A recent survey suggests that CIOs are loosening the purse strings on IT spending. IT vendors may want to hold off their celebrations, though, because much of the spending appears to be headed for deflationary forces like cloud computing, virtualization, and their kissing cousin, open source.
An economic rebound never looked so dire.
That's unless you're an IT buyer, of course, suggests a new report from Goldman Sachs. In this week's report, titled "A Paradigm Shift for IT: The Cloud," Goldman Sachs said it expects that pent-up IT dollars will flow in the short term to building out next-generation data centers (e.g., cloud computing). But in the long term, less money is expected to find its way into fewer wallets:
After the initial build-out, Cloud Computing could drive some headwinds for the IT industry, as a result of two factors. First, we see virtualization as a deflationary technology. Second, we see IT spending consolidating in the hands of fewer buyers--the Cloud providers, hosting vendors, and large enterprises. These factors will likely dampen IT spending growth due to greater utilization and buyer pricing power.
Even short-term build-outs may prove disappointing, however, as Goldman Sachs expects large enterprises to grow existing virtualization and automation technology adoption in the rollout of private clouds, shifting slowly to an embrace of public clouds over time. The chart below gives some idea as to when cloud computing will hit its stride:
Who wins in this scenario?
According to the report, Red Hat stands to benefit from the cloud-computing craze. ("Red Hat is well positioned for the emerging Cloud Computing ecosystem, largely due to its open source background and current ubiquitous deployments in data centers, including enterprises, as well as in Cloud providers such as Amazon," the report states.)
But the real beneficiaries will be...the same old crew. "[K]ey suppliers for internal Clouds are likely to be those that have the most complete portfolio of hardware, software, and services," including IBM, Hewlett-Packard, Cisco Systems, EMC, and Oracle.
New boss...same as the old boss.
The other beneficiaries are the start-ups that provide critical components of cloud computing, with an emphasis on management tools. Here we may see open-source companies benefit, including Reductive Labs (Puppet project), Cloudera, and the two rising private cloud companies, VMOps and Eucalyptus, among others.
While open source doesn't factor heavily into this particular Goldman Sachs analysis, the firm has before called out open source's role in wringing more value out of fewer IT dollars. Open source is a primary driver of the global reset in IT spending expectations.
With less money flowing into the pockets of fewer vendors, we can expect to see both increased consolidation and fierce competition for the IT spending that remains. Those vendors that can help CIOs do more with less stand to benefit from this shift to low-cost, high-value computing.
And those that can't? Well, let's just say they may pine for the good old days of the global recession.
As late as November 2008, Goldman Sachs was projecting a 4 percent decline in global IT spending, and a 5 percent drop in developed economies.
What a difference a few months make. On Monday, Goldman Sachs released an update to its "IT Spending Survey" report, and now projects a 9 percent decline in global IT spending, and a 12 percent decline in developed economies.
Goldman Sachs projects a more optimistic 1 percent decline in 2010 global IT spending, but given how quickly it has had to revise downward its 2009 projections, it wouldn't be wise to budget against these projections.
As with the last report, however, there is a serious silver lining for open-source vendors. Two of them, actually. The first is that surveyed participants now rank open-source software spending 21st on their priority list, up from close to bottom (of 43 total) in November. The second? 80 percent see cost reduction as critical, making it the top priority for CIOs.
As more CIOs understand the cost savings that open source delivers, I expect that we'll see open source climb the spending priority list even faster.
(Credit:
Goldman Sachs IT Spending Survey)
In other words, even as global IT spending gets slammed, open source's relative share of that spending should increase.
Take a recent example from the French Gendarmerie. Despite a 70 percent decline in its IT budget, the French Gendarmerie was able to maintain and grow IT projects, specifically with desktop-related projects, by moving to open source. Officials there estimate that they saved 50 million Euros in license fees alone.
Open source is truly the standout in Goldman Sachs' report. Software-as-a-service, which is also generally touted as a cost saver, declined in priority from the middle of the list to 36th. Want to save more money? Use open source. That's the message CIOs are buying.
Follow me on Twitter at mjasay.
Even as Forrester Research predicts a 3 percent drop in global information technology revenues, as reported by The Register, investment bank Goldman Sachs is piling on the woe it promulgated in an earlier report that CNET covered with a new report entitled "IT Spending Survey: Mapping 2009."
As detailed in the report, incumbent vendors are about to see their sacrosanct maintenance revenue streams get pillaged:
Where enterprise IT spending is likely to lag in 2009
(Credit: Goldman Sachs)Accounting for more than 50 percent of revenues at vendors such as Oracle, this is going to be painful, indeed, though the report also calls out that some of the bigger brand names are likely to weather the downturn better than most.
