We have just published Forrester's current forecast for the global market for information technology goods and services purchased by businesses and governments (see January 6, 2011, "Global Tech Market Outlook For 2012 And 2013"), and it shows growth of 5.4% in 2012 in US dollars and 5.3% in local currency terms. Those growth rates are a bit lower than our prior forecast in September 2011 (see September 16, 2011, “Global Tech Market Outlook For 2011 And 2012 — Economic And Financial Turmoil Dims 2012 Prospects"), where we projected 2012 growth of 5.5% in US dollars and 6.5% in local currency terms. I would note that these numbers include business and government purchases of computer and communications equipment, software, and IT consulting and outsourcing services equal to $2.1 trillion in 2012, but do not include telecommunications services.
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.
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?
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.
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:
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.
On Tuesday, we were ready to publish our mid-2011 global IT market forecast. It projected 7.4% growth in the US IT market in 2011, and 10.4% in 2012. Global growth in US dollars was forecast at 10.6% in 2011 and 7.6% in 2012, with the dollar rebounding in 2012 from its weakness in 2011; measured in local currencies to eliminate currency fluctuations, growth was projected to be 7.8% in 2011 and 9.1% in 2012. Our definition of the IT market included business and government purchases of computer and communications equipment, software, and IT consulting and outsourcing services -- it did not include their purchases of telecommunications services, which are declining in the US and growing slowly globally.
Our forecast did recognize three threats to economic growth, and thus three risks to our forecast: 1) a failure to reach a sensible resolution to raise the US debt ceiling and start on a path to lower budget deficits; 2) a failure of European governments to reach a sensible resolution to the Greek debt crisis that lowered the Greek debt burden and reduced the risk of a broader debt crisis that included Italy and Spain; and 3) overreaction by China and India to rising inflation that reduced their growth.
Back during the dot.com boom years, existing telcos and dozens of new network operators, especially in western Europe and North America, laid vast amounts of fiber optic networks in anticipation of rapidly rising Internet usage and traffic. When the expected volumes of Internet usage failed to materialize, they did not turn on or “light up” most (some estimate 80% and even 90% on many routes) of this fiber network capacity. This unused capacity was called “dark fiber,” and it has only been in recent years that this dark fiber has been put to use.
I am seeing early signs of something similar in the build-out of infrastructure-as-a-service (IaaS) cloud offerings. Of course, the data centers of servers, storage devices, and networks that IaaS vendors need can scale up in a more linear fashion (add another rack of blade servers as needed to support an new client) than the all-or-nothing build-out of fiber optic networks, so the magnitude of “dark cloud” will never reach the magnitude of “dark fiber.” Nonetheless, if current trends continue and accelerate, there is a real potential for IaaS wannabes creating a glut of “dark cloud” capacity that exceeds actual demand, with resulting downward pressure on prices and shakeouts of unsuccessful IaaS providers.
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”).
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?
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.