Major Industry Trends
Information technology (IT) is both a huge industry in itself and the source of dramatic changes in business practices in all other sectors. The term IT covers a number of related disciplines and areas, from semiconductor design and production (also covered in the profile of the electronics sector), through hardware manufacture (mainframes, servers, PCs, and mobile devices), to software, data storage, backup and retrieval, networking, and, of course, the Internet.
On top of this, there has been a convergence between IT and telephony, driven by transforming voice traffic from an analog signal to digital packets, indistinguishable from other data packets travelling through a computer network. IT in the leisure sector is already about enabling interaction with video, movies, and TV, and this trend is increasingly carrying over into the business space.
Each of the major subareas in IT is itself capable of being divided into component parts. Storage, for example, breaks down into disk drives, tape drives, and optical drives, and into attached storage and networked storage. PCs break down into business desktop PCs, high-end workstations, and “extreme” gaming PCs for games enthusiasts—the computer and console games industry has already produced “blockbusters” that outsell best-selling film releases from Hollywood.
Software subdivides into numerous specialist areas, from relational databases to business applications—characterized by Microsoft Office, for example.
Somewhat off the main track of IT at present, but very much related both to increases in processor power and to work in simulation and artificial intelligence, is the field of robotics. This lies outside the scope of this profile, but the linkages between robotics and IT are already transforming both manufacturing and defense.
In addition, the IT arena is characterized by a number of key trends and emerging technologies which, again, have the potential to transform the way businesses currently use IT and carry out their operations. An example of a trend would be the outsourcing of IT servicing needs, such as support for desktop PCs, or for whole IT-based functions, such as accounts processing. An example of a technology trend would be virtualization. This refers to the ability of a single large server to be subdivided into a number of virtual machines, which can be either virtual PCs or virtual servers.
Virtualization carries with it a number of benefits, including stopping what, at one stage, looked like an endless proliferation of servers inside companies. Splitting one large server into a number of virtual servers enables the organization to reduce the number of servers it has to manage. Server virtualization should not be confused with another powerful trend: the creation of virtual environments inside the machine. The fact that desktop processors are now powerful enough to mimic real-world physics in computer space is transforming both design and entertainment.
All these trends have enabled the IT industry to continue to generate a strong demand for the next generation of servers, PCs, and laptops. However, in a recession, IT-using companies of all sizes generally postpone upgrading their IT systems and implementing major IT projects that are not already in hand. This makes the IT manufacturing sector vulnerable to downturns in the economy, and the global downturn from 2008 to 2009 had a major impact on revenues in the sector worldwide.
According to a press release by IT market analysts Gartner in January 2014, worldwide IT spending grew by 0.4% to US$3.7 trillion in 2013. Gartner projected growth of 3.1% in 2014 to US$3.8 trillion.
The report said that spending on devices (including PCs, ultramobile PCs, mobile phones, and tablets) contracted by 1.2% in 2013, but that it will grow 4.3% in 2014. Convergence of the PC, ultramobile (including tablets), and mobile phone segments, as well as an erosion of margins, is expected to take place as differentiation will soon be based primarily on price rather than on the orientation of devices to specific tasks.
Growth in spending by businesses on software continues to be the strongest trend throughout the forecast period. Gartner sees this sector growing by 6.8% in 2014. It added that customer relationship management and supply chain management (SCM) have already experienced a period of strong growth:
“Investment is coming from exploiting analytics to make B2C processes more efficient and improve customer marketing efforts. Investment will also be aligned to B2B analytics, particularly in the SCM space, where annual spending is expected to grow 10.6 percent in 2014,” according to Gartner. “The focus is on enhancing the customer experience throughout the presales, sales and post sales processes.”
Gartner made a downward revision of its forecast for overall IT spending growth in 2014, from 3.6% to 3.1%, from its forecast of the previous quarter. It explained: “A downward revision of the 2014 forecast growth in spending for telecom services—a segment that accounts for more than 40 percent of total IT spending—from 1.9 percent to 1.2 percent is the main reason behind this overall IT spending growth reduction. A number of factors are involved, including the faster-than-expected growth of wireless-only households and a more frugal usage pattern among European customers. The latter coincides in Western Europe with a breakout of fierce price competition among communications service providers to retain customers and attract new ones.”
The outlook for spending growth on data center systems for 2014 was cut from 2.9% in Gartner’s previous forecast to 2.6%. This was mainly due to a reduction in the forecast for external controller-based storage and enterprise communications applications. These segments represent 32% of total data center system end-user spending.
Gartner has revised slightly downward the compound annual growth rate of IT services between 2012 and 2017. The largest contributor to this revision comes from reductions in IT outsourcing—specifically, in growth rates of colocation, hosting, and data center outsourcing. “We are seeing [chief information officers] increasingly reconsidering data center build-out and instead planning faster-than-expected moves to cloud computing. Despite these small reductions, we continue to anticipate consistent four to five percent annual growth through 2017,” said Gartner.
For comparison, market research firm International Data Corporation (IDC) predicts that the growth in global IT spending will slow to 4.6% in 2014, down from an earlier forecast for the year of 5%. IDC summarized its forecasts for 2014 in a press release published in February 2014 announcing a new edition of its “Worldwide black book,” which forecasts IT spending in 54 countries around the world, focused on 25 individual market segments across hardware, software, IT services, and telecom services.
The main reasons for the downward revision, according to IDC, are the economic slowdown in emerging markets (with currency devaluation and inflation inhibiting business confidence), plus what it terms an inevitable deceleration in the “massive” growth of smartphones and tablets.
Although overall industry growth has cooled, some areas of IT spending are growing rapidly as businesses in the mature economies (including the United States and Western Europe) begin to invest in overdue infrastructure upgrades and replacements, according to the report. In 2014, spending on servers will increase by 3% (after a decline of 4% in 2013) and spending on storage will grow by 3% (following a 0.5% decline in 2013). The PC market is showing tentative signs of stabilization, with improving commercial shipments in mature markets. The increased pace of investment in hardware will have a positive effect on the revenue of IT service providers, which is forecast to grow by 4% in 2014 (up from 3% in 2013). Business software spending remains strong, with growth expected in the range of 6% to 7% in 2014.
“The inevitable slowdown in the explosive pace of smartphones and tablets is masking an underlying improvement in many areas of IT spending,” according to IDC. The company added that “Businesses in mature economies are beginning to feel more confident about the economy compared to a year ago, and this is translating into new IT investments. There’s significant pent-up demand in the US and Europe for infrastructure upgrades, capacity and bandwidth investments, and overdue replacement cycles. Many businesses will choose to fix the roof while the sun is shining in 2014.”
In its press release IDC noted that there are still significant inhibitors that will keep IT spending growth moderate by historical standards. Cannibalization remains a broad trend, impacting everything from PCs (tablets) to software and services (Cloud) and ensuring major disruption to revenues for individual vendors. Price erosion and commoditization in hardware have spread to mobile devices. Though showing signs of bottoming out, the PC market continues to post year-on-year declines in revenue terms, and investment in telecom infrastructure remains tepid in many countries as carriers compete for a more mature customer base.
Nevertheless, IDC sees IT market fundamentals as more solid in 2014 than in 2013. “At the end of 2013, we passed the $2 trillion mark in annual IT spending for the first time in history, and $1 trillion in hardware spending. This year’s milestones will include half a trillion dollars in spending on mobile devices alone (phones and tablets), and more than $400 billion on software. With some markets on the up while others are on the down… There will be as many losers, as winners, in the next 12 months ahead.”