Leasing Greases IT Acquisitions, Pumps the Economy
June 28, 2004 Timothy Prickett Morgan
Like many ideas in the computer industry, the on-demand and capacity-based pricing models that many IT vendors are toying with these days are a blast from the past with a new twist. While companies on both sides of the bargaining table have been trying to figure out how to do utility pricing for IT gadgets and software, traditional leasing continues to be a way for companies large and small to use computing equipment without having to pay for it all up front.
That is not to say that the computer leasing industry did not take its lumps as the economy went on the skids in 2000 and governments around the world cut interest rates to try to spur their economies. Couple these two trends with two others, the rapid decline in the cost of computing equipment, which reduces the amount of equipment customers lease every few years, and the territorial desire of captive leasing companies to own the leases in shops that use their equipment, and you get a perfect storm that sent the IT leasing business spinning in the early 2000s. This combination of forces, more than any other factor, is what drove industry stalwarts like Comdisco and El Camino Resources out of the business. (Comdisco was eaten by rival Sungard, and El Camino sold off most of its assets and has only recently gotten back into the IT leasing game, albeit so far in a small way.)
Good statistics for describing the prevalence of leasing around the world are a bit hard to come by, but the Equipment Leasing Association, an industry advocacy group based in Arlington, Virginia, compiles industry statistics and monitors the health of the leasing industry in the United States. The ELA represents all lessors, not just those that lease IT equipment.
To grasp the prevalence of leasing, you have to first figure out what companies buy in terms of capital equipment and then look at how much of it they finance through leases. According to the U.S. government’s Bureau of Economic Analysis, over a five-year period spanning from 1998 to 2002, the top-10 industries in the country spent an average of $446.8 billion investing in capital equipment. The largest capital equipment expenditures were in the wholesale industry ($75 billion), financial services ($68.3 billion), telecommunications ($61 billion), and services ($51.9 billion) industries. Retail, real estate, agriculture, commercial banks, power companies, and airlines also were big capital equipment investors. This mix more or less reflects the mix of companies in the overall economy.
According to the ELA, leasing volumes in 2002 accounted for $178.7 billion in capital equipment expenditures, which grew to $205.6 billion in 2002, a compound annual growth rate of 2.8 percent. Within the IT sector, according to the ELA, companies leased $17.4 billion on computers (both servers and desktops), $2.3 billion in software, and $10.7 billion in other IT equipment (network gear and such) in 1997. But the leasing of computers almost doubled to $30.3 billion in 2002, software more than doubled to $5.5 billion, and other IT equipment grew to $14.3 billion. That’s a compound annual growth rate of 11.7 percent for computer leasing, 19 percent for software leasing, and 6 percent for other IT equipment. The ELA did not offer an estimate for IT leasing for 2003, but says that companies in the United States spent $668 billion on capital equipment in 2003 and that $208 billion (31 percent) of equipment went under lease. The ELA is projecting that leasing volumes will grow to $229 billion in 2004, and that about $122 billion will be concentrated in IT equipment and related software. Clearly, the appetite for IT leasing is growing even as equipment costs come down and interest remains very low.
Because the leasing racket is coming under fire from many different angles, the ELA has a mission to quantify the benefits of leasing to customers and to the politicians who set the tax rules and monetary policies that can radically affect whether leasing of capital equipment (IT or otherwise) makes sense for lessors or lessees. The ELA says that 8 out of 10 companies in the country lease all or some of their equipment, so the practice is pervasive even if only about a third of the total value of the equipment that companies invest in is leased. According to the ELA, companies lease equipment to protect themselves against owning equipment that can become technologically obsolete and to allow their businesses to change gears more quickly (such as shifting from one server platform to another). Leasing also helps cash flow by matching the lease payments to the immediate value that the asset provides on a monthly basis. When you buy a big mainframe, iSeries, or Unix server, you pay for all the value you are hoping to get from it over the course of three years in one fell swoop. That ties up a lot of money. This is why the ELA has paid economists to try to estimate the value of leasing in the economy as a whole. According to these studies, the ELA proclaims that every $1 billion in equipment leasing creates approximately 30,000 jobs because it does not lock down money that could not otherwise go into the payroll.
The ELA commissioned a study by Global Insight, a global economic and financial forecasting company, to study the effects that leasing has on the U.S. economy in terms of boosting Gross Domestic Product and creating jobs. According to the study, by freeing up capital that would have immediately been sunk into equipment between 1997 and 2002, leasing activities across all industries produced between $100 billion and $300 billion in GDP growth, spurred another $228 billion in additional equipment investment, and created between 3 million and 5 million jobs. (One might say created new jobs and protected existing jobs from being removed, to be honest about it.) The study is very complex, as economic models are. If you want to delve deeper into it, you can get a copy (in PDF format) of this study, “The Economic Contribution of the Equipment Leasing Industry to the U.S. Economy,” from the ELA site.
Next week I will discuss leasing trends with the top executives of the leasing arms of IBM, Hewlett-Packard, and Sun Microsystems, who all took time out of their busy schedules to give me an education on what is happening out there with leasing in the IT market.