IDC Makes Its IT Prognostications for 2005
December 6, 2004 Timothy Prickett Morgan
About this time of the year, everyone has had about enough and is looking forward to a fresh start in the new year. If you liked 2004 in the information technology market, then, according to dozens of analysts who track IT for IDC, you are going to like 2005. You see, 2005 will be like 2004–only more so. (That was a joke. Laugh now, because there are not many jokes in IT land these days.)
In the past couple of weeks, IDC’s rivals, Gartner, Forrester Research, and META Group, have made their predictions and prognostications about how 2004 will end and how 2005 might go if something drastic doesn’t happen in the major economies of the world. (Gartner has released general predictions about the IT market for the coming years, but has not yet said how 2004 will end up or what it expects for IT spending growth in 2005.)
Frank Gens, senior vice president of research at IDC, is expecting worldwide IT spending to be up around 5 percent in 2004 (a lot still depends on the final few weeks of the year), and that in 2005 spending should be up 6.1 percent, reaching above $1 trillion and bringing about another $60 billion or more into the IT economy. IDC’s model for 2005, based on input from 700 analysts, assumes that there will be a mild rebound in IT spending in Western Europe and a modest rise in IT spending in the United States. Gens says that IDC is well aware that the economies of continental Europe are a bit tenuous and make it hard to pin down a number for IT growth in 2005, but this is counterbalanced somewhat by the possibility that spending increases in the United States could be higher than expected. It would seem that IDC is being conservative in its optimism. IDC is counting on continued weakness in Japan but excellent growth in Russia, China, India, and other emerging markets. At a macroeconomic level, IDC is actually assuming the worldwide economy cools a little, that oil prices continue to be high, and that political and military unrest in the hot spots of the world remains about the same as it is now.
“We expect a boringly moderate overall growth rate of 6 to 7 percent in 2005,” said Gens in a conference call detailing the 10 major IT predictions IDC is calling for the next year. “But that growth rate will mask one of the most turbulent times I have seen in IT.” Gens’ comments echo those of Howard Rubin, senior vice president at META, who said a few weeks ago that the IT market has “microclimates” of spending growth as well as big areas where spending is in decline or flat. In our coverage a few weeks ago of the META and other IT spending prognostications recently released, we said almost exactly the same thing as Gens did: that IT budgets are growing modestly, which should be comforting, but the aggregate growth numbers mask the churn in subsectors of the IT economy. Gens said that IDC analysts expect that infrastructure software (especially security software), handheld devices, networking equipment (particularly wireless gear), and outsourcing services would be the strong sectors of the IT economy in 2005. “This moderate growth sets the tone for the industry,” warned Gens. “If you want to exceed this growth, you need to cut costs and focus on growth areas.”
On the hardware front, IDC expects that the blade server market will heat up (the pun was, no matter how much Gens protested, intended), but he declined to give any stats on just how hot it will get. Now that Dell has re-entered the market, IDC expects not only that adoption of blade servers will increase but also that average selling prices will come down. This is great if you are a customer, but not so great if you are a blade server vendor that was counting on blade servers to be a profit center. Gens warned that IDC expects blade server acceptance to be heavily dependent on regions and industries; blades are not yet, apparently, as mainstream as rack servers once were, which is a bit baffling when you consider the benefits of blade servers and their integrated networking and management features. However, the growing acceptance of blade servers will put price pressure on the entire server market, IDC says. IDC also expects vendors (like Azul Systems) to take another stab at creating server appliances, this time focused on OS-agnostic, network-attached processing to accelerate certain functions in a system. On the storage front, the ever-increasing capacities of disk drives and the move from expensive SCSI and Fibre Channel disks to cheaper alternatives, like Serial ATA, will continue to put pricing pressure on all storage products.
On the software front, IDC expects that the big system makers–IBM, Hewlett-Packard, Sun Microsystems, and EMC–will continue to snap up companies as they build out their “Dynamic IT” portfolios. Dynamic IT is IDC’s term for the adaptive, agile, on-demand infrastructure that IT vendors are dreaming up as a replacement for the comfortable, monolithic IT systems that most of us are familiar with and loathe. IDC also says that software pure players such as Microsoft, Computer Associates, and Novell will go on eating binges, too. Gens also wonders out load if Dell will jump into the software market to start building its own ecosystem. (This seems very unlikely, but possible. Dell could, for instance, pick up a neutral player like Computer Associates, which has a market cap of $18 billion, compared to Dell’s own value of $101 billion as we go to press. Dell only has $4.5 billion in the bank, so a Dell-CA deal would have to be a merger, not an acquisition.)
In the application market, which IDC pegs at $100 billion in 2005, Gens says that everyone will stop trying to find the “killer app” and platform vendors (meaning the big operating system and middleware players) will be sorely tempted to migrate up the software stack and acquire big ERP, SCM, and CRM software providers to create “killer platforms.” However, by doing this, any platform vendor risks alienating its own base of independent software vendor partners. Making such deals may be tempting, but on second thought, we think everyone will tightly partner, which means the status quo. If Microsoft can’t or won’t buy SAP, it is hard to imagine that it will buy Oracle or PeopleSoft, or the combined Oracle-PeopleSoft. The people within IBM’s Software Group responsible for relations with Big Blue’s partners don’t want to buy an ERP vendor, and HP doesn’t look very eager, either. IDC is predicting “an avalanche” of acquisitions and mergers in the data and information management markets as big IT platform companies acquire data transformation, business intelligence, business process analysis, and analytic software providers to build out their platforms.
As platform vendors build up their software stacks, they will all aim to make a dynamic, services-oriented infrastructure that can compete with the alternative stacks that other vendors have been trying to assemble. (It is not going to be as simple as Java versus .NET.) IDC has been saying that the fragmented platform and software markets would consolidate, and that those companies that focused on vertical market solutions, which address real-world customer needs, will be the winners. “We have said that vendors need to dig deeper and provide vertical market focus if they want to grow. This is the technology that will allow them to do this and not go broke,” said Gens. He wondered aloud how many different enterprise software stacks the IT market can support. Gens said that IDC didn’t know how many, but that it was definitely smaller than the number of vendors trying to build such stacks.
On the services front, IDC is predicting that business process outsourcing skills will be in high demand, but in short supply, in the United States, and that will compel offshore outsourcing companies to develop these skills and perhaps even to onshore back in the States to catch the whole BPO wave. IDC also reckons that the trend to offshore will continue among the large onshore providers. Gens said that IDC estimates that IBM has somewhere between 15,000 and 20,000 consultants working offshore and that Accenture has about 10,000, just to name two. Hewlett-Packard, Capgemini, Electronic Data Systems, and others will increase their offshore presence as they try to chase new business and cut costs at the same time. Offshore companies in India and China will, ironically, look to remote areas of their own countries as costs in current offshore centers in Bangalore and Mumbai increase as a result of labor shortages. All services companies will be looking at Eastern Europe (particularly in Poland and the Czech Republic) and Latin America to find cheaper skilled labor and facilities.