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.
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.
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:
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.
While the last results for US Senate and House of Representative seats are still trickling in, the overall picture is clear — the Republicans have taken control of the House, but the Democrats will retain their majority in the Senate and of course still hold the presidency. In my view, this outcome is a small positive for the tech market, but doesn’t fundamentally change our outlook for around 8% growth in the US IT market and 7% growth in global IT markets in 2010 and 2011.
On the eve of the election, my big concern from an IT market perspective was that the Republicans would take control of both the House and the Senate. That concern was not driven by my political affiliation (which happens to favor the Democrats), but by the potential for a political stalemate between a confrontational Republican Congress (with hard-line conservative Republicans and Tea Party supporters setting a shut-down-the-government tone) and a combative Democratic president. In that political environment, badly needed measures to help stimulate a lagging economy would get stalled, the political battles could shake already weak business and consumer confidence, and the US economy could then slip into a renewed recession. And an economic downturn of course would be bad for the tech sector.
Like many business executives and consumers, I have been paying a lot of attention to the economic indicators, looking for signs either of a stronger economic recovery or a potential renewed recession. As a technology market analyst, I track economic indicators because I’ve found that the growth in the economy is one of the best predictors of what the technology market growth will be -- far better than surveying CIOs to find out their spending plans, which tend to be backward looking.
Based on my reading of the economic indicators and the forecasts of professional economists, it looks to me that both the US economy and the global economy will fall between extremes of strong growth or recession, growing weakly but not slipping back into recession. As a result, in Forrester's latest forecast (US And Global IT Market Outlook: Q3 2010), we have trimmed our forecasts for the US tech market to a still-robust 8.1% growth for 2010 (down from our 9.9% forecast in July), with 7.4% growth in 2011. Globally, the tech market measured in US dollars will grow by 7%, compared with our July forecast of 7.8%, with the somewhat weaker outlook for the US tech market offsetting slightly better performance in Europe and strong growth in Latin America, the Middle East, Africa, and Asia/Pacific.
These forecasts include business and government purchases of computer equipment, communications equipment, software, IT consulting and systems integration services, and IT outsourcing. If we add telecommunications services (as we do for the first time in this report), US information and communications technology (ICT) market growth in 2010 will be 5.6% and 6.6% in 2011.
Like thousands of Oracle clients and a dozen or so Forrester analysts, I was at Oracle OpenWorld last week. One of the big news items was the announcement of the availability of Fusion Applications. The creation of these new applications has been a massive effort, involving many of Oracle’s top software designers and developers working for over five years. My preliminary opinion, along with my colleagues, is that Fusion apps do have some useful new features and a better user interface than prior Oracle products, as well as providing a more credible SaaS option than Oracle's prior On Demand offerings.
However, there seems to me to be a lack of clarity as to how Fusion apps fit in the evolution of the Oracle family of apps. To its credit, Oracle has stated that it is going to be responsive to clients, not forcing them to convert to Fusion nor make staying on existing apps unattractive by not supporting and enhancing those apps. Instead, it wants to make Fusion apps so attractive that clients will want to adopt them, either (rarely) as a whole suite or (more likely) as step-by-step replacement or additions to existing app products. Still, that leaves unclear what Oracle sees as the endgame for Fusion vs. its other app products.
As I see it, there are four scenarios for how Fusion apps will relate over time to the existing portfolio of apps that Oracle has acquired and continues to support through its Applications Unlimited position:
Fusion apps take over and replace the other applications over time.
Fusion apps become yet another app product line, which co-exists with the other apps.
Fusion app features and functions percolate into and are absorbed into the other apps, which persist indefinitely.
Fusion apps provide new categories of applications, which get brought into the other app families as add-ons.
While taking in the latest US GDP report and its implications for the tech markets, I have been struck by a pattern of US business putting its money into technology instead of people. Part of the increased tech investment is replacement of old servers and PCs, but most investment has been in technologies to cut costs and improve efficiency. These purchases have been good news for the US tech market, which (as I predicted) is growing strongly. However, it is not so good for the overall economy. The lift to US economic growth from business IT investment is a positive, but the corporate reluctance to hire new employees is making consumers reluctant to spend. Moreover, much of the business investment in computer equipment is flowing overseas in the form of imports of these products, which is also hurting US GDP growth. So, the strong outlook for the tech market is paradoxically contributing to a less robust outlook for the US economy.
The US Department of Commerce released its preliminary report on US Gross Domestic Product in Q2 2010 last Friday, July 31, 2010, and today posted more detailed numbers on business investment in computer equipment and communications equipment. In addition to providing Q2 2010 data, there also were revisions in data for business investment in computer equipment, communications equipment, and software for 2007 to Q1 2010. So, let’s look at what the latest data is saying about the state of the US tech market.
To paraphrase Charles Dickens, Q2 2010 seemed like the best of times or the worst of times for the big software vendors. For Microsoft, it was the best of times; for IBM, it was (comparatively) the worst of times; and for SAP it was in between. IBM on June 19, 2010, reported total revenue growth of just 2% in the fiscal quarter ending June 30, 2010, with its software unit also reporting 2% growth (6%, excluding the revenues of its divested product lifecycle management group from Q2 2009). Those growth rates were down from 5% growth for IBM overall in Q1 2010, and 11% for the software group. In comparison, Microsoft on June 22, 2010, reported 22% growth in its revenues, with Windows revenues up 44%, Server and Tools revenues up 14%, and Microsoft Business Division (Office and Dynamics) up 15%. And SAP on June 27, 2010, posted 12% growth in its revenues in euros, 5% growth on a constant currency basis, and 5% growth when its revenues were converted into dollars.
What do these divergent results for revenue growth say about the state of the enterprise software market?