Reading the IT Leaves for 2006
Published: January 12, 2006
by Timothy Prickett Morgan
The 2005 IT budget cycle has ended, and the 2006 budget cycle has begun. And that means the prognosticators, predictors, soothsayers, and auguries of the IT analyst community, and their counterparts on Wall Street, are all gazing into their crystal balls and trying to figure out what is going to happen in 2006 in terms of IT spending and technology trends. Some of you will follow trends, others will buck them, but none of us will escape their effects.
The primary thing that everyone wants to know first and foremost is what is going on with IT spending in the aggregate. Is it going up or down? This is the basic barometer, for better or worse, for the IT economy. And as I have said in past stories about such IT projections, the relatively modest changes in overall IT spending often mask very large changes underneath those numbers--the shift from mainframes to midrange computers, the advent of X86 servers, the increased volumes of servers but their dramatically lowered prices, and so forth. Still, whether we like it or not, the health and wealth of the IT economy is often judged by that aggregate growth or decline number, and this is the number that sets the tone for the business climate we will all live in during 2006.
The good news is that IT spending looks like it will increase once again in 2006. The bad news is that the growth will be smaller than in 2005, and it may turn out that 2007 sees even lower growth in IT spending than 2006.
Each of the major IT consultancies has its own way of reckoning the elements and size of the IT market, with varying degrees of services and telecom thrown into the hardware and software mix. So you have to take these estimates all with a grain of salt. According to Gartner, worldwide spending on IT by companies and governments will grow by 4.5 percent in 2006 to hit $1.76 trillion. Gartner is throwing a lot more things into the IT market than I would, and I often wonder if they are double- or triple-counting some of that revenue, as we do when calculating the gross domestic product of a country. (What happens when IBM sells a bunch of servers to a system integrator like EDS, which in turn supports telecom applications run by AT&T that sells a hosted service--perhaps e-mail hosting--to companies? How many times do you count the underlying technology sales that went into the ultimate service?) In any event, Gartner predicts that IT spending in the white-hot Asia/Pacific region will grow by 7.5 percent in 2006 to hit a whopping $210 billion.
Gartner has identified six trends that it thinks will be key in 2006 (among others). In early 2006, Gartner intends to flesh out its predictions with 50 reports (which you have to pay for, obviously). Gartner says that because people use their work notebooks and laptops at home and during business hours doing non-business activities (we all do it, come on. . . . ), companies will begin mandating that employees pay for and own the laptop they use. Gartner figures that employees will get a stipend for laptop purchases, much as employees who travel get mileage payments on their own cars. I would go one further and say that a corporate virtualized environment, like VMware's ACE product, fits nicely with such a scheme, since that makes your entire desktop environment portable. You could run your work desktop environment from a VM that you have stored on a CD and never actually load it onto your home PC. This provides a tamper-proof environment that businesses will feel safe deploying, and a non-invasive way to use the home PC to do work. As previously reported in this newsletter, Gartner is also suggesting that by 2010, the number of IT professionals will shrink by 40 percent, with "versatilists" who know different aspects of IT and the business surviving and system admins and other specialists doing about as well as the dinosaurs 65 million years ago. Gartner is also projecting that by 2010, 30 percent of U.S. homes will have only cell or VoIP phone access. This is interesting, but what I want to know is if businesses will be ahead or behind consumers on this one. The other four predictions were interesting, but not exactly related to general IT topics. So I am skipping them.
Over at Forrester Research, the merlins of marketing have released a more sophisticated and more specific IT spending projection to the general public--obviously in the hopes of selling even more detailed reports. However, Forrester's data is focused only on the United States. Forrester says that the Internet build-out that started in 2001 among companies (not dot-coms) will peter out in two to three years. Forrester says that IT spending in the United States grew at 7 percent in 2005 and will do the same in 2006, but the company is expecting IT spending to only grow by 2 percent in 2007 because it believes that the growth in U.S. gross domestic product will start to slow in the next two to three years, causing the inevitable decline in IT spending as companies cut IT projects first to save money when the economy tightens. Interest rates, high energy prices, a drop in the housing market are all factors in this projection.
