

[00:55:35] What could Arrow offer that would persuade a large reseller to concentrate more of its business with the company rather than splitting it among several distributors? Do value-added services, such as the Solutions Lab or Arrow Capital, create significant commercial value for reseller partners?

MS [00:55:56]: Yes. (1) It's an economic agreement based on the total business. Arrow has partners who are of significant size who go across all suppliers where they have key account executives assigned to them. Those key account executives are the ones responsible for ensuring that they get the increased and increased and increased share of that reseller's business across all suppliers. Number one is contractual terms around selling agreements based on volume achievement, increased profitability. One is the economics, and that's the most important. Number two, from the partner's point of view. (2) I think Arrow is recognised in the industry as number one, very strong technical support with the Arrow Solutions Lab and leading edge ensuring that they've got the engineers on staff who have the skills they need to be able to talk to customers on behalf of partners who may not be there yet.

CD [00:57:19]: Do you have a sense of ECS's operating margin?

MS [00:57:24]: I don't. That's not something I can comment on yet.

[00:57:26] What do you think is the greatest risk to ECS sustaining low-double-digit billings growth and improving profitability moving forwards?

MS [00:57:39]: In addition to all the things we just talked about, I'd say execution. The leadership is very, very focused on clear strategy. Everybody understand it. I think that one of the biggest risks is can they move fast enough.

CD [00:58:05]: Okay. I think it's a good place to close. Let me end by saying thank you so much, for your input.

MS [00:58:10]: You're welcome.

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