8 Reasons Tech Will Survive the Economic Recession
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.
Nov 13, 2008
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% next year instead of the 5.9% predicted prior to the financial crisis. In the United States, IT spending will eke out 0.9% growth.
IDC predicts the slowest IT markets will be the United States, Japan and Western Europe, which all will experience around 1% 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%, 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 US$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 Â and Gartner reported that PC shipments grew 15% 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% to 45% — 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% 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."
5. Telecom carriers are cutting back, but not dramatically.
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% decline in October.
Forrester says computer and communications equipment vendors will be
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% next year instead of the 5.9% predicted prior to the financial crisis. In the United States, IT spending will eke out 0.9% growth.
IDC predicts the slowest IT markets will be the United States, Japan and Western Europe, which all will experience around 1% 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%, 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 US$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 Â and Gartner reported that PC shipments grew 15% 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% to 45% — 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% 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."
5. Telecom carriers are cutting back, but not dramatically.
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% decline in October.
Forrester says computer and communications equipment vendors will be