Enterprise IT is in flux. Weak economic conditions will pressure budgets, particularly in the government market, while CIOs contemplate a major strategic change of direction. The focus is on making the deluge of data useful, fostering collaboration, and empowering a mobile workforce, with an eye toward the inevitable transition to “the cloud”. As such, the PC upgrade cycle is winding down without real prospects of a further wave ahead, as thin and mobile devices begin to take hold in the enterprise. Data center investment, driven in recent years by virtualization, is cresting. The incremental demand will come from cloud-based businesses, which will continue building distributed data processing, storage and networking capacity at breakneck pace. The leaders in this are building overwhelming competencies in managing “big data”, serving mobile user bases and fostering collaboration that will yield strategic value to enterprise customers far beyond cost savings. As IT departments shift to this model, over the course of years, hardware will be commoditized and software franchises exposed to harsh competition. Winners: cloud hosts, cloud optimized SaaS, IT consultants, mobile platforms, and commodity cost leaders. Losers: traditional data center IT.
A fourth consecutive year of economic turmoil will dampen enterprise IT spending, particularly by government customers. 2011 was a strong year for global enterprise IT spending, growing more than 7.5% YoY against fairly easy compares. However, projections for 2012 suggest a sharp deceleration, with the eurozone crisis the biggest issue. We are more bearish than most, with a particular concern for government IT spending, which has risen from 12% to 18% of global demand since 2000 and faces heavy budget pressure in almost all geographies.
CIO priorities turning more strategic, and information-driven vs. business process driven, shifting focus from legacy applications and opening doors for new vendors. In a difficult spending environment, CIO surveys suggest that IT investment priorities are changing from operational support to more strategic ends. Business intelligence – using IT to gain insight from rip tide of enterprise data – now takes the top spot in Gartner’s survey, while a move to “the cloud” takes second. Collaboration and mobile applications have also become top issues across multiple surveys. In contrast, traditional applications, like ERP and data base management systems, are not investment priorities and, in fact, could be vulnerable to new competition with a move to the cloud.
The PC upgrade cycle is receding, the next (and likely, last) up-cycle is likely several quarters away, and should usher in an era of thinner, more mobile clients. A part of the upside surprise in 2011 IT spending was an unexpectedly strong Windows7 PC upgrade cycle that will not repeat in 2012. While the release of Windows8 is scheduled for the fall, we believe that it will not stimulate another upgrade cycle, but rather enable tablets and ultrabooks to compete with other mobile platforms to cannibalize the traditional PC. These products will be smaller, cheaper and, importantly, a foothold for a new architecture and a new set of device vendors in the enterprise.
Spending on data center virtualization may decelerate this year, as enterprise IT anticipates a future in the cloud. The other important piece of strong 2011 IT spending was the ongoing build out of virtualized data centers. Deploying this technology allows IT departments to consolidate processing and storage, gaining flexibility, economies of scale, improved utilization, and easier applications deployment and support. However, the virtualization wave has crested and CIOs are now focused on the move to the cloud, which could render further investment in local data center capacity superfluous.
Cloud-based vendors, with established bona fides advantaged for high priority applications. Leading cloud operators offer massive scale economies, leading edge data center design, superior support capabilities, and ubiquitous access vs. traditional enterprise data centers, often forged over years of investment. These advantages are particularly beneficial to the business intelligence, collaboration and mobile workforce applications at the top of CIO priorities and difficult to exploit by software not purpose built for the cloud. As such, companies with established scale and skill in the cloud, like Amazon, IBM, Microsoft, Google and Salesforce.com, will be difficult to catch.
Spending on cloud-based data centers will accelerate, spurring market shift to commodity hardware and open source software. As the migration to the cloud begins in earnest, investment by these massive data processing operations will be the most important demand driver for enterprise IT. Unfortunately for most IT vendors, these highly sophisticated data center operators will not buy the same expensive, proprietary, turnkey solutions that their enterprise customers bought. Rather, they will buy cheap, commoditized hardware in bulk and develop their own value-added software solutions on top of inexpensive open-source infrastructure.
The leaders in the cloud will win. Specifically, the top cloud hosts, the best purpose-built SaaS vendors, the most cloud savvy IT consultants, and the lowest cost commodity component suppliers are positioned to capture a disproportionate share of enterprise IT market value. We also expect a sharp uptake of mobile devices into the enterprise market, obviously benefitting leading platform ecosystems.
Traditional enterprise IT vendors will lose. Similarly, premium hardware and software vendors into the enterprise IT data center will suffer, as customer relationships open to competition and commodity solutions pressure prices. This includes makers of PCs, servers, storage systems, and networking gear, as well as most traditional software players.
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