8 Reasons Tech Will Survive the Economic Recession
Written on 10:05 AM by Right Click IT - Technology Services
– Carolyn Duffy Marsan, Network World November 13, 2008
The global economy is in as bad shape as we've ever seen. In the last two months, U.S. consumers have stopped spending money on discretionary items, including electronic gear, prompting this week's bankruptcy filing by Circuit City. Retailers are worried that Black Friday will indeed be black, as holiday shoppers cut back on spending and choose lower-priced cell phones and notebook computers.
Yet despite all of the bailouts and layoffs, most IT industry experts are predicting that sales of computer hardware, software and services will be growing at a healthy clip again within 18 months.
Here's a synopsis of what experts are saying about the short- and long-term prognosis for the tech industry:
1. The global IT market is still growing, although barely.
IDC this week recast its projections for global IT spending in 2009, forecasting that the market will grow 2.6 percent next year instead of the 5.9 percent predicted prior to the financial crisis. In the United States, IT spending will eke out 0.9 percent growth.
IDC predicts the slowest IT markets will be the United States, Japan and Western Europe, which all will experience around 1 percent growth. The healthiest economies will be in Central and Eastern Europe, the Middle East, Africa and Latin America.
Similarly, Gartner's worst-case scenario for 2009 is that IT spending will increase 2.3 percent, according to a report released in mid-October. Gartner said the U.S. tech industry will be flat. Hardest hit will be Europe, where IT expenditures are expected to shrink in 2009.
Overall, Gartner said global IT spending will reach $3.8 trillion in 2008, up from $3.15 trillion in 2007.
"We expect a gradual recovery throughout 2010, and by 2011 we should be back into a more normal kind of environment," said IDC Analyst Stephen Minton. If the recession turns out to be deeper or last longer than four quarters as most economics expect, "it could turn into a contraction in IT spending," Minton added. "In that case, the IT market would still be weak in 2010 but we'd see a gradual recovery in 2011, and we'd be back to normal by 2012."
2. It's not as bad as 2001.
Even the grimmest predictions for global IT spending during the next two years aren't as severe as the declines the tech industry experienced between 2001 and 2003.
"Global economic problems are impacting IT budgets, however the IT industry will not see the dramatic reductions that were seen during the dot.com bust. . . . At that time, budgets were slashed from mid-double-digit growth to low-single-digit growth," Gartner said in a statement.
Gartner said the reason IT won't suffer as badly in 2009 as it did during the 2001 recession is that "operations now view IT as a way to transform their businesses and adopt operating models that are leaner. . . . IT is embedded in running all aspects of the business."
IDC's Minton said that in 2001 many companies had unused data center capacity, excess network bandwidth and software applications that weren't integrated in a way that could drive productivity.
"This time around, none of that is true," Minton said. "Today, there isn't a glut of bandwidth. There is high utilization of software applications, which are purchased in a more modular way and integrated much faster into business operations. Unlike in 2001, companies aren't waking up to find that they should be cutting back on IT spending. They're only cutting back on new initiatives because of economic conditions."
"We're anxious about whether the economy will resemble what the most pessimistic economists are saying or the more mainstream economists," Minton said. "But we don't see any reason that it will turn into a disaster like 2001. It shouldn’t get anywhere near that bad."
3. Consumers won't give up their cell phones.
They may lose their jobs and even their homes, but consumers seem unwilling to disconnect their cell phones.
"I would sleep in my car before I would give up my mobile phone," says Yankee Group Analyst Carl Howe. "Consumers buy services like broadband and mobile phones, and even if they lose their jobs they need these services more than ever."
Yankee Group says the demand for network-based services—what it dubs "The Anywhere Economy"—will overcome the short-term obstacles posed by the global financial crisis and will be back on track for significant growth by 2012.
Yankee Group predicts continued strong sales for basic mobile phone services at the low end, as well as high-end services such as Apple iPhones and Blackberry Storms. Where the mobile market will get squeezed is in the middle, where many vendors have similar feature sets. One advantage for mobile carriers: they have two-year contracts locked in.
Telecom services "are not quite on the level of food, shelter and clothing, but increasingly it satisfies a deep personal need," Howe says. "When bad things happen to us, we want to talk about it. And in today's world, that's increasingly done electronically."
4. Notebook computers are still hot.
Worldwide demand for notebooks—particularly the sub-$500 models—has been strong all year. But that may change in the fourth quarter given Intel's latest warnings about flagging demand for its processors.
Both IDC and Gartner reported that PC shipments grew 15 percent in the third quarter of 2008, driven primarily by sales of low-cost notebook computers. Altogether, more than 80 million PCs were shipped during the third quarter of 2008, which was down from estimates earlier in the year but still represents healthy growth.
IDC said notebook sales topped desktop sales—55 percent to 45 percent—for the first time ever during the third quarter of 2008. This is a trend that will help prop up popular notebook vendors such as Hewlett-Packard, Dell and Apple. Apple, for example, saw its Mac shipments rise 32 percent in the third quarter of 2008, powered primarily by its notebooks.
The big unknown is what will happen to notebook sales during the holiday season. Analysts have noted sluggishness in U.S. corporate PC sales this fall as well as home sales, where most demand is for ultra-low-priced notebooks.
"The impact will come this quarter. People will be looking for cheaper products. . . . They will not be spending as much as they did a year ago," IDC's Minton said.
Intel said yesterday that it was seeing significantly weaker demand across its entire product line and dropped its revenue forecast for the fourth quarter by $1 billion.