Even so, my company, and others that I advise, are seeing a flight from expensive maintenance contracts to open-source alternatives. At least half of my pipeline is filled with existing customers looking to dump their maintenance contracts with incumbent vendors.
Why? Because a solid open-source product can easily cost 10 percent of a proprietary vendor's maintenance contract, while delivering equivalent or better functionality. While any change will likely necessitate some third-party consulting--the No. 1 target for the budget ax in 2009--the cost advantages of doing this can still be substantial.
That said, any benefits from new projects must be near-immediate:
... Read moreInvestment bank Goldman Sachs just released its "Americas: 2009 Software Outlook" report, and it promises near-term pain for an already struggling technology industry:
The worst of the IT-spending slowdown likely remains in front of us, as we start the clock on slashed 2009 budgets. We forecast 0 percent revenue growth for our group, below consensus at 5 percent, and 1 percent earnings growth, below Street at 2 percent.
(Credit:
Goldman Sachs)
In other words, things are going to get worse before they get better.
For Goldman, this means that it is recommending stocks that it believes enterprise customers will buy into: defensive/large-cap stocks like Microsoft and Oracle, as well as companies that suggest "strong cost-cutting discipline and mission-critical product sets" like BMC, CA, and Symantec. Why? Because these are the safe bets, among other reasons:
We expect the "Big 5" software companies (Microsoft, Oracle, SAP, Symantec, CA) to benefit from more defensive revenue streams due to critical nature of functions, "stickier" maintenance, stronger negotiating leverage, and a likely spending consolidation to larger vendors. Hence, we assume 0 percent growth for this group in 2009.
The other reason called out in the report is that recessionary pressures will push CIOs to consolidate their IT spending into the big "ecosystem" vendors, rather than buying best of breed. If true, this will likely hurt open source, even as its lower costs help.
Even so, I'm looking at a sales pipeline for Alfresco Software, my employer, that is three times anything we've seen in the past, which suggests to me that the recession may be very good for open source, though more data (and time) is necessary to prove out this thesis.
Interestingly, Goldman sees Salesforce.com getting a lower share of IT spending in 2009, and it has slapped a "Sell" rating on its stock. I suspect that Goldman may be off in this, given that SaaS is a great way to adopt IT, at a measured pace with diminished risk. But the point is well-taken on spending with established vendors, though this may ultimately benefit Salesforce.com, as it's the biggest player in SaaS.
The only positive in a recession is that we'll see a serious separation of wheat from chaff in IT vendors. I continue to believe that open source will do well through the downturn (indeed, Goldman calls out Red Hat as a winner in the downturn, able to withstand downward pricing pressure), as well as SaaS, though I also concede to Goldman's point that a large portion of IT budgets will find their way to the industry's dominant vendors.
The bad news is that in its November report on IT spending, Goldman Sachs is projecting a 5 percent decline in 2009 in developed economies (the United States, Western Europe, and Japan), or 65 percent of IT spending, compared with 4 percent expected growth in 2008 and 7 percent growth in 2007. The slowdown will span all vertical markets (financial services, communications, and so on).
The good news? Goldman Sachs expects IT spending in developing economies, which accounts for 35 percent of IT spending, to hit 7 percent growth in 2009. The net? A 1 percent decline in IT spending in 2009.
The other good news? Most IT budgets are weighted toward operating expenditures, with OpEx consuming 75 percent of budgets, leaving just 25 percent for capital expenditures. Why is this good news? Well, that depends on how you make money. If you're an open-source or SaaS company, you fall into the OpEx spending category, where most of the money will be in 2009. If you're trying to peddle proprietary licenses (CapEx), well, good luck with that.
Of course, it's not all bad news for proprietary software vendors, as "operating budgets, which comprise staffing and recurring elements such as maintenance, typically have more resilience associated with them, even in downturns," according to Goldman Sachs. Given that an increasing percentage of revenue for software giants like Oracle comes from maintenance, they should be able to at least tread water on existing deployments.
Hardware vendors, however, should expect a gloomy 2009, but not everyone will be hurt equally.
... Read more
IT spending is expected to slow down.
(Credit: Goldman Sachs)Goldman Sachs has delivered some bad news for IT vendors.
In its "Independent Insight: U.S. Technology Strategy" report released Monday, Goldman Sachs predicts that IT spending growth in 2008 will drop to 4 percent from a former projection of 6 percent and that pricing pressure on vendors is going to get worse.