Forrester says that computer makers--PCs, servers, storage, and such--will do relatively well in the U.S., with strong growth in early 2006 but a slip in late 2006 and early 2007, followed by a rebound in 2008 as a new IT spending cycle gets under way. Forrester is projecting an incredible IT spending growth rate of 11 percent in 2009 and 2010, but did not identify what on earth would push that growth. In the software sector, Forrester says that spending will remain steady at 6 percent revenue growth in 2006, with new SOA architectures in 2008 and the Vista operating system at the end of 2006 helping to stimulate software spending. The spending in IT services that commenced in 2005 will die out to a mere 1 percent growth in 2008, according to Forrester, but will rebound to 13 percent growth rates in 2009 and 2010 as companies try to digest SOA and other new technologies and seek help from outside their own walls to do it.
As many people have been projecting, Forrester believes that cheap, virtualized hardware, inexpensive and virtualized software, software implemented as a service, and integrated business intelligence will be the hallmarks of future systems. Forrester also thinks that RFID, telematics, biometrics, and mobile networking will spawn a new phase of application development, and that what it calls "social computing," meaning community development projects, blogs, search engines, and viral marketing, will reshape the way IT products are created, distributed, and marketed.
At IDC, the researchers are projecting IT spending growth of about 5.5 percent in 2006, down a bit from the 6 percent growth it calculates will be seen a few months from now looking back at 2005. IDC expects double-digit growth in IT spending in China, India, Central and Eastern Europe, the Middle East, and Africa.
As with other consultancies, IDC is seeing a shift from selling IT products to selling IT services, and that hardware and software will not be immune from this change. IDC is predicting that SAP, Oracle, and Microsoft will deliver their ERP suites as services in 2006, in fact--something they have to do to compete against each other and new players in the market like Salesforce.com.
IDC is also telling people that proprietary, "go it alone" product development is a thing of the past, but at the same time IDC paradoxically lauds Google, which isn't exactly open about its core technologies and never will be. The fact is, the IT industry fears that Google will somehow use all of its PhDs to try to figure out how to make a large part of the IT industry irrelevant, and Google is not going to try to dispel that fear or the myth that it can take on a Microsoft or IBM and challenge it for supremacy in the IT space. Google is a young, smart company, and it is causing IT vendors to re-examine their strategies, to be sure. But Google is no more invincible than Netscape was, and the premise that people are attaching to Google--that essentially, you use Google as your application suite--is not one that the company has officially sanctioned. Google cannot withstand the full weight of Microsoft, which has 10 times the cash and several monopolies with which to fuel its competitive products. Microsoft is a lot stronger in 2005 than it was in 1995 when it took on Netscape and smashed it to bits. That said, if Google can keep companies like Microsoft honest and be a force for innovation among IT service and software suppliers, then that is wonderful. In effect, you have to wreck and recreate your own business before Google does. In that way, Google is not an explosion, but a catalyst that drives the explosion.
And, by the way, Google is not worth $120 billion (its current market capitalization, and a colossal 90 price/earnings ratio) any more than Sun Microsystems was worth over $200 billion at the height of the dot-com boom. Google had $3.2 billion in sales in 2004, and brought just under $400 million to the bottom line--which means it is a great business. Google has $5.5 billion in cash, and it might break $6 billion in sales for 2005, which is just stunning. But that ain't nothin' compared to Microsoft, which has a market capitalization of just under $400 billion, over $40 billion in cash after distributing $32 billion in cash in the summer of 2004 to shareholders. The company is set to book about $41.5 billion in sales in calendar 2005, and about $18 billion of that will fall right to the bottom line.
Google, say hello to Mind Boggle. A monopoly is a terrible, terrible thing--unless you happen to have one.