European ICT Market Will Grow More Slowly Than US Market, But With Wide Geographic Variances

I am in Barcelona, Spain, at our IT Forum EMEA event, where my colleague Peter O'Neill and I presented our latest forecasts for the tech market in Western and Central Europe.  In parallel, Forrester has just published our report with this and much more information (see June 8, 2011, “European Information And Communications Technology Market 2011 To 2012 -- The North-South Divide Persists, With Wide Variations In Country Information And Communications Technology Growth”).  Here are the key conclusions that I would highlight from the report:

  • As a geographic unit, the market for business and government purchases of information and communications technologies (ICT) in Western and Central Europe will grow by 3.8% in 2011 (measured in euros), compared with 6.4% growth in the US (measured in US dollars).  Excluding slow-growing telecommunications services, the information technology (IT) market in Western and Central Europe will grow by 4.5% in euros vs. the 7.4% growth in US dollars in the US (see June 7, “European Information And Communications Technology Market 2011 To 2012 -- The North-South Divide Persists, With Wide Variations In Country Information And Communications Technology Growth”).
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Difference Between Dell And HP Q1 2011 Performances Much Less Than The Investment Community Thinks

Hewlett-Packard reported its financial results for the quarter ending on April 30, 2011, early in the day on May 17, a day sooner than expected. Dell reported its financial results the same day, at its normal time at the end of the day. In many ways, as we will see in a minute, the results were similar. Yet the financial market reaction was dramatically different. HP's stock price dropped by 7% during the day, while Dell's stock price rose by almost 7% in after-hours trading. Bloomberg News, in its article on the two companies' results, headlined what it saw as the reason for the different performance: "Dell Shares Rise After Corporate Spending Gives Company Edge Over Rival HP."

I am not a stock analyst, nor is Forrester in the business of analyzing or forecasting stock performance. But the divergent responses of the stock market to the financial results of HP versus Dell do have implications for vendor strategy, while the underlying results show where the tech market is headed.

First, let's compare the actual numbers. HP's revenues in the quarter were up by 3%, and right in line with expectations, while Dell's revenues were just 1% higher, and lower than expectations. Dell's sales to business rose by 3%, while HP's sales increased by 8%. Dell's sales to consumers fell by 7%, slightly better than the 8% drop in HP's sales to consumers. So far, very similar numbers between the two vendors, with HP actually doing better than Dell in the quarter. So, why the market perception that Dell outperformed HP?

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Forrester Projects 8% Growth In US IT Purchases In 2011, And 10% In 2012

Forrester just published our latest forecast for the US market for business and government purchases of information technology (IT) goods and services (April 1, 2011, "US Tech Market Outlook, Q1 2011 -- Building a Springboard For Even Stronger Growth in 2012"), and we have raised our 2011 and 2012 outlooks: we now forecast 8% growth in the US in 2011 (up from our 7.4% forecast in January) and 10.3% in 2012 (compared with a 9.3% forecast earlier).  For the broader ICT market (information and communications technology, adding in telecommunications services), 2011 growth will be 6.8% compared to a 5.1% rise in 2012. 

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Q1 2011 Results For Accenture And Oracle Point To Strong 2011 For IT Services And Software

On March 24, 2011, both Accenture and Oracle released better-than-expected financial results for their fiscal quarters ending in February 2011.  In both cases, revenue growth was stronger than expected, with Accenture's revenues up 17% and Oracle's reported revenues up 37%.  Note, though, that Oracle's reported revenues were measured against a period in which it recorded only one month's of Sun Microsystems' revenues following the completion of that acquisition; adjusting the base period to show a more complete picture of the Sun revenues (which we estimate at about $1.8 billion in the three months ending in February 2010, compared with the reported $458 million), Oracle's revenues were 13% higher.  Still, its software and services revenues were up a strong 19%.

