The Top Ten Tech Events Of 2011

New Year’s Eve is the time for looking back at the past year before preparing for the next on New Year’s Day. So, I’m taking the time before the festivities tonight to take stock of 2011 and put down my thoughts on what were the top 10 events in the tech world. This is one person’s opinion, so feel free to voice your own counterpoints.

In reverse order (and with apologies to David Letterman):

10. Microsoft’s acquisition of Skype. I’m still not clear about how Microsoft is going to use Skype, but Skype’s expanding role as a platform for person-to-person videochats may make this one of Microsoft’s better acquisitions.

9. IBM’s Watson wins Jeopardy!, setting stage for creating deep analytical solutions for other business problems. The average person doesn’t understand technology. But many people follow the Jeopardy! game show on TV. By developing an artificial intelligence system that could successfully beat the best human contestants in Jeopardy and giving it the human name of Watson, IBM did a brilliant job of showing its technologies’ potential in a way the average person could understand. More importantly, it has followed up by building new Watson-based solutions for healthcare diagnostics, financial services risk management, and other business situations.

8. Microsoft/Nokia partnership for Nokia to adopt the Microsoft Phone operating system for its smartphones. Both Microsoft and Nokia have struggled in keeping up with Apple and Google in the smartphone market. By combining forces, they gave themselves another chance to become a credible third option in the smartphone market.

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Oracle Delivers A Lump Of Coal To The Tech Market, But It's Too Soon To Call It A Harbinger Of A Tech Downturn

Oracle yesterday reported surprisingly weak results for its fiscal quarter ending on November 30 (see December 20, 2011, "Oracle Reports Q2 GAAP EPS Up 17% to 43 Cents; Q2 Non-GAAP EPS up 6% to 54 Cents"), with total revenues up just 2%, software revenues up 7%, hardware revenues down 10%, and services revenues flat. Even worse, hardware product sales were down 14%, new software license revenues rose just 2%, and license revenues for Oracle applications actually fell by 4%. Oracle had set expectations for revenue growth of 5% to 15%, and most financial analysts had projected growth at the high end of that range, based on Oracle's license revenues in prior quarters growing by 22% to 34% for applications, and 14% to 27% for database and middleware revenues. Oracle attributed the shortfall in revenues to potential deals that failed to close by the end of the quarter due to buyer caution.

For the tech sector, this is a worrisome report. Oracle's software revenues had been consistently stronger than the overall tech market, growing by 17% in US dollars in the prior quarters in 2011. If Oracle's software revenue growth slips to 7%, does that imply that the rest of the tech market is going to see little or no growth in Q4 2011?

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IBM's Acquisition Of Emptoris Moves It Squarely Into The ePurchasing Software Market — Watch Out For Fireworks

IBM today announced that it will acquire Emptoris, a leading vendor of ePurchasing software products, with strengths in eSourcing, spend analysis, contract lifecycle management, services procurement, and supplier risk and performance management (see December 15, 2011, “IBM Acquisition of Emptoris Bolsters Smarter Commerce Initiative, Helps Reduce Procurement Costs and Risks”). That IBM made an acquisition of this kind was not a surprise to me, given that the heads of IBM's Smarter Commerce software team at the IBM Software Analyst Connect 2011 event on November 30 had laid out a vision of providing solutions for the buying activities of commerce as well as the sales, marketing, and services activities. Indeed, in the breakout session in which Craig Hayman, general manager of industry solutions at IBM, laid out the Smarter Commerce software strategy and showed the vendors that IBM had acquired in the sales, marketing, and services arenas, he said in response to my comment about the obvious gaps that IBM had in the buying area that we should expect to see IBM acquisitions in that area.

What was a surprise to me was that IBM acquired Emptoris. My prediction would have been that IBM would buy Ariba, because of the long relationship that has existed between these companies. In contrast, Emptoris has generally worked more with Accenture, and not as much with IBM.

