Information Technology Industry

Information technology (IT) is both a huge industry in itself, and the source of dramatic changes in business practices in all other sectors. The term IT covers a number of related disciplines and areas, from semiconductor design and production (also covered in the profile of the electronics sector), through hardware manufacture (mainframes, servers, PCs, and mobile devices), to software, data storage, backup and retrieval, networking, and, of course, the internet.

On top of this, there has been a convergence between IT and telephony, driven by transforming voice traffic from an analogue signal to a digital packet, indistinguishable from other data packets travelling through a computer network. IT in the leisure sector is already about enabling interaction with video, movies, and TV, and this trend is increasingly carrying into the business space.

Each of the major sub-areas in IT is itself capable of being divided into its component parts. Storage, for example, breaks down into disk drives, tape drives, and optical drives, and into attached storage and networked storage. PCs break down into utility-business desktop PCs, high-end work stations, and “extreme” gaming PCs for games enthusiasts—the computer and console games industry has already produced “blockbusters” that outsell top releases from Hollywood.

Software subdivides into numerous specialist areas, from relational database technologies to enterprise applications, to “horizontal” office applications characterized by Microsoft Office 2007, for example.

Somewhat off the main track of IT at present, but very much related to both increases in processor power, and to work in simulation and artificial intelligence, is the field of robotics. This lies outside the scope of this profile, but the linkages between robotics and IT are already transforming both manufacturing and defense.

In addition, the IT arena is characterized by a number of key trends and emerging technologies which, again, have the potential to transform the way businesses currently use IT, and carry out their operations. An example of a trend would be the outsourcing of IT services, such as desktop PC support, or whole IT-supported functions, such as accounts processing. An example of a technology trend would be virtualization. This refers to the ability of large servers to be subdivided into a number of virtual machines, which can be either virtual PCs or virtual servers.

Virtualization carries with it a number of benefits, including stopping what, at one stage, looked like an endless proliferation of servers inside companies. One large server can now be split into a number of virtual servers, enabling the organization to reduce the number of boxes it has to manage. Server virtualization should not be confused with another powerful trend, the creation of virtual environments inside the machine. The fact that desktop processors are now powerful enough to mimic real-world physics in computer space is transforming both design and entertainment.

All these trends have enabled the IT industry to continue to generate a strong demand for the next generation of servers, PCs, and laptops. However, in a recession, companies of all sizes generally postpone upgrading their IT, or implementing major IT projects that are not already in hand. This makes the sector vulnerable to downturns in the economy, and the current global downturn is already having a major impact on revenues in

 

Market Analysis

According to the IT market analysis firm, Gartner, worldwide server shipments and revenues saw double-digit declines in the fourth quarter of 2008. By comparison with the same quarter in 2007, shipment numbers declined by 11.7% while revenue dropped by 15.1%. Commenting on the figures, Heeral Kota, a senior research analyst at Gartner, said: “The weakening economic environment had a deep impact on server market revenues in the fourth quarter, as companies put a hold on spending across most market segments. Almost all segments exhibited similar behavior, as users sought to reduce costs and spending, deferring projects where possible.”

Gartner said that the fall in shipments and revenue was reported across all regions apart from Japan, which managed a 4.7% revenue increase. Europe, the Middle East, and Africa (EMEA) suffered the worst decline, with revenues falling by 20.6%. Even the emerging regions of Latin America and Asia-Pacific suffered, with declines of 12.5% and 14.8%, respectively. North America server revenue declined by 14.6%.

The scale of the IT server sector as an industry can be seen from the fact that IBM, the market leader, ended 2008 with revenues of US$4 billion from server shipments, with almost exactly one-third of the global market. However, IBM saw revenues decline by 17.4% as a result of the downturn. Hewlett-Packard was next, with revenues of just under US$4 billion and with a 30% market share.

The figures in server shipments for 2008 chart the impact of the downturn fairly starkly. The sector had been enjoying fairly strong results during the first half of 2008, but a severe decline in sales set in as the intensity of the downturn began to bite, Gartner said.

If things are bleak on the server front, the outlook is just as bad for PCs. Gartner is predicting that the PC industry will suffer its sharpest unit decline in history in 2009. Gartner expects some 257 million PCs to ship worldwide through 2009. This would represent an 11.9% contraction on the numbers sold in 2008. Even after the dot.com bubble burst in 2001, global PC unit shipments only contracted 3.2%.

To view these statistics in perspective, it is important to remember that setting up a new chip-fabrication plant to make the next generation of PCs costs some US$3 billion. With margins on PCs being at an all-time low, it is very difficult for the industry to sustain itself if companies and households stop upgrading to the latest generation of PC.

According to Gartner, both developed market economies and emerging markets are forecast to go through tremendous slowdowns. After the telecoms and dot.com crash in 2001, sales of PCs in mature markets contracted by 7.9%, Gartner says, while sales growth in emerging markets slowed to 11.1% in 2002. Both these low points will be substantially exceeded in 2009. The impact will be deepened by hardware suppliers, who will act prudently and maintain inventories at an all-time low to avoid losses.

