Efficiency Gains, Cloud Hold Down IT Spending Growth
There is pent up demand for IT infrastructure upgrades as systems are aging in the datacenters of the world, and that is pushing up demand for hardware and software. However, all of the virtualization tools that are available for servers, storage, and increasingly networking, are at the same time driving up utilization and holding down revenue growth among IT vendors. Throw the cloud into the mix, where companies buy capacity for a short term only when they need it, and there is even more downward pressure on the IT market.
That's the picture that Steve Minton, vice president in the global technology and industry research organization at IDC, paints about the IT market for 2014. The latest prognostication put together by Minton's team of economists and analysts calls for IT spending across all categories – hardware, software, and services – to only increase by 4.6 percent this year to $2.13 trillion. That is down from a forecast that Minton put together a few months back that had global IT spending rising by 5 percent. That slight change is around $8 billion evaporating from the IT budgets on earth.
The good news, of course, is that there is growth across all categories in the IT sector, excepting peripherals, which includes printers, copiers, and monitors that are generally attached to PCs or networks. IDC reckons that server spending will rise by 3 percent in 2014 to around $55 billion after a 4 percent decline last year. (IDC is not expected to release its figures for the fourth quarter of 2013 until the end of February, so this is our first hint at how poorly server makers fared in the final three months of last year.) Spending on storage (disk, flash, and tape arrays) will grow in synch with servers, hitting around $38 billion in total. This is better than the half-point decline the storage market had last year. Spending on network equipment, which includes switches and routers for corporate datacenters as well as the gear installed by service providers to build out their networks, will rise at a slightly faster pace, kissing 4 percent growth if all goes well, and crest above $161 billion. (The datacenter portion of this number, for corporations and governments, is relatively small part of that networking pie, at around $54 billion.)
For those of you who remember what real IT growth felt like and when predictions were skeptical at the beginning of the year and rose as the year went on – as opposed to the way it has worked for the past decade, where projections are constantly revised downwards – you might be asking yourself: Can we ever return to that kind of boom-boom growth in the IT sector again? Of have the CEOs and CFOs of the world just gotten used to asking CIOs to do more for less?
"I think it is partly that," Minton explained to EnterpriseTech by email. "Ever since the financial crisis, budgets have been tighter – they froze, and then never really returned to pre-2008 levels. The emergence of cloud, for example, has allowed CIOs to put more pressure on IT suppliers and drive down prices. But related to that, cannibalization is a big part of it, too. Cloud spending cannibalizes from traditional IT services and software, often at lower price points; tablets cannibalize from PCs, usually at lower price points. Enterprises use virtualization so they have to buy fewer servers, and less often. They use storage management software to use their storage hardware more efficiently, and buy less storage (and they outsource some of their server and storage needs to the cloud, too). And partly related to all of that, as these markets get squeezed and become even more competitive, we get even more price erosion – average price per server, per TB storage, and so on – in a vicious cycle."
Minton added that the market penetration for IT products in emerging markets like China and India is much higher now than it was few years ago. And thus, the growth rates that were so lucrative for the big IT companies in those emerging markets were inevitably cooling down even before the economic downturn last year in those regions.
"All of this adds up to an industry growing at around 5 percent a year, when the economy is stable, rather than 8 percent."
That 3 percent difference in an IT market that is over $2 trillion is around $60 billion. About the size of Dell, just to give you some perspective.
The other thing that is cooling off a bit is the explosive growth of smartphones and tablets, which had been pulling up the overall IT market for the past several years. The good news is that spending on enterprise software – everything from operating systems to middleware to management tools to applications – is set to grow at between 6 and 7 percent this year to $416 billion. IT services across all kinds – including cloud infrastructure and platform computing as well as the more traditional outsourcing and system integration – is expected to increase by around 4 percent to $671 billion.
In fact, says Minton, if you take mobile phones out of the picture, then the remaining IT market is currently set to grow at around 3.4 percent this year compared to 2.9 percent in 2013. While this doesn't mean the IT market is an easy place to compete, it is still a vibrant market with trillions of dollars up for grabs and reasonable profits to be had.