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Sound The Alarm For Tech Vendors: The European Titanic Has Already Hit The Iceberg

Neither The Economist magazine nor the Organization for Economic Cooperation and Development (OECD) is known for being alarmist. So one pays attention when The Economist in the lead item ("Is this really the end?"; see also "The euro: Beware of falling masonry") in its November 26 issue stated: "The chances of the euro zone being smashed apart have risen alarmingly, thanks to financial panic, a rapidly weakening economic outlook and pigheaded brinkmanship." The OECD had similar strong words of concern in its press release ("OECD calls for urgent action to boost ailing global economy") announcing its latest "Economic Outlook": "Decisive policies must be urgently put in place to stop the euro area sovereign debt crisis from spreading and to put weakening global activity back on track."

For me, the economies of the European Union (EU) have disturbing similarities to the ocean liner RMS Titanic as it steamed across the Atlantic on that fateful trip in 1912. From the start when Greek debt crisis surfaced in early 2010, the leaders of the EU have consistently done too little, too late to keep the problem contained and manageable. The steps that could have been taken to change course were not taken. Instead, the EU ocean liner stayed on its course, right into the path of an iceberg of financial panic.

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The Tech Market Gives Small Thanks — "It Coulda Been Worse"

The day before Thanksgiving is a good point to pause and give thanks for the recent news in the tech market, before we give thanks for our personal blessings with our families and friends tomorrow.  So, amidst the glum news about the ongoing European debt crisis that is grinding growth to a standstill, the failure of the congressional supercommittee to make any progress on US budget deficits or stimulus, and the crashing stock markets, here are some things that tech vendors can be thankful for.

  1. US economy is still growing.  The revised real GDP growth rate for Q3 2011 was 2%, down from the preliminary report of 2.5% (Gross Domestic Product, 3rd Quarter 2011 [second estimate]).  That's not much growth, but at least it is growth.  And the report on "Personal Income and Outlays: October 2011" released this morning showed a 0.4% increase in October from September (5% at an annualized rate), with consumer spending up by 0.1% (1% annualized).  So, the fourth quarter began with some good momentum for consumer spending. 
  2. The US tech market is still growing — better than the government data indicates.  The Bureau of Economic Analysis data on business investment in information technology was revised downward from the preliminary release, with total IT investment growing by just 3.3%.  However, computer equipment grew by 10.6% and software by 6%, with software doing even better if we make adjustments to exclude the "own account" software that is created by firms for their own use.  The bad news was that communications equipment investment declined by 13.2%. 
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Economic Clouds Pull Back From The Tech Market, Reducing The Risks Of A Recession And Resulting Cutbacks In Tech Buying

Tech vendors got two pieces of good news today. 

First, European leaders appear to have reached agreement on a three-phase initiative that will 1) reduce the debt burden on Greece by about half, reducing its debt-to-GDP level to a potentially affordable level of 120%; 2) push European banks to increase their capital by about $150 billion so they can better withstand writedowns on their portfolio of Greek, Portuguese, Irish, and potentially other government debt; and 3) increase the funding for the European Financial Stability Facility to about €1 trillion (US$1.4 trillion) in order to extend credit if needed to Italy and Spain in addition to Greece, Italy, and Portugal.  Taken together, these initiatives if followed through will go a long way to defusing the debt problem that has hung over European economies.  It is premature to say the European debt crisis is over -- European leaders have consistently been several months late and several hundred million euros short of the aggressive rescue efforts that the US took to deal with the Lehman Brothers financial crisis.  Still, this is the first time that European leaders have come up with a plan that matches the scope of the problem they face.  While weak economic growth and continued downturns in most heavily indebted European countries will still persist, we think the risk of a serious recession in Europe may have been averted.

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Despite Economic Problems, Tech Market Will Continue To Grow In 2011 And 2012

As readers of my blog will remember, we were all ready to publish our mid-2011 update to our global economy report (see July 28, 2011, "Forrester Will Lower Its Tech Market Forecast By One-to-Two Percentage Points, Depending On Federal Debt Ceiling Outcome") when the US deficit ceiling crisis, renewal of the European debt crisis, and other developments raised questions about the strength of the economic recovery. Given the deterioration in the economic outlook, we stopped publication to rework our forecast to reflect those changes. The delay did have a some side benefits, including getting Q2 tech market data for Canada, adjusting our US data on computer equipment, communications, and equipment for Bureau of Economic Affairs revisions, incorporating new data sources for our US projections for IT consulting and outsourcing services, and taking advantage of the better data on Australia, China, India, and Japan from Forrester's acquisition of Springboard.