However, all is not total gloom. The trend for corporates and home users to switch to mobile PCs, rather than desktop units, will keep growth going for worldwide mobile PC shipments. Gartner is forecasting sales of 155.6 million units, up 9% from 2008. By way of contrast, desktop PC shipments will struggle to exceed 101 million, a drop of almost 32% on 2008. The most popular form in the mobile space will continue to be the mini-notebook, Gartner says. In particular, users are moving to higher-specification notebook PCs with larger screens, of around 8.9 inches. Prices, however, will continue to fall. Gartner is predicting that the price of a mid-specification mini-notebook PC with a large screen will fall, from an average of US$450 in 2008 to under US$400 by the end of 2009.

Another plus point is that the industry as a whole learned some valuable lessons in the crash of 2001, and is already demonstrating that it is much more agile, and better able to react to changing market conditions in 2009.

Not surprisingly, with all this bad news about slowing demand on actual “built” hardware, the downturn is also hitting demand for chip production. In fact, Gartner’s prediction here is that it will be at least 2013 before the semiconductor industry sees revenues comparable to those it achieved in 2008, when revenues peaked at US$256.4 billion. Over the course of 2009, the sector will see a drop in excess of 24%, with total global semiconductor revenues estimated to top out at US$194.5 billion. There is a precedent for this prediction, in that after the 2001 recession, the semiconductor industry took four years to get back to the revenues it had generated in 2000.

The contraction predicted for 2009 is considerably more gloomy than a prediction made by Gartner six months ago, when it was only predicting a contraction for the sector of 16%. On the plus side, modest single-digit growth should return in 2010.

Apart from semiconductor chip manufacturers, the other huge area in the field is memory chips, or, more specifically, DRAM chips. According to Gartner, DRAM suppliers lost more than US$13 billion in 2007 and 2008, due to massive overcapacity in the market and soft pricing. But many suppliers are now reducing supply, which should push DRAM prices back up, and put the industry on a better footing.

While the industry is absorbing all this bad news, there are positive trends that manufacturers, systems houses, value-added resellers, and consultancies can focus on. The move to replace tens or even hundreds of individual servers with large virtual servers is picking up pace, and is not going to be stopped by the recession. It is a cost-saver and efficiency driver, so companies will press ahead with virtualization programs. This, in turn, will drive sales of larger servers, and could drive applications upgrades as well. According to Gartner, worldwide virtualization software revenue will increase by 43%, from US$1.9 billion in 2008 to US$2.7 billion in 2009. Virtualization also plays well to the green agenda, and greening up IT by lowering its carbon footprint is another unstoppable trend for 2009 and 2010. Virtualization plays to this on a number of fronts. First, it is more power-efficient to run a single, large server than a number of smaller servers. Second, the manufacturing carbon footprint is lower, and, third, if the virtualization exercise extends to the desktop, then one server can replace dozens of PCs. Revenue from hosted virtual desktops (HVDs) is expected to more than triple, from US$74.1 million to US$298.6 million through 2009, Gartner says.

Storage systems in IT tend to be divided into external disk storage, where the disks are being “managed” in some way independently of processor resources, and attached storage, as in the typical PC or low-end server that comes with one or two hard drives already installed. According to the market analysis company, IDC, the worldwide external-disk storage market showed its first year-on-year fall for five years, for the last quarter of 2008. IDC reports a fall of 0.5%, with revenues totaling US$5.3 billion that quarter. Total disk-storage systems capacity shipped amounted to 2,460 petabytes, a growth of just 27.3% on the volume shipped in 2007. (The point here is that with e-mail and, now, live video, demand for storage should be vastly ahead of this figure).

Again on a positive note, one area where large and medium companies, as well as some service providers, can be expected to continue spending through the downturn is on the new IT concept known as “cloud computing.” IDC expects worldwide spending on cloud computing and cloud services to reach US$42 billion by 2012. Cloud computing is a term that essentially refers to the delivery of services to communities of users over the internet, instead of via a data centre located in the same building. Access to the service is via a web browser, and everything from storage to the processor power that drives the service is located remotely. The term itself comes from the way the internet is depicted in computer network diagrams (a non-specific “cloud”), and points to the fact that all the complexity of infrastructure that makes the service possible is hidden “in the cloud.”

According to a survey IDC conducted with almost 700 IT executives across the Asia-Pacific region, some 11% said they were already using cloud-based solutions. A further 41% indicated that they are either evaluating cloud-based solutions, or are piloting such solutions. Gartner, on the other hand, claims that cloud-computing application infrastructure technologies will still need some seven years to mature. It sees three phases of evolution for cloud computing going up to 2015 and beyond. Up to 2011, applications will be mostly opportunistic and tactical in nature, and will have little impact on mainstream IT, Gartner argues. By 2015, however, it expects cloud computing to have been commoditized, and to have become the preferred solution for many kinds of corporate applications that are now run in-house on standard IT equipment.

In summary, the immediate future for IT looks like being a period of tough belt-tightening. However, the underlying innovation in the sector, and its ability to transform mainstream business processes while enabling new kinds of business practice is undiminished, and should re-emerge to drive revenue growth once the global upturn starts to gain momentum.