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.
The Canadian market for purchases of information and communications technologies (ICT) by businesses and governments is about 10% the size of the US ICT market, and only about 3% of the global ICT market. Still, it is an important market because of the sophisticated level of its tech adoption (i.e., its readiness to adopt advanced technologies) and its proximity to the US market.
Canada's ICT market growth rates of 6.2% in 2011 and 2012 growth of 8.1% in Canadian dollars will be very similar to the US ICT market growth in US dollars in the same periods. With the Canadian dollar having gained strength against the US dollar, that means that US vendors will see even stronger Canadian revenue growth when they convert their Canadian sales back into US dollars.
Communications equipment and software will have the strongest growth in 2011, at 10.5% and 8.4%, respectively. Computer equipment growth of 4.4% and telecommunications services growth of 2.2% will be the weakest product categories.
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?
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.
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.
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.
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.
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.