Will IT Spending Drop in 2001?

For most of the first half of the year, technology pundits from Aberdeen
to TechRepublic have repeatedly tried to discredit the alarmists that feared
IT spending will stop. But the bleak overviews of business conditions
proliferated on Friday by one technology giant after another suggested that
overall IT spending just might decline for the first time from the $665
billion spent in 2000.

As late as last month, Aberdeen Group indicated that global IT spending would grow at a compounded annual
growth rate of 9.6 percent. Those findings matched results of Dataquest, the
unit of Gartner Inc., which forecasted the worldwide IT services market to
expand to nearly $750 billion in 2001, despite the “concern about the
economy and the struggles among dot-com companies.”

But companies now admit that increasingly longer sales cycles and pricing
pressures are starting to affect IT spending much more than the dot-com
bust. Indeed, enterprise solution provider BMC Software indicated it
experienced pricing pressure, in part from competition, but mostly due to
customers that were unwilling to fork over their hard-earned dollars.

“Our closure rates at the end of the quarter were lower than we
expected,” said Bob Beauchamp, president and CEO of Houston-based BMC.

What normally took 12 months to complete now takes place on an 18-month
time frame, according to Raymond Boggs, vice president of International Data
Corp.’s Small Business and Home Office Research.

Last month, Boggs penned a study that found small businesses will spend less on
technology in 2001 than they did in 2000. The decline largely represents a
contraction in the desktop PC segment but also from networking and
enterprise systems.

“We actually were surprised by the relatively low use of local area
networks by small business despite lower priced solutions being available,”
Boggs told InternetNews.com.

To be sure, small businesses and home offices merely represent a small
portion of the overall IT market. (To date, no research firm has yet
projected a slowdown in IT spending for 2001.) And Boggs also was quick to
point out that small businesses traditionally are “a poor judge” of IT
expenditures, always projecting 30 to 40 percent below what they’ll
actually spend.

Still, early signs show that prolonged sales cycles are temporarily halting the growth in IT spending. And those signs will likely continue to pop up over the next three
weeks as most of Corporate America releases their first half results.

“The June/July quarter for enterprise systems companies is showing
similar or deteriorating trends compared with the [first] quarter,” wrote
Laura Conigliaro, hardware analyst at Goldman Sachs.

Even the data storage market, which was supposed to be the largest
segment of the IT market, is staggering after industry leader EMC Corp. of
Hopkinton, Mass., said customers are taking “a longer time to spend what
they do have.” The company stock on Friday helped drag down
the whole stock market after admitting it would earn only a fraction of what
had been expected.

“It now appears that there are fewer dollars being invested in
information technology than a year ago,” said Joe Tucci, EMC’s president and
CEO. A company spokesman said that Tucci’s comments are based from
observations and conversations with EMC’s customer base but clarified that
EMC’s top officer is not making a projection on the year.

To Goldman’s Conigliaro, however, the picture still isn’t any better.

“Even at current low prices, some customers told us that they would just as soon
wait until next quarter when prices invariably will be lower,” she wrote.

“Pricing is unusually aggressive and, combined with lower volumes, is
taking its toll on gross margins. This will be hard to reverse in its
entirety, even when demand starts to firm,” the analyst added.

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