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Not all doom and gloom in IT

The events of 2001 have reminded us that, for most companies, havinga great technology infrastructure isn’t the decider between success andfailure. This can be seen from the savage impact wider economic andpolitical events have had on businesses this year – and also from the fateof many IT companies.

First, let’s be clear that business IT spending hasn’t collapsed. It’sbeen holding up far better than the gloom in the press and on the stockmarkets suggests. IT spending has been cut, but no more than otherbusiness spending in the slowing economy.

The consensus among the research firms is that business IT spending during2001 will turn out to have been higher than in 2000 – by only 2-3% it istrue, but this is still growth. The IT industry as a whole hasn’tcontracted.

It’s true that hardware sales have dipped and many dotcoms and applicationservice providers have disappeared. But businesses still need and arestill buying IT products and services. Indeed, some trusted suppliers aredoing well. Among the winners are IBM and Dell, along with big outsourcingcompanies EDS and CSC.

The losers include most of the other PC manufacturers, network-equipmentmakers such as Cisco and Nortel, and telephone operators. Software andservices have held up better, but firms relying on Internet-drivenbusiness models have hit trouble, including former hosting giant Exodusand many specialist e-commerce developers.

PC makers have been having a tough time for several reasons. Consumerdemand has dropped off because people are worried about spending onbig-ticket items when the overall economic outlook is so unclear.

Meanwhile business demand for desktop PCs has been flat in Europe and indecline in the US because of a combination of the general investmentclimate and where we are in the equipment replacement cycle. The ITindustry is paying now for its success in persuading businesses to replacemachines in 1999 as a precaution against the millennium bug – a largechunk of the installed base is less than three years old.

Dell has bucked the trend and has grown sales – and still makes a profitfrom them. It has pulled off this trick because its very efficientbuild-to-order business model gives it a cost advantage that it hasexploited to win an intense price war. It has taken substantial corporatebusiness away from Compaq and the other top vendors.

Compaq, which was the world’s number one PC vendor last year, is nowtrailing Dell worldwide and is even further behind in the US, where Dellnow has over a quarter of the PC market. Compaq’s troubles have beencompounded by its stop-start merger with HP, which casts doubt over thelong-term future of its product lines.

IBM has benefited from its diverse business. Over 60% of its revenue comesfrom software and services. IBM’s reputation makes it a supplier of lastresort, which stands its services arm in good stead when buyers arenervous. “It may be expensive but its solutions will probably work,”people seem to feel, a sentiment reinforced by IBM’s cleveradvertising.

IBM has been doing well in databases against Oracle, and has also beenwinning share in high-end storage systems from EMC.

EMC’s troubles also cast doubt on HP’s strategy this year of viciouslycutting costs to keep investors happy. Cost cutting is dangerous forhigh-tech vendors when it affects research and development – hurtingfuture products. If HP falls behind it could be in trouble because itscustomers can easily switch to rival vendors in many of its key markets(PCs, servers, imaging). If it cuts too deep HP could find itself endingup little more than a printing ink and toner supplier, this being one areawhere it does have customers locked in.

Oracle, while remaining profitable, has seen a 20% decline in licencerevenues. This is roughly in line with the experience of most enterprisesoftware companies, suggesting general economic conditions are toblame.

Microsoft has done better. All things considered it has had a good year.It has been successfully chipping away at Oracle’s database business frombelow, but more importantly Windows 2000 has sold well and it hassuccessfully evaded the US Justice Department’s attempts to break it up.But it isn’t in the clear yet. The European Commission is still pursuingit under competition laws, and it isn’t yet known whether users willembrace the new Windows XP operating system.

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