The IT ‘Recovery’: Here’s What’s Ahead
IT spending “recoveryâ€
is merely an “echo boom†with higher volumes, lower prices
It’s
difficult to play the hardware stocks; in part, because there is no real
“recovery†trend to play. It’s a stock picking sector — Dell, the superior
performer, on continued share gains; Hewlett-Packard a potential turnaround play
on its new management team; Sun a “poor mans†turnaround play. Recovery of IT
spending just isn’t a catalyst… yet. Â
The first
thing I ask when folks mention “tech recovery” is: “Recovery from what?” There’s
been some degree of “bounce back” from the lows of 2002, and I expect we’ll see
more, albeit modest, increases going into 2006 over 2005 and 2004.
I view the
up-tick in tech spending since the lows of 2002 as having two aspects.
First, I
see a bounce back from untenable IT spending lows. To use one metaphor, we’ve
re-filled the gas tank after running it down to fumes — but we aren’t driving
all that more than we were a year ago, and we’re certainly not buying a new car.
Second, I
see it as a replacement spending cycle, particularly replacement of PCs. Many
people haven’t seen this “echo boom” happening because pricing is weak, but PC
processor unit volumes are higher than pre-Y2K. However, some financial analysts
have suggested that when profitability returns, companies would spend more on
technology. They seem to believe that there is a de-facto, causal relationship
between the two. While profitability has always been a key criteria for large IT
purchases, in my experience as a tech analyst, and in the experience of most
folks I know in IT management, it has largely been a gating criteria. Even in
the best of times, other things need to fall into place, and the big one is a
demonstrated (or at least perceived) business need for the new technology.
That is an
important difference between this “recovery†period and all previous ones.
Cycle of Upgrades Has Changed
The PC
business is a good example of what’s going on today and how it differs from past
cycles. In the 20 years since the introduction of the PC, we have seen cycle
after cycle of upgrades. Each of these upgrade cycles has been driven by new and
compelling capabilities that made new hardware a necessity. Not only that, but
most of these cycles also introduced new capabilities that made PCs more
essential to more people leading to an ever-widening installed base. In each of
these cycles, companies tended to replace everything they had, and they also
tended to buy more. Most of these upgrade cycles were driven by new software.
Over the years, Intel’s upper management has recognized and openly spoken of
this “software spiral” as being the driving force behind PC upgrades and the
addition of new PCs to the installed base. So long as Microsoft (and others)
continue to writer hungrier and hungrier applications, with more and more
compelling uses, people continue to buy more and more capable PCs.
Today the
software spiral is not driving an upgrade cycle in hardware. Although there is
an “echo bubble” in PCs, this is, for the most, part, a replacement cycle — not
upgrading to substantially more powerful hardware. In large part, companies are
still running current office suites and other applications on PCs that are four
years old, or on new PCs that are not substantially different from their old Y2K
hardware. There are few new applications that would require companies to upgrade
their hardware and certainly little reason to deploy additional PCs, because
everybody in the organization who needs one has one — or inherited one from
someone who was laid off.
The major
reason for companies to replace PCs right now continues to be that some of the
oldest ones — usually 4- to 5-year old boxes — have become cheaper to replace
than to keep repairing. (I need to draw a distinction between a replacement
cycle, of old hardware with units of approximately the same capabilities, versus
an upgrade cycle, which is to more powerful hardware).
But even
these replacements have a very different character than previous cycles. Many of
the computers being replaced are quite capable of doing the job, and anything on
the market today is more than capable of replacing them. So we are replacing old
or broken boxes with new, inexpensive, bottom-of-the-line ones. My sense is that
if companies could save money buying even less-capable boxes, they would.
So we are
seeing an “echo boom” in PC unit sales — not business revenues and
profitability from PC sales. Dell Inc. is one exception; it has increased share
at the expense of other companies, largely HP and IBM / Lenovo — and, due to its
superior expense management has eeked out some improved profitability.
I think
this mini-boom will last for a few more quarters.
Killer App Needed to Spur
Hardware Sales
Eventually
some new application will come along to require more hardware resources, and at
that point companies at large will need to think about a real capability
upgrade, rather than a replacement program. Meanwhile, companies are likely to
continue to replace things on the cheap and will probably hold off on major
hardware upgrade programs until there is some compelling reason to do so.
Companies also need a clear idea of what they need in terms of upgrades.
The impact
of all this is clear: Hardware manufacturers, semiconductor makers, storage and
disk drive makers, and all their suppliers are likely to continue to sell more
low-end, lower-margin products. That’s an anathema to companies such as Intel,
Sun Microsystems, Hewlett-Packard, and the like, which make the lion’s share of
their profits from sales of their high-end product lines.
Some
financial analysts believe that the introduction of new wireless notebooks will
somehow stimulate demand for new PCs that previous software cycles did. I don’t
doubt that in some sectors this may be accurate. Certainly in the highly mobile
world of Wall Street analysts, investment bankers, hedge fund and mutual fund
analysts, lawyers, journalists, and the like, the utility of such devices is
indisputable. But even they need to go no further than their own trading floors
or operations departments to recognize that a large number of workers will never
be able to be mobile in the same way.
In many
American companies, less than 10% could probably have a reason to use a PC away
from their regular work stations; i.e., less than 10% of employees are mobile.
The vast bulk of employees are on the phone taking orders, resolving customer
issues, entering data, making payments, shipping product, or in administrative
roles. These are not activities that would tend to make wireless PCs a
compelling investment for their companies. And in truth, the bulk of these
lower-wage employees would never be trusted with taking home a $2K to $4K piece
of equipment in any case. That is not my view, rather, it’s the view of many IT
spending decision makers.
Companies Using More Software
CapabilitiesIn
enterprise software, I am aware of many organizations using more of the features
in their enterprise software suites, rather than upgrading their software. Many
companies never learned the full capabilities of their software when they
installed it during the Y2K boom. Now they are increasingly taking advantage of
what’s already there, rather than buying more. These packages are so
multi-faceted that few people I know claim to be using them to their fullest
ability, and many are walking away from huge “upgrade” projects in favor of
making better use of what they already have. This process is having a
substantial impact on large systems integrators who, having historically made
their money on large implementation projects, are now bidding for minor
“enhancement” projects at cut rates.
In
summary, I see no compelling reason to believe that many companies will start
throwing large amounts of extra money at new, upgraded technology, even if
profits do recover substantially in the coming months. Although I do expect the
replacement cycle we have seen the last couple of years to continue with
comparable, low-priced units. That said, while there should continue to be
replacement spending, I don’t see a substantial absolute dollar increase in IT
spending for 2006, beyond 2005 spending levels, absent a robust, broad-based
economic recovery — even if unit sales do continue to increase.
Melanie
Hollands
melaniehollands@yahoo.com