IT Starts To Feel The Impact Of The Great Infection

April 13, 2020 Timothy Prickett Morgan

You know the difference between an economy and an ecosystem? Me neither.

We stand by our conviction – and that backed up by the economists and market watchers at IDC – that the IT sector is going to fare better than other sectors in the wake of the global coronavirus pandemic and the jarring effects of the lockdown most of us are under. But we are also not surprised that IDC had to revise its estimates of IT spending projections for 2020 and beyond only a few days after putting out its initial thoughts. It’s a fluid situation, with the global economy hammering the brakes like we have never seen it do in the history of, well, history.

On March 27, IDC put out its first pass on how server and storage spending would be impacted by the pandemic, and also flashed up a bunch of graphical forecasts on IT spending in general at about the same time, which we happened to capture scrolling across its homepage in succession and captured for you to see. We wrote up our analysis of their prognostications in the April 6 edition of The Four Hundred, which we of course wrote on the Friday before, April 3. What we didn’t know at the time was that IDC had already taken a second look at some of its forecasts and released an update on April 2, which we will tell you about now. But don’t be shocked if there is another revision between now and when we meet again next Monday. This is the way it is.

The update for global IT spending growth in the march 27 forecast was actually comprised of two bars: Probable growth of 3.7 percent worldwide (measured in constant currency, not in US dollars) and pessimistic growth of only 1.3 percent worldwide (again in constant currency. This is down from an estimate in January for 2020 for IT spending growth to be up 5.1 percent, before the impacts of the pandemic were really known, and then another one in February where it was pretty obvious something awful was happening in Wuhan, China, and the forecast for growth was cut back to 4.3 percent. I don’t know what is worse than pessimistic in a forecast – we could give you a few choice words here, but maybe realistic is the kind one – but now the people at IDC now expect for global IT spending to shrink by 2.7 percent. I suppose optimists (or silly people on Wall Street or in government) call that “negative growth” so it doesn’t sound so bad as “decline.” But we are definitely talking about a decline now.

Here is how Stephen Minton, program vice president in IDC’s Customer Insights & Analysis group, which merges the thinking of the economists and market researchers into the coherent global and regional forecasts that are generally pretty good, puts the situation: “Overall IT spending will decline in 2020, despite increased demand and usage for some technologies and services by individual companies and consumers. Businesses in sectors of the economy that are hardest hit during the first half of the year will react by delaying some purchases and projects, and the lack of visibility related to medical factors will ensure that many organizations take an extremely cautious approach when it comes to budget contingency planning in the near term.”

There is an interplay between gross domestic product and IT spending. Very generally speaking, IT spending tends to grow faster than GDP – about a factor of 2X in normal times – and it looks like it declines at about a 2X rate in bad times, too. Here is the relationship IDC shows between the two in its forecasts over the past three months:

Now, after Minton and the team reviewed what is going on in the economies of the world and took in whatever data IDC has gathered from IT shops about their sentiments, the company figures global IT spending will decline by 2.7 percent this year and real GDP worldwide will decline by 1.7 percent. This is a huge swing in the forecast in a very short time, but it is not as dramatic as some of the figures we have had to absorb, such as the unemployment rate or the revenue decline in the airline and cruise and hotel industries, just to name a few. (I don’t even want to think about how many people are and will be infected by the SARS-CoV2 virus that appears to have come from horseshoe bats, like so many bad things do because they are social animals that live in huge colonies that rival the size of major metropolitan areas populated by humans. Or how many people have ad will die from this before we get herd immunity or a vaccine. I am sticking to the economic data here.)

Here is what the IT spending by category looks like in the latest forecast:

IDC now says that server and storage spending combined will be down 3.3 percent and switch and router spending will be down 1.7 percent. All things considered, this is not too bad. Total infrastructure spending is expected to rise by 5.3 percent as companies spend more on cloud infrastructure services and public cloud builders and hyperscalers buy more iron to support these workloads. (I think there’s some double counting going on here, or at least mixing of apples and oranges.)

“Hardware spending in general is always identified for rapid spending cuts during any economic crisis, as a means for enterprises to quickly protect short-term profitability,” Minton said in a statement accompanying the forecast. “In previous economic crashes, IT hardware has tended to overshoot the economic cycle on both the downside and in the recovery phase. That’s because underlying demand drivers don’t change overnight, but the timing of purchases is shifted and delayed, and this can now be done even more quickly than in the past. What’s different now is that cloud is a bigger factor than it was in any previous global recession, and this should mean that overall spending is less volatile than in the last two major IT spending downturns.”

Here is how the broader information and communications technology (ICT) spending looks in the latest forecast:

As you can see, telecom spending is relatively immune to whatever is going on, and that stands to reason considering how depending we are on voice and data services.

But here are two things to consider. That lost spending, and therefore a whole chunk of money that whips around the IT vendors and then goes back out into the supply chain and into people’s pockets, is going away and it doesn’t come back. It looks like $215 billion in lost spending in the ICT space in 2020 and 2021 by our math. That’s nearly three IBMs, to put that into perspective. The other thing is that none of these numbers talk about the aggregate IT budgets at companies and how they are going to change. We care about the payroll as much as the spending on hardware, software, and services – and this is a much larger number at every company on earth. What’s happening here? We just don’t know yet.

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