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This Week's Economic And Tech News Points To A Tech Downturn in Europe, Slower But Still Positive Growth In US, And Boom In Asia

Picking through economic news this week (French and German growth numbers; financial market turmoil; scattered US indicators) and the vendor announcements from Dell, HP, Lenovo, NetApp, and Salesforce.com, four trends emerge:

  1. European economies are headed for a recession, and European tech market is already in decline. Eurostat (The European Union statistical agency) announced on Tuesday, August 16, that real GDP in the 17 euro area countries and the 27 European countries both grew by just 0.2% in the second quarter of 2011 from the first quarter. Annualizing these growth rates to make them comparable with US GDP growth rates, the numbers were 0.8%. France's real GDP showed no growth, while Germany's real growth was o.4% on an annualized basis. These were sharp slowdowns from France's growth of 3.6% in Q1 and Germany's growth of 5.3%. With worries growing about a financial crisis hitting European banks as a result of potential losses on their holdings of Greek, Portuguese, Irish, Italian, and Spanish bonds, ongoing government austerity programs in these countries as well as the UK, and feeble EU efforts to deal with the problems, there is a high probability that Europe will slip into recession in Q3 and Q4 2011.
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S&P Downgrade Of US Debt And Related Financial Market Distress Mean Slower Growth In US And Global Tech Markets

The financial news from the US and Europe – the messy resolution of the US debt ceiling impasse and the related downgrade of US government securities, the sharply higher prices for Spanish and Italian debt after inadequate response to the latest Greek debt crisis, and the big drops in stock markets on Monday – will certainly weaken the economic growth prospects of both the US and Europe. We anticipated much of this two weeks ago, both before the US debt ceiling was raised at the 11th hour along with a makeshift deficit reduction plan (see my blog on July 28, 2011) and after the news of much lower US economic came out on Friday (see my blog on July 29, 2011). In fact, the resolution to the debt ceiling issue was slightly better than we expected (no default, and in interim deficit reduction that cut only $21 billion in fiscal year 2012 starting in October 2011) while the US economic outlook in Q2 2011 and earlier was quite a bit worse. The big surprise was S&P's downgrade of US securities from AAA to AA+. While that downgrade was not copied by the other rating agencies and in fact had no impact today on the prices of US treasury securities, it had a big psychological impact. Along with the bad news coming out of Europe after interest rates on Spanish and Italian debt spiked, the S&P downgrade triggered the 600 point or so drop in the Dow Jones Industrial index today, following a 500-point fall on Friday. The result of all these events at best will mean very weak growth in both the US and Europe in the rest of 2011 and well into 2012; at worse, it increases the risk of a renewed recession.

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US Q2 2011 GDP Report Is Bad News For The US Tech Sector, But With Some Silver Linings

The US Department of Commerce released preliminary Q2 2011 GDP data this morning (National Income and Product Accounts -- Gross Domestic Product: Second Quarter 2011 (Advance Estimate); Revised Estimates: 2003 through First Quarter 2011), and there was not much good news in the numbers.  First, US real GDP growth came in at a weaker than expected 1.3% (see Table 1).  Equally bad, prior quarters' growth was revised downward -- Q1 2011 down to 0.4% from 1.9% earlier, and Q4 2010 down to 2.3% from 3.1% earlier.  Given the negative impact of the deadlock on raising the US Federal debt ceiling -- even if a default is avoided at the last minute -- it is hard to see US real GDP growing faster than 2% in Q3 and Q4 2011, and very possibly not much more than 1.5%.

Table 1, US Real GDP Growth Rates, Before and After July 29, 2011 revisions

 

Real GDP, annualized growth rate from prior quarter

Q1 2009

Q2 2009

Q3 2009

Q4 2009

Q1 2010

Q2 2010

Q3 2010

Q4 2010

Q1 2011

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