While a lot of attention has rightly shifted to the long-term promise of new technologies like IoT, artificial intelligence and augmented reality, we haven’t yet reached the endgame in terms of the opportunities surrounding the migration to cloud and mobile platforms which have largely driven the IT market since 2012. In fact, vendors which have gone through the sometimes painful process of shifting their business focus to the 3rd Platform over the past five years should be rewarded with improving fortunes in the next 12-18 months.
Last Year's Weaker Period for IT Spending and Today's Upturns
Cloud Services and Software
The last year or so has been a weaker period for IT spending, overall. Cloud service providers took a breath after several years of aggressive infrastructure investment, with some waiting for the next Intel cycle (Purley) before upgrading their core datacenter equipment. Software-defined everything has also begun to take a bite out of infrastructure hardware spending. But end-users are still migrating to cloud services at an impressive rate of adoption, and this should drive another strong cycle of datacenter spending in the near term. Cloud service providers will resume their buildout and deployments from the second half of this year, while year-on-year comparisons will also become a little easier (2015 was a huge year for cloud deployments). Meanwhile, more software value will shift to SaaS and PaaS.
On the mobile side, last year saw a sharp slowdown in smartphone sales momentum, with the overall market posting growth of less than 1% in constant currency terms (still somewhat better than declining sales of tablets and traditional PCs). Some of that slowdown reflected a lack of compelling innovation at the maturing premium end of the market, and some of it was due to increasing price competition in key markets like China. Both of those headwinds are receding somewhat, as innovation picks up steam and smartphone users in emerging economies begin trading up to more powerful devices.
The smartphone remains fundamentally central to the IT market, and rumors of its demise were greatly exaggerated. Not only that, but tablets will also return to growth from 2018 onward, as premium devices start to account for a larger share of revenues. In fact, mobility is likely to become an even stronger focus for product design across all devices in the next few years, with a large proportion of growth (and profits) in the traditional PC market also concentrated on ultra-portable form factors.
Cloud-First, Mobile-First Strategy is Central to Today's Tech Market
All the talk a few years ago was of a cloud-first, mobile-first approach to technology market strategy, and there’s no doubt that the center of gravity for the industry has dramatically pivoted towards these platforms since 2012. This has a number of implications for vendors and suppliers. For example, China accounts for around a quarter of all client device sales in the world today, thanks to the explosion in smartphone adoption.
Similarly, cloud service providers account for a still-growing share of all sales of servers, storage and network equipment. Software which has been redesigned around the cloud and mobile fulcrum has seen strong rates of growth, while project-oriented IT services related to enterprise mobility and hybrid cloud deployments have somewhat made up for cannibalization of traditional revenue streams like outsourcing.
Global Economic Uncertainty Impacting IT Spending
The elephant in the room is continuing uncertainty over the global economy. While enterprise cloud adoption is unlikely to be significantly derailed by any slowdown in GDP, it could shift the focus of cloud deployments towards projects with a rapid scale of cost-savings and lower levels of risk. Similarly, the smartphone isn’t going anywhere, but business spending on mobile application development and enterprise mobility services would inevitably be impacted in the short term by a severe downturn in the economy.
Upgrading a fleet of PCs to faster, more portable or detachable devices is the kind of thing which a company may choose to put on ice for a year or so if confidence is heading south. In a worst-case scenario, if businesses are not hiring as many new employees (or even lowering their headcount) this would have a direct impact on the number of PCs or software licenses they need to budget for. Datacenter infrastructure which hasn’t yet moved to the cloud could either be put on a fast track to migration or just maintained for another year. Operational spending would be more insulated and ring-fenced: in the past, this meant traditional outsourcing and maintenance services and anything related to security, whereas now it increasingly means public cloud services too.
Global Economies: Europe, USA, China
The good news is that the likelihood of a big economic slowdown has receded since the beginning of the year. Europe has performed better than expected, despite uncertainty around Brexit. The US economy is still growing and creating jobs, and China has so far avoided the downside scenarios around a potential ‘hard landing’. Emerging markets are still broadly heading in the right direction, although some are at the beginning of a long haul. Oil producers are benefiting from a little more stability in energy costs. As a result, the foundations for a strong second half of the year in tech spending are pretty solid.
This is not to say that the threats have dissipated completely. Brexit is likely to start dragging on the UK economy in the next couple of years, and the outcome of negotiations with the EU will go a long way to determining whether this slowdown spills over into the rest of Europe. Interest rate rises may start to drag on a US economy which some economists still regard as fragile and vulnerable to external forces (like a slowdown in China). The EIU is still forecasting a significant slowdown in China in 2018, which could start to drag on the rest of the global economy soon afterwards.
Today's Implications for ICT Spending by Cloud and Mobile Growth
The shift to a cloud-first, mobile-first market should nevertheless mean that the ICT industry is a little less vulnerable than in the past, when it relied more directly on capital spending by large corporate clients which have been operating in a mode of permanent contingency planning since the financial crisis (it not before). The growth of cloud means that more spending has been moved to an opex model, which will naturally be less volatile in the face of any short-term slowdown in the economy. It also means that capital spending is less reliant on large corporate end-users, with cloud service providers accounting for a larger share of investment. Service providers will tend to keep investing for as long as the demand for their services remains stable.
The same can even be said for the impact of mobile, to a lesser extent. Most smartphones are purchased by consumers, and many are subsidised by telecom service providers with 2-year contracts, effectively transferring the cost of a new smartphone to an opex model too. As long as people keep using faster and more capable phones to download and stream more data, so the service providers will keep investing in their physical infrastructure to serve those customers effectively (especially in countries where competition is fierce). Sales of commercial tablets and portable PCs would clearly be impacted by a slowdown in the economy, and there might be some impact on smartphone sales or average prices if this slowdown lasted for more than a 6-12 months, but overall spending is less vulnerable than a decade ago when sales of traditional PCs to businesses and consumers accounted for a much bigger share of total revenues.
Will there be a slowdown in the next 18 months?
We assume that growth will be slower in China by the end of 2018, and that this will have some impact on other countries including the US by the end of 2019. The short term outlook looks rosier, and this sets the stage for a strong spending cycle in the second half of 2017. Excluding phones (which are following a different, more volatile path), IT spending is expected to show relatively steady growth over the next 2 years, with improving momentum in emerging markets such as Brazil, Russia and the Middle East/Africa which have been impacted by economic factors since 2015. Western Europe may be affected by Brexit, but other regions are broadly heading in the right direction. The short-term forecast is for relatively clear skies and warm temperatures.