We have a unbelievably strong distribution channel… So to the extent that we can go out, get products that we can distribute through our sales channel, to the extent that we can get products that we can cross-sell and upsell to our customers, we think we can create that mix and shift to software, to services.
Mike Hayford, NCR CEO
This quote came from NCR’s CEO Mike Hayford on their Q3 2018 earnings call. But it’s so contradictory from what we see NCR actually doing in their channel, at least with respect to Aloha, we wonder if anyone bothered to give him a reality check.
For starters NCR has been embroiled in a class action suit with their channel for the past year. NCR allegedly changed their Hosted Solutions agreements with their resellers unilaterally and retroactively. What does that mean?
NCR has a class of products called Hosted Solutions (they’re not particularly relevant or reasonably priced, but that’s another discussion). These are “cloud” products sold on a monthly, recurring SaaS license. NCR builds the products and until recently their resellers would sell Hosted Solutions to their customers. NCR has changed this up by hiring their own sales people to accelerate the uptake of Hosted Solutions and, in theory, work with resellers to introduce Hosted Solutions to the reseller’s customers faster. Many resellers still prefer to sell the products themselves, however, as they don’t feel the sales reps do a sufficient job.
Regardless, resellers previously received a buy rate and a suggested MSRP for Hosted Solutions. NCR would bill the customer directly and send the reseller the difference. Resellers were given the flexibility to choose the price of the Hosted Solutions offered to their customer: some marked the price above MSRP while others discounted.
On January 1, 2018 all that changed. At that time NCR told their resellers they would be receiving 20% of the final price tendered for the Hosted Solutions. For many resellers this represented a large drop in their revenues. “On aggregate Aloha dealers lost 30% of their revenue for Hosted Solutions. So 21 resellers filed a suit,” a source shared with us.
NCR would tell you that they were doing all the work to build, sell, and support the Hosted Solutions. NCR’s resellers would tell that you they would receive 99% of the support inquiries and were still selling most Hosted Solutions themselves.
“We lost total trust in NCR,” explained a reseller. “What’s to keep NCR from moving the goalposts again? Why would I be excited to sell Hosted Solutions when the new arrangement doesn’t even cover my cost to sell and support them?” argued another.
Next, NCR has been using a clause in their reseller agreements to prevent their resellers from selling their businesses. For an NCR reseller to transfer 50% ownership or greater to another party, NCR must approve it. Technically Micros, another large industry POS incumbent, had a similar language for their resellers but it was never used. “Micros never used their position to deny a sale as far as I’m aware. When most dealers wanted to sell Micros would just acquire them instead, so it was more like a ROFR (right of first refusal) than anything I hear NCR doing.” That from a founder at one of Micros’ earliest and most prominent dealerships.
NCR has taken a different tack.
“When we were interested in buying Aloha resellers prior to the JetPay deal NCR couldn’t get enough of it. It’s like they wanted to get rid of their dealers, or at least have larger companies acquire them to run them better,” shared a contact.
But ever since NCR knew the JetPay deal was eminent, NCR has not been so warm to suitors of their resellers. “We tried buying some Aloha resellers recently but NCR balked entirely,” shared another payments acquirer. “There’s too much risk with NCR hanging around that the Aloha channel is not worth the trouble.”
Dealers are concerned that NCR has made their businesses worth significantly less. “It’s not hard to see what they doing: they’re holding onto us to sell JetPay to our merchants and they don’t want any other payment company buying our customer base. I’ve built my business over several decades and now I can’t even get out.” A sad commentary from one of the aggrieved dealers but it’s probably accurate considering i3 Verticals, a payments processing company, did acquire Aloha resellers in the past, building the precedent of payments acquisitions.
Rubbing more salt in the wound NCR has significantly curtailed reseller participation and events. “We haven’t held a Reseller Advisory Board meeting in about a year, but it’s not like NCR ever really cared for our advice anyway,” jests a reseller.
On top of this, the channel’s main events have been cancelled. Focus, a dealer conference NCR hosted, was used to align strategy, gather feedback, and share stories from the market. “Focus was about finding agreement and learning how we could all do better. We’d often talk about the competitive landscape and give NCR insights on changes they could make to position their products to be more competitive.” As of this year that event is no more; in its place is a one-way webinar where NCR tells the channel what’s happening but doesn’t offer a forum for collaborative discussion.
NCR has also canned President’s Club, an awards program for their most performant resellers. “Resellers are still recognized but it’s lost the allure it once had,” proclaimed one of this year’s President’s Club winners.
NCR has also perpetuated – and exacerbated, amazingly – their earlier blunders.
While NCR’s resellers must compete in the real world where cloud POS DOES exist and IS gaining material market share, NCR has not even bothered to produce an upgraded cloud replacement for Aloha POS. Their channel has zero confidence in a path forward. “Micros is owned by one of the slowest software companies on the planet [Oracle] and yet they have Simphony, a cloud replacement for RES POS. Meanwhile NCR has prioritized strong-arming payments [via JetPay] over fixing existing problems and giving us a market-relevant POS product,” decried an Aloha reseller.
Lastly, NCR’s resellers are really feeling the underhanded economics they’re being dealt. NCR charges the industry’s highest toll for integrations. If a NCR reseller brings a third party solution to their merchant they make relative crumbs for the effort. “NCR makes about $25 per month if we bring in a third party tool. Of that we’re allowed to keep only $5. We have to do all the work of selling and supporting the customer and the third party goes through NCR’s excruciating approval process,” explained a reseller.
Further to this point are the Aloha POS reseller economics. While no formal numbers have been announced, NCR has announced that they will be transitioning Aloha to be sold via a SaaS model. Aloha resellers are significantly concerned that NCR’s new agreement will decrease their revenue share. “We’re worried NCR will be consistent and screw us again. None of us made money selling NCR Silver so we didn’t sell much of it. Now that NCR is instituting their new SaaS pricing for Aloha we’re 99% sure we won’t make money on that product either.”
All of this comes to a culmination in NCR’s recent acquisition of BEC, one of the few major US markets where NCR did not yet have a local office. It’s also no coincidence that BEC was the largest plaintiff in the Hosted Solutions class action filed against NCR. With this acquisition NCR has nearly every major US market covered with a direct sales force.
When looking at this body of evidence we believe NCR is eliminating their channel in an evil genius sort of way.
- NCR claws back recurring revenues of Hosted Solutions which depresses the value of their resellers. SaaS revenues get a ~8x multiple while perpetual revenues get a 1x multiple. Resellers litigate but NCR can tie it up in court for years
- NCR uses reseller contracts to deny sale of Aloha dealerships. This despite an established precedent of payments companies buying Aloha dealerships vis-a-vis the i3 Verticals acquisitions in 2018. NCR’s actions thusly depress market liquidity of an Aloha reseller and drive down the value of a dealership. Sure, resellers can litigate but NCR can once again tie it up in court
- NCR changes Aloha reseller agreement to mandate SaaS but pays resellers a paltry amount, once again depriving resellers of more lucrative SaaS revenue per the first point. (Note: this has not yet come to pass, but it is reasonable speculation given past behavior).
So an Aloha reseller is left with a business that has falling revenues and no chance of being courted by anyone else. Guess who swoops in to “save” the dealership by acquiring it at a massive discount in sales process where only one possible acquirer is allowed exist?
Stick a fork in the Aloha channel – they’re done. We fully expect the Aloha channel to be selling other POS systems as their main offering by the end of 2019. And since NCR’s channel represents 25% of Aloha’s installations, it’s not a trivial doing.
What a time to be alive.