Because their fiscal quarters end one month earlier than most other vendors, Accenture and Oracle serve as early indicators of how the IT services and software segments of the tech market do each quarter.  The 27% increase in license revenues for Oracle's database and middleware products and the even stronger 34% growth in its application license revenues are signs of growing demand for software products -- not just SaaS products, but also classic licensed software products.  Purchases of those products typically lead to purchases of systems integration consulting services from IT services vendors like Accenture.  And indeed Accenture reported 20% growth in revenues from consulting services, compared with more modest (but still good) 13% growth in its outsourcing businesses.  So, my expectations that software and IT services will be the leading tech market growth categories in 2011 are supported by these results.    

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Japan's Troubles Raise A Red Flag But Don't (Yet) Alter Our Global Tech Market Outlook

With Japan's triple hit of earthquake, tsunami, and nuclear power plant dominating newspaper headlines and TV news, I have gotten some questions from clients about the impact of the disaster on the overall tech market.  In general, I think the effects of these disasters on the total 2011 outlook will be small -- at worst, they will hurt tech market growth in Q2 2011 while strengthening growth in Q3 and Q4.  However, that outlook assumes that the problems at the Fukushima Dai-ichi nuclear complex improve or don't worsen.  If that situation turns into a Chernobyl-type disaster that causes permanent evacuations from a multi-mile radius around the plant and possible shutdowns of other nuclear power plants, the impacts on the Japanese economy and on the Japanese tech industry -- not to mention for the people of Japan -- would be very negative, and cause a downward adjustment in our tech market forecast.

The potential impacts of the Japanese disasters show up on both the tech supply side and on the tech demand side, so let's look at both angles. 

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IT Investment May Be Hurting US Job Growth

The tech industry has generally enjoyed a good reputation with the public and with politicians -- unlike those "bad guys" in banking, or health insurance, or oil and gas.  However, analysis that I have done in a just-published report -- Caution: IT Investment May Be Hurting US Job Growth -- suggests that this good reputation could be dented by evidence that business investment in technology could be coming at the expense of hiring. 

Some background: In preparing Forrester’s tech market forecasts, I spend a lot of time looking at economic indicators.  Employment is not an economic indicator that I usually track, because it has no causal connection that I have been able to find with tech market growth.  However, given all the press attention that has been paid to an unemployment rate in excess of 9% and monthly employment increases measured in the tens of thousands instead of hundreds of thousands, it has been hard to ignore the fact that US job growth has been remarkably feeble in this economic recovery. 

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IBM's Watson And Its Implications For Smart Computing

Like many connected with IBM as an employee, a customer, or an analyst, I watched IBM's Watson beat two smart humans in three games of Jeopardy.  However, I was able to do so under more privileged conditions than sitting on my couch.  Along with my colleague John Rymer, I attended an IBM event in San Francisco, in which two of the IBM scientists who had developed Watson provided background on Watson prior to, during commercial breaks in, and after the broadcast of the third and final Jeopardy game.  We learned a lot about the time, effort, and approaches that went into making Watson competitive in Jeopardy (including, in answer to John's question, that its code base was a combination of Java and C++).  This background information made clear how impressive Watson is as a milestone in the development of artificial intelligence.  But it also made clear how much work still needs to be done to take the Watson technology and deploy it against the IBM-identified business problems in healthcare, customer service and call centers, or security.

The IBM scientists showed a scattergram of the percentage of Jeopardy questions that winning human contestants got right vs. the percentage of questions that they answered, which showed that these winners generally got 80% or more of the answers right for 60% to 70% of the questions.  They then showed line charts of how Watson did against the same variables over time, with Watson well below this zone at the beginning, but then month by month moving higher and higher, until by the time of the contest it was winning over two-thirds of the test contests against past Jeopardy winners.  But what I noted was how long the training process took before Watson became competitive -- not to mention the amount of computing and human resources IBM put behind the project.