The good news, however, is that Goldman Sachs doesn't see IT spending levels dropping to their 2001-2002 or 1990-1991 levels due to more rational IT spending from 2003 to 2007. In other words, we have don't have as far to fall. The even better news if you're open-source vendor Red Hat? Shrinking IT budgets are your friend.
Where will IT dollars likely go? According to Goldman Sachs, hardware spending has likely already been cut as much as it's going to be, leading enterprises to look to save money with internal IT staff cuts and lower spending on services. Services, however, are more likely to be cut for onsite services, with 50 percent of Goldman Sachs survey respondents indicating that they will be cutting services budgets: offshore services are expected to remain relatively strong.
Not everyone is losing out in the downward economy, of course. Goldman Sachs sees growing enterprise interest in Apple's iPhone, for example. Software, too, may be a moderately bright spot:
In general, indications of software spending are marginally better than for overall tech spending, while indications for spending with Oracle looked better still. Linux is still making headway in the enterprise, with our responses showing Red Hat's dominance may actually be growing. A first read showed a meaningful proportion [21 percent] of respondents planning to test Google apps, a negative for Microsoft longer term.
Oracle is succeeding, with 35 percent of survey respondents indicating that they plan to increase Oracle spending, because it can aggressively cross-sell its vast product portfolio at a low customer acquisition cost, while Red Hat and Google are winning because they offer superior value propositions. Unfortunately, Novell isn't seeing the same open-source bounce as Red Hat.
... Read more
Goldman Sachs IT Spending Indexes
(Credit: Goldman Sachs)Goldman Sachs has bad news for most of the IT economy: IT spending will slip from 7 percent growth to 5 percent growth in 2008. While not yet recessionary, the outlook is dipping dangerously close to that, as its indexes in its latest IT spending report show:
Expectations of budget growth remain down significantly on a year-over-year basis, with many CIOs limiting their purchases to projects with a high and fast ROI. We continue to believe that 2008 IT spending will decelerate to 5 percent from 7 percent in 2007....Demand for discretionary IT projects dropped to its lowest point in the history of our survey, with caution beginning to spread to the offshore providers.
CIOs have emphasized to us that they are buying on a need versus want basis, are often downsizing deals to fit with current budget constraints.... In fact, contrary to general tightening in spending, purchases with an especially compelling ROI are being accelerated in the current environment.
The sky isn't falling, but it's going to scrape a few vendors' heads in a worsening IT economy. No wonder venture capitalists are bemoaning their exit options and returns.
But not everyone is going to get pummeled. In terms of spending priorities for 2008-09, server virtualization and server consolidation were ranked No. 1 and No. 2, respectively, with cost cutting hitting No. 3 and grid computing and on-demand computing rounding out the very bottom of the list. (In addition to open-source software, which is not surprising because people shouldn't necessarily be proactively "buying open source" so much as buying open-source virtualization, applications, etc.)
In short, no one is clamoring to spend money on buzzwords.
... Read moreRemember the good ol' days of enterprise software when a vendor could foist a multimillion-dollar software package on an IT buyer and get away with also charging downstream fees for support and maintenance?
In a sign that this bleak time for IT buyers is at an end (and a bleak period is ahead for proprietary software vendors), Goldman Sachs this week cut its 2008 estimates on a wide range of software companies, citing a softening in capital expenditures for the near term. According to a Barron's blog:
Goldman cut 2008 estimates on many software stocks, focusing on enterprise exposure, pure-plays that could be harmed as customers seeks to purchase good enough substitutes from larger vendors, and vendors who sell big ticket items that could be delayed in a slower spending environment. The firm cut estimates by 1 percent on average...... Read more
The data in this Goldman Sachs report is dated (2003) [PDF], but it provides an interesting historical look at what we thought Linux would do back in 2003, and what it actually has done. The good news: the data is off. Goldman Sachs underestimated just how prevalent Linux would become in just four short years. For example, Goldman Sachs' survey revealed that only 39% of enterprise IT respondents were using Linux, but today that number is ~100%. Open source does quite well when the customer gets to vote.
It's going to be a long decade for Microsoft and the UNIX vendors especially because, as PJ at Groklaw notes, the widespread adoption in enterprise IT is only one instance of Linux's growing dominance. Significant, but it's the global tidal wave that should be of more concern to the proprietary vendors. Perhaps this is one reason for Microsoft's patent noise?
Linux-on-Intel appears likely to emerge as the dominant platform in corporate data centers....
... Read more
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