For those of us anchoring our market analysis on vendor revenues for the quarter, the waiting isn’t over yet. It’s the vendors who publish results unaligned with calendar quarters that are ‘at fault’ so to speak. HP announces its financial results on May 20th 2009 and companies such as Dell, Accenture and few others can be used, but publish even later… By the nature of things it’s prudent to publish quarterly results less than one month in arrears. I would normally wait until next Wednesday but I think there’s an immediate, urgent need to talk about the perilous state that our market finds itself in. I want to help with ‘survival tools’ but think we’ve got to face the reality of the situation.
What’s Been Happening Up To Q109?
Taking vendor revenues, estimating where necessary and factoring up to an estimate of total market values we arrive at the first two thirds of the time-line shown in Figure 1. It shows some interesting historical trends. For instance:
- Telecom Services – the biggest has actually been the most dynamic, with peaks and troughs outside the scope of the other three categories.
- Hardware has under-performed other categories – by definition demonstrating a lack of comparative demand, but also the result of widespread dis-aggregation of software. Hardware products fell first as we entered the downturn.
- Software perhaps because it is the smallest has had the highest growth of the categories and IT Services is somewhere in the middle
I read somewhere recently about the death of hardware, software and services as categories. What my research shows is that they are closely allied (as is Telecoms Services). They are interdependent and do more to classify the market assumptions their suppliers make and the supply chain the build than any intrinsic difference in value to the customer. However I think they are really helpful in researching and analysing the market.
The Pros And Cons Of Vendor Modelling
Those of you following my blog will see that I make constant references to vendor revenues. While collecting the data from my 57 chosen vendors I’ve come to the unfortunate conclusion that we’re skating down a steep cliff of a deep downturn. The World ITC markets fell by 12% in Q109 to reach around $1.3T according to my estimates. We all know we’re in it – but everyone’s trying to work out how long it’s going to last.
Vendor revenues don’t relate on a one-to-one basis with market spending. For instance:
- There are a number of almost pure ITC-vendor-to-ITC-vendor businesses (such as Intel, AMD, Wistron, Compal, Quanta). The movement of these companies’ revenues can help us take the pulse of the patient – but they are so far back in the supply chain that it’s better to track the Major Brands to see how user spending is going.
- Once the Major Brands get hold of the products the distributors add value, but we have to strip out the channel margin as a component of user spend – always a small proportion of their revenues.
- Even the Indian software companies such as Tata Consulting Services and Wipro work for other vendors – so we might make the mistake of double-counting the overlapping customer spend. The services area is full of sub-contracting and co-opertition.
- Finally I’ll mention the issue of organic and non-organic growth. In profiling companies such as Oracle, EMC, IBM and Cisco over the last couple of months it’s clear to me that the revenues of acquired companies often make these major vendors grow (non-organically) faster than the overall market. If we had models wide enough to include the acquiree as well as the acquirer, of course there wouldn’t be such a big problem. But there are literally millions of ITC companies around the world – especially in software, service and distribution areas.
I’ve got grand plans of filtering out overlaps, applying calculations for adding channel margins and looking at indicators to create sub-regional and country splits… but that’s for later on. For now I thought I’d just look at the current situation and offer a market forecast. I’m doing my best to stay friends with the tens of forecasters I used to work with, but not having to integrate sure speeds things up.
The Length And Depth Of The Downturn
The last two big downturns in ITC spending came in 1992 and 2001, with the first deeper than the second – as demonstrated by long-term plotting of consumer, business and other confidence levels. This one looks as if it’s going to be bigger than both.
My forecast says that the downturn will last two years before recovery and that we’ll see the biggest fall (-14%) in both of the next two quarters (Q209 and Q309). Negative growth will lessen until we see the first quarter of positive growth in Q310. Following that I see single digit growth in each of the quarters to the end of 2011.
I do believe the different categories of offering will see different U-shapes in the downturn. In particular:
- Hardware leads us in and will also lead us out. I think we’ll see some small growth in Q210 while other areas’ growth remains negative.
- Software’s decline will be shallower. I don’t see it getting into double-digit decline. However I think the recovery for software will take longer – returning to growth only in Q111.
- Telecoms Services decline will not get much worse than the 12% it experienced in Q109. It is a hedge bet in a recession, because many people telephone when they can’t afford to travel.
- IT Services will suffer five more quarters of decline I believe. Although there are specific areas – such as outsourcing – which traditionally do well in a recession. This one may be different, as there’s not much left to outsource and many large companies are trying to renegotiate big multi-year contracts.
Eventually (like earlier downturns) the ICT market will return to growth and the next two years will be put down to a statistical blip (see Figure 2) people refer back to discuss the next problematic time. My hope is that I’ve flagged this one up early enough for us to be able to prepare and survive.
Profits Fall Faster Than Revenues
One of the subsidiary things I’ve been following is net income (or net profit) from the vendors in my model (Figure 3). So if you want to get really scared think about where the graph will go from now on!
Filed under: Market Share And Forecast, Surviving The Downturn Tagged: | downturn, EMEA, Forecast, it-industry, Martin Hingley, Recession