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Tech Market Will See Similar Growth In 2011 As In 2010, But With Important Twists

At first glance, our forecast that the global IT market will expand by 7.1% in 2011 is right in line with the 7.2% growth we are estimating occurred in 2010 (see our January  11, 2011, "2010-2012 Global Tech Industry Outlook" report).  In fact, there are many points of similarity between the two years besides the overall growth rates, such as comparable growth rates in communications equipment purchases both years, or the US and Asia Pacific growing at similar rates of growth in 2010 and 2011.

However, there are three important points of difference that I think make our projected growth for 2011 more impressive than the almost identical rate of growth that occurred last year:

  1. Minimal rebound effects in 2011.  2010 was the year when IT capital investment bounced back from recession-depressed levels in 2009, especially in computer equipment and to a lesser degree in software.  Companies had been cutting back on purchases of servers, personal computers, storage devices, and peripherals like printers and monitors since 2007.  That meant a build-up of a lot of deferred demand for replacement equipment, which was unleashed in 2010, helping to drive 11% growth in this category last year.  Licensed software also felt some of these effects, with freezes on capital investment pushing purchases from 2009 into 2010.  Thus, in both cases, 2010 growth rates were measured off of low bases in 2009.  In contrast, the 2011 growth will reflect new demand for IT goods and services, not pent-up demand for prior years.  And the 2011 growth rates will be measured off a stronger base that reflects that fact.
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Which Vendors Have Gotten Smart (Computing, That Is)?

Thirteen months ago, I introduced the concept of “Smart Computing,” which I predicted would drive the next big wave of technology innovation and growth in the 2008 to 2016 period (see December 4, 2009, "Smart Computing Drives The New Era of IT Growth"). Smart Computing involves the addition of new awareness technologies like RFID, sensors, and image recognition and new real-time analysis technologies, along with adoption of foundation technologies like service-oriented architectures, unified communications, virtualization, and cloud computing. Since then, I have been tracking the tech market for evidence that this is in fact happening.  

One key indicator I am watching is how many vendors have started to incorporate “Smart Computing” terms and language into their marketing, sales, and brand material.  This matters, because tech vendors will be the ones that translate the concepts embedded in Smart Computing into actual sales of solutions and products to clients, thereby generating the revenue growth that will cause the tech market to grow twice as fast as the economy as we expect.  In fact, that kind of tech market growth has been occurring, at least in the US (December 14, 2010, “US Tech Industry Outlook For 2011 -- 2011 Likely To Replay 2010's 8% Overall Domestic Growth Rate”).  But we want to see whether that strong growth is due to adoption of Smart Computing solutions, or other factors.

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Among Large Tech Vendors, Microsoft Does The Worst Job Of Reporting Its Revenues

To keep track of what’s happening to the tech market, I collect quarterly data on the revenues from more than 70 large IT vendors. Accordingly, I spend an unhealthy amount of time looking at their quarterly earnings releases, analyst presentations, and 10-Q and 10-K reports — making me something of a connoisseur of vendor earnings releases, at least from the perspective of revenues and their breakdown by products and geographies.

From that perspective, Microsoft wins the prize for the most opaque earnings release. First, 2003 was the last time it provided its revenues by geography and its revenues from sales to original equipment manufacturers. Since then, there’s been no data or even guidance on its geographic revenues. Second, it does not break out sales to consumers from sales to business and government, although it does report the growth rates in its sales of Office and its other information worker products to consumers or to enterprises. Third, about every year or so, it re-juggles its product line revenues, shifting product revenues into or out of different product lines. While it generally restates the revenues for the prior eight quarters to bring them into line with its new business unit categories, it doesn’t provide guidance or data on prior years, making comparisons with past years very challenging.

I considered ranking other vendors on the transparency of their earnings releases. But I decided it would be more useful to describe the kind of data that I as a technology analyst — and other vendor strategists analyzing the tech market — would like to get from vendor earnings releases.

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