The brunt of the slowdown in IT spending will hit servers and PCs, predicts Forrester Research analyst Andrew Bartels. Forrester is adjusting its IT spending forecast for 2009 downward, and plans to release new numbers after Thanksgiving, he adds.
"PCs and servers may see declines similar to 2001, but we're not going to be seeing that across the whole tech industry," Bartels says. "Software is a bright spot. Much of software spending comes in the form of maintenance and subscriptions. The licensing part may go down, but that's only a quarter of total software revenues."
The biggest U.S. carriers—including AT&T and Verizon—are in much better shape going into this recession than they were during the dot.com bust. So while consumer spending will fall in 2009, it is expected to have less of an impact on the telecom sector than it did after 2001.
Yankee Group says the financial crisis will not significantly impact network build-outs by carriers because most of the financing for 3G, Fios, WiMAX and other next-generation networks is already in place.
"These are multibillion-dollar build-outs, and most of the financing has been arranged months if not years in advance," Yankee Group's Howe says. "We were projecting that in 2009 carriers would spend over $70 billion on these network build-outs in the U.S. Now we're saying that there will be $2 billion or $3 billion less in spending. . . . We're talking single-digit percentage declines, not wholesale cuts."
This doesn't mean that the network industry will emerge from the chaos unscathed. Carriers will squeeze their equipment providers, and companies like Cisco are already feeling the pinch. When Cisco announced its latest earnings last week, CEO John Chambers reported the company had seen its sales shift from solid-single-digit growth in August to a 9 percent decline in October.
Forrester says computer and communications equipment vendors will bear the brunt of IT cost-cutting from enterprise customers.
6. Corporate data storage needs keep rising during recessions.
Every segment of the IT market is weaker today than it was six months ago. But some segments are less weak than others, and one of the healthiest is storage.
“Storage is relatively stable because of the fact that companies are using a lot more of their storage capacity and they are still dealing with an increasing amount of data that requires storage on a weekly basis. That’s not going to change,” IDC’s Minton said. “It’s not just the hardware, but the storage software that will be relative bright spots in the years ahead.”
One storage industry bellwether is EMC, which continued to demonstrate strong demand for storage hardware and software in its recent quarterly results. EMC’s revenue grew 13 percent in the third quarter of 2008 compared to a year ago. Unlike many other network industry leaders, EMC is projecting continued revenue gains in the fourth quarter of 2008.
Similarly, this week Brocade issued a preliminary release indicating strong sales for the quarter ending in October. CEO Michael Klayko said the company will outperform its sales projections from August 2008.
“Storage needs are on the rise, and storage investments will continue,” Forrester’s Bartels says. “We don’t see cloud storage as having a meaningful impact yet.”
7. New IT markets will continue to emerge, although more slowly.
Emerging economies such as China and Latin America are slowing down, but they are still expected to have IT sales increases in 2009. The Latin American market, in particular, is a solid one for IT companies such as IBM, HP and Microsoft, which have a strong foothold south of the border.
“In the past two to three years, Latin America has had some of the fastest growth rates in IT spending,” IDC’s Minton said. “Brazil is the biggest market, and it has been growing at double digits. But all of the markets in Latin America have been growing by more than 10 percent a year. With some exceptions, the economies there are relatively stable and have had less political turmoil than in the past. . . . This is one of the regions that we think will bounce back pretty quickly.”
Other emerging markets that will continue to post growth in IT spending in 2009 are Central and Eastern Europe, the Middle East and Africa, IDC predicts. While these markets won’t experience double-digit gains next year, they will help offset sharp declines in IT purchasing in the United States, Japan and Western Europe.
Forrester warns that IT vendors shouldn’t count on so-called BRIC countries—Brazil, Russia, India and China— to bail them out of the financial crisis altogether.
“The BRIC markets are performing better than the industrial markets, but they are also slowing down,” Forrester’s Bartels says. “Among those markets, China looks to be the strongest, then Brazil and Mexico. Russia is weakening, and India is weakening. They’re not going to go into a contraction, but the growth rates could slow to the point that they feel like a contraction.”
One issue for IT vendors is the rising strength of the U.S. dollar, which means U.S. tech vendors will bring home fewer dollars from their foreign sales when they convert currencies.
“The dollar has been strengthening against every currency except the Chinese currency,” Bartels says. “Even if a vendor is successful in sales in Brazil or Russia, they will bring back fewer dollars, which was not the case six months ago.”
8. Outsourcing helps companies stretch their IT budgets.
Many companies will freeze new IT initiatives for the next three to six months as they absorb the Wall Street crash. But one segment that’s likely to continue is IT outsourcing because it provides near-term cost reductions.
“While IT outsourcing will benefit from an economic slowdown in 2008 as companies turn to IT outsourcing vendors to help cut costs, trends toward use of lower-cost offshore resources and smaller-scale outsourcing deals will keep growth modest,” says Forrester Research.
Forrester predicts IT outsourcing will grow around 5 percent in 2009 and 2010.
“When you sign an outsourcing agreement, you’re locked into it barring going out of business,” Forrester’s Bartels says. “Outsourcing revenues are not going to be variable.”
On the horizon is cloud computing, which also holds the promise of reducing corporate IT overhead but requires more up-front spending than outsourcing.
“Over the longer term, we’re pretty bullish about cloud computing,” IDC’s Minton said. “But there will be a lot of hurdles for a bigger corporation. It’s difficult for them psychologically to give up control, and there are quite a lot of up-front costs to engage consultants, to roll out applications to a large number of employees, and there’s training involved. But ultimately these projects save money.”
