IT Spending To Boom In 2018, Tails Off In 2019
June 25, 2018 Timothy Prickett Morgan
It is hard to say what is the cart and what is the horse in the elements that make up an economy. Our sense of how well or poorly the economy is doing actually affects how we react and therefore how we actually spend on goods and services, and therefore there is always an element of self-fulfilling prophecy mixed in with the underlying fundamentals. It is hard to predict what an economy is going to do, much less 185 different ones that are interconnected on planet Earth, and it is even harder, perhaps, to reckon what one aspect of those economies – spending on IT hardware, software, and services and related telecom services – will do or not do.
But the prognosticators at IDC and Gartner take a stab at it on a quarterly basis, and from time to time to help gin up a little business, they put out some figures publicly that give those of us who do not subscribe to expensive IDC and Gartner services a chance to get a feel for their predictions and thinking. This gives us all something to reckon against with our own budgets for various products and services and to see if we are raising or lowering the class average. For those who want to spend more to gain competitive advantage, such figures can be a kind of leverage. If you are spending more than the average in various categories, then this is either a reason to keep doing so or a reason to keep mum and just move along about your business.
IDC was the latest to put out an IT spending forecast, doing so last week on the AS/400’s 30th birthday. (You all know that is June 21, so I didn’t have to tell you that.) Stephen Minton, vice president of customer insights and analysis, has put together the forecasts for IDC for so long we can’t remember when he didn’t do it. In constant currency – which means keeping the exchange rates constant between the two years but converting all sales to U.S. dollars to get everything in the same currency – Minton is figuring that worldwide spending for IT and telecom stuff will rise by 3.7 percent, to just a hair over $4 trillion, down a bit from the 4.2 percent growth in 2017. There are a lot of markets and categories in this IT spending, which includes not just a little bit of everything, but everything. Minton teases that by 2022 IT and telecom spending will keep rising until it hits $4.5 trillion. Spending on PCs and tablets is expected to be weakening over the next five years (including between 2018 and 2022), as will also happen with external storage arrays, certain other peripherals, and traditional IT outsourcing. The dip that Minton is willing to call is that overall IT and telecom spending will drop to below 3 percent growth in 2019, and the slowing growth rates this year and next are due to increasing economic uncertainty. (This is not a good time for a trade war, but then again, it never is.)
Minton put together this chart, which shows the spending growth rates for the past two years plus the forecast for 2018 by categories:
Minto gave a recap on what happened in 2017 along with his 2018 forecast, saying that the core IT infrastructure spending – servers, storage, switching, and core systems software – saw an 11 percent increase in spending in 2017 and will grow in the range of 8 percent to 12 percent over the next five years. Hyperscalers and cloud builders are spending a lot here, of course, but there is also an enterprise upgrade cycle helping the spending along, too. The spending by these hyperscalers and cloud builders dominates servers and is coming to dominate storage and networking, too. They largely build their own core system software, so that is not counted here. (But we think the people costs should be added to these figures across all countries and organizations, and as we have suggested in the past, would probably double the IT spending with another $4 trillion.)
Price increases on PCs and smartphones and servers in 2017 help inflate the revenues, by the way. The U.S. market saw IT spending rise by 1.9 percent in 2016 and the growth rate rose to 4.5 percent in 2017 and the rate is expected to hold this year, more or less, thanks to the Trump administration tax cuts. Minton suggests that a recession – at least a mild one – will hit the United States by 2020, a consensus view of economists. But the hit of this recession on IT spending will be smaller, he says, because of the growth of IT spending by hyperscalers and cloud builders. They will seek to benefit from the downturn, and in a lot of cases, IT workloads will move off premises and we think they might never come back. Infrastructure as a service (IaaS) is a case in point, with 37 percent revenue growth forecast for this year and about 30 percent per year for the remaining four years in the forecast period.
Gartner put out its forecast for IT spending back in early April, and was projecting that spending in 2018 would rise by 6.2 percent to $3.7 trillion globally. Again in constant currency, and yes, they obviously have some discrepancies on what does and does not constitute commercial IT and telecom spending. The strength of the US dollar is the main reason for this growth, according to John-David Lovelock, a research vice president at Gartner who works on the spending forecasts, but looking ahead, trade wars with Canada, Mexico, and China are causing economic uncertainty and therefore volatility and in those conditions, IT spending among enterprises, who are extremely conservative, tends to take the hit. The big hyperscalers and cloud builders are not just immune to these effects, but are the beneficiaries of them.
Here is the IT spending growth by category and year visually:
Gartner is also kind enough to provide a table of its revenue estimates for various categories for 2017 and its 2018 and forecasts, which is here:
The gap between IT hardware and software spending continues to rise, and this is no surprise to us. Hardware is becoming either converged or disaggregated and increasingly both storage and networking functions formerly done on expensive, seal-box appliances is moving to storage infrastructure in both the enterprise and across service providers of every stripe. So the cost per unit of capacity or performance is being pushed down at the same time the revenues – and profits – are being squeezed by competition. This puts a ceiling on datacenter systems growth. Enterprise software, however, has people as its main component – at least for now – and the costs of people rise each and every year, and therefore the cost of the software licenses and support contracts has to also rise. So some of that gap between hardware and software is just people. Some of it is intellectual property with inherent value that vendors want to capitalize on. At some point, software vendors will want to have fewer people writing software to make it more profitable – and they will leverage machine learning, we think, to do so.
But we all have jobs for a while yet. Don’t worry.