If the IT economy is going to turn around, it will be the second part of next year led by a PC and low-end server upgrade cycle, so say industry prognosticators at several analyst groups.
Earlier this month, New York-based Fitch Ratings gave its assessment of major influences on the economy going forward and the next 6 months look pretty shaky.
“Any growth improvement will be gradual as end-user companies continue to face economic and competitive pressures, particularly in the telecommunications equipment segment. As a result, pricing pressure will remain severe as companies focus on maximizing network and system productivity in the lowest-cost manner,” said Fitch senior director Brendan Buckley.
Buckley says low levels of IT investment over the past couple years could lead to pent-up demand, but meaningful growth is unlikely. Fitch estimates the IT sector will grow by mid single digit rates in 2003 with the hardware segment, particularly personal computers, potentially experiencing the greatest turnaround.
Hardware watchers at Deutsche Bank Securities say the salesmen they’ve interviewed describe themselves as being “bruised and beaten up” after a tough 2002. Nonetheless, they feel they have seen the worst and are hopeful that demand patterns will gradually improve in 2003. Of the salesmen polled, some 80 percent believe a recovery is in the works for next year. One problem they point to is lack of new applications and the fact that CIOs are still looking for instant gratification and instantaneous ROI. Accordingly, they believe major new projects may take longer to be initiated.
“With that said, salesmen believe utilization rates are back to historical highs and they believe customers will be forced or compelled to look for upgrades and more computing power to meet these new demands,” said Deutsche Bank analyst George Elling. “While this is certainly a positive for the industry, the current pricing environment has driven price performance up dramatically which could lead to significant box replacements but at lower price levels.”
Out of the more than $1.26 trillion that the Aberdeen Group expects companies worldwide to spend on information technology next year, purchases will consist mostly of hardware, software, and services, with the services segment representing approximately 50 of the total. Even online marketing is expected to come back around in 2003.
“The catalysts for technology spending growth have undergone a fundamental change,” said Hugh Bishop, Aberdeen senior vice president and author of the report, Worldwide IT Spending 2003-2006: Measuring the Incremental Recovery. “Top-line revenues, capital spending levels, and national economic health now dictate IT purchases. As a result, industry growth will be more incremental and tied to basic business principles.”
Aberdeen’s numbers also indicate worldwide hardware expenditures will increase a total of only 8.3 percent from 2002 to 2006, while software and services will increase 27.2 percent and 17.7 percent, respectively, over the same time period.
North America leads all other regions in projected 2003 spending, followed by Europe and Asia Pacific Rim. IT spending growth from 2003 to 2006 in these three leading regions will be led by Asia Pacific Rim at a growth rate of 6.5 percent, followed by North America at 4.9 percent and Europe at 2.6 percent.
Aberdeen expects that China will vault from the sixth largest market for IT products and services (in 2002) to the third largest market by 2006, surpassing the Germany, U.K., France, and Italy.
Big Players Remain Big
So why will hardware be the knight in shining armor for next year’s economy? The key, say analysts, will be price wars augmented by new technology.
Traditionally, Dell Computer
had spurred the most response in the hardware market by aggressively cutting prices, but Fitch researchers say certain diverse product categories from IBM
as well as their stronger credit profile give the top two server players the flexibility to keep Dell at bay as they fight for market share.
still remains the dark horse of the bunch with analysts predicting entry-level systems like their LX50 boxes becoming more of an enabler with services becoming the driver for many transactions.
Analysts also say the blade server revolution is expected to continue as well as a need to upgrade to faster servers fueled by new Intel
Xeon and Itanium server chips as well as the long-awaited AMD
Hammer series semiconductors – Athlon64s (Clawhamer) and Opterons (Sledgehammer).
“From an industry and end-market perspective, IT growth in 2003 will be dependent on manufacturing, banking, and government spending. The consumer portion of IT spending represents slightly less than 7 of the total and this has declined over the years and should grow at a slower pace than the overall market in the next few years,” said Fitch Ratings Director Nick Nilarp.
The High-End Computer Marketplace
Many companies are focused on hardware consolidation; however, Deutsche Bank says the high-end market is showing extremely mixed results. In the case of IBM’s zSeries, Linux has stimulated some demand and the traditional mainframe users remain a viable outlet for the product family.
“However, even after a turbo refresh in the fall, the current Z family needs a next generation product which salesmen believe will take place late in the first quarter or in the second quarter of 2003,” said Elling. “Although MIPS growth is likely to be somewhat anemic in Q402 we believe IBM has held its own quite well.”
With regard to other high-end mainframe equivalent offerings including F15K from Sun and SuperDome from Hewlett-Packard, Deutsche Bank says salesmen view demand as somewhat mixed, reflecting a high-end IT spending problem. Demand for the high-end tends to be from existing users that have budgeted for large systems as critical projects. With customers looking to save funds, the consolidation trend has largely slowed. Sun salesmen categorized F15K business as being “okay” but certainly not stellar and Hewlett salesmen point to good growth in SuperDome, although from a somewhat limited base.
Mid-range servers are still the domain of Unix as neither NT nor Linux scale above a 4- or 8-way system effectively. However, analysts are watching this market closely and believe Intel-based servers, Linux, and to some extent NT will begin to gain momentum in this area over the next year. Traditional workhorse machine such as the 6800 from Sun, the Regatta (p690) from IBM, and the N-series from HP have all had their days in the sun. Momentum is currently not what was seen in the late 1990s and Dell has its sights on this marketplace.
“As yet, salesmen at other companies do not view Dell as a key competitor. Lower end products like the V880 and the soon to be introduced 1280 from Sun as well as the p650 and p670 (Baby Regatta) from IBM are also encroaching on this market,” said Elling.
Deutsche Bank says significant demand continues to be seen for low-end servers and it is here that most analysts point to Linux, NT, and Intel-based server as dominant factors. Dell’s aggressive marketing thrust and the intrigue of Linux has fueled overall demand. Although companies like Sun with its LX50 and others are still attempting to hold on to their market share, Deutsche Bank says salesmen surveyed about this low-end servers view this market as a particularly difficult one in which to stave off encroachment.
The open source community continues to gain momentum and major corporations are increasingly looking to Linux as a key operating system for the future.
“Although our sales contacts have mixed views, it seems as if the Linux momentum will be difficult to stop,” said Elling.
Criticisms of Linux revolve around scalability, but this problem should be solved in the near future. In addition, as an open source community, some believe the necessary protocols and systems will be difficult to standardize. Some salesmen, particularly at Sun, point to the current lack of true applications to run on Linux.
The company most likely to be negatively impacted will be Sun (although Sun has endorsed Linux and is probably debating internally how aggressive to become in this arena). For now, Sun appears to keep Linux on the periphery and maintain its power sales on Solaris.
Finally, while the majority of analysts say the big boom of the late 90s will not show its head for some time, 2003 should be noted as a recovery year.
Long-term IT spending is gated by gross domestic product (GDP) growth and corporate revenue growth. IT spending now accounts for 3.88 percent of the world GDP and 4.42 percent of the U.S. GDP.