State demand stimulates the American IT market

high tech
Forrester Research and International Data Corporation (IDC) forecasts released last week that U.S. information technology spending will grow 5 percent this year, bringing total spending back to levels seen in the 1999-2000 tech boom. At the same time, the main contribution to the development of this market is still made by the state - in terms of IT consumption, it is an order of magnitude ahead of any sphere of private production or services, providing contracts to the main manufacturers of computer equipment and software.

Optimistic forecasts

During the high-tech boom of 1999-2000, the costs of companies and organizations on IT reached their peak. According to IDC estimates, $835 billion was spent worldwide on IT in 1999, and $908 billion in 2000. However, in 2001, against the backdrop of the stock market recession, IT spending fell - the decline was -0.5% in 2001 and - 4.1% in 2002. In August 2003, the first increase in costs was recorded, which continued in the next four months. In general, in 2003, IT expenses increased by 2% - to $871 billion. But a breakthrough is expected this year. According to an IDC forecast released last week, average global IT spending growth will be about 5% this year. The largest increases are expected in the US at 5% and the Asia-Pacific region (excluding Japan) at 7%, while growth in Japan and Europe will be relatively modest at 3% and 2% respectively. Forrester Research also forecasts a five percent increase in IT spending in the United States. As in 2003, the main increase in costs is expected in the second half of the year, which is associated with the seasonality factor common to the entire US economy (see interview).
Up to two-thirds of global spending on IT occurs in the United States, while the most active buyer of IT products is the American state, which thus actually stimulates the development of the entire industry. According to Forrester Research, government IT spending this year will be greater than any industry in the US economy. The government is expected to spend $128 billion on IT—almost twice as much as professional services, which ranks second at $70 billion. Retailers are in third place with $62 billion.
As Forrester Research analyst Andrew Bartels said in an interview with Kommersant, the trend of state dominance in IT spending “has existed for several years now.” According to him, "during the fall in IT costs in the private sector in 2001-2002, the share of government spending on information technology rose to 18% of all IT costs." However, Mr. Bartels believes that the fall in tax revenues in 2003, caused by the policy of the administration of US President George W. Bush to reduce taxes and the general crisis of the American tax system, as well as the growing budget deficit, forced US federal and regional authorities to reduce their expenses, including on IT. And yet, the share of the public sector in IT costs will remain, according to Mr. Bartels, the most significant.
While all experts agree on the general growth trend of the IT market, their estimates of growth rates vary depending on the calculation methodology. Thus, the president of the analytical company Precursor Group, William Wyman, believes that growth will be from 8 to 11%, and the state will give way to the main consumer of IT in the financial sector (see interview).

What are they buying?

According to market experts, the cost distribution structure for various IT categories in the United States will not change significantly this year. According to Forrester Research, the structure of expenses in 2003 and 2004 is as follows: computers and peripheral equipment - $89 billion ($97 billion in 2004), communications equipment - $105 billion ($106 billion), software - $181 billion ($195 billion) , services - $94 billion ($97 billion), IT outsourcing - $70 billion ($76 billion), payment of salaries and incentives - $200 billion ($204 billion).
Overall, Forrester Research believes that this year's theme will be "doing more with less": 56% of surveyed IT executives plan to stay within their budget, 25% plan to spend more, and 19% plan to spend less. Most of the money will be spent on computer hardware—expenses for this item are expected to grow by 10%. Software costs will increase by 8%. The minimum increase in costs is expected in the field of networking and communications equipment - only 1%.
Obviously, the cost structure depends on the specifics of the business. For example, the majority of US retailers' IT spending will be on the purchase of high-tech equipment for retail and warehouse premises - 57% more than in the previous year. The growing need to master new information products will cause a 16 percent increase in spending on IT training for retail chain personnel.
A number of companies plan to develop their own priority areas. The telecommunications company SBC Communications announced plans to install the FreedomLink service, that is, Wi-Fi zones (wireless Internet access) in 3 thousand customer service centers of the fast delivery company UPS. By the end of this year, it is planned to provide wireless Internet to about 1.5 thousand UPS centers, next year - to another 1.5 thousand, and by 2007 - to another 2 thousand UPS customer service centers. The subscription fee for using the FreedomLink Wi-Fi service is $19.95 per month, or $7.95 per day. In general, by 2006, SBC Communications plans to install about 6 thousand Wi-Fi zones in the United States. AT&T plans to invest in optimizing the operation of its servers, the potential of which is currently only used at 5-10%.

Who sells

The rise in IT costs is closely related to the rise of the entire American IT industry. According to a report by the US Department of Economics, published in mid-December 2003, the growth of the American IT industry in 2003 was 6.4% compared to 1.6% in 2002 and 0.9% in 2001 (Kommersant wrote about this on 12 January). Receiving more funds from the sale of their products, manufacturers of computer equipment and software invest them in the development of production and research, which as a result leads to the entry of new technologies and equipment into the market, stimulating new purchases.
The largest players in the US computer equipment market in terms of market capitalization are IBM - $156.9 billion, Dell - 86.8 billion, Sun Microsystems - $13.9 billion and Apple Computer - $10.3 billion. Leaders in the production of peripheral equipment - Hewlett-Packard - $70.6 billion, Canon - $45.7 billion and Lexmark - $11.9 billion; The largest software development companies are Microsoft - $272 billion, Oracle - $62.8 billion and SAP AG - $48.7 billion. At the same time, IBM, HP, Dell, Microsoft, Oracle, as well as Computer Sciences Corp. (CSC) and Electronic Data Systems (EDS) are major suppliers of products to the US government.
The second half of 2003 turned out to be the most favorable for the major manufacturers of computer hardware and software in the United States. Average revenue growth for hardware manufacturers was 12% in the third quarter, and 11% in the fourth quarter. The most successful hardware sellers were Dell (the company's revenues in the fourth quarter of the last fiscal year increased from $9.7 billion to $10.6 billion) and Hewlett-Packard (its revenues grew from $17.3 billion to $19.8 billion). Revenues from software developers grew by an average of 16% in the second half of last year. Microsoft's 13 percent earnings growth in the second half of the last fiscal year was largely due to growth in sales of Microsoft Office and Microsoft Business Solutions.
EVGENY KHVOSTIK

Newspaper "Kommersant" No. 60/P dated 04/05/2004, page 17

Authors:

Evgeny Khvostik

Themes:

IT market

Growth at public expense