In 2015 the move away from second platform IT options accelerated. Businesses are now running on the third platform. From an IT investment point of view, IDC expects businesses to acquire core infrastructure assets for strategic business initiatives, but the evaluation process for new on-premise assets will be weighed carefully against alternatives such as cloud options or service providers (SPs). This is a key shift, as most businesses have now deployed IT cloud projects and will ramp up this activity as a way to shift expenses to business projects instead of IT expenditures. For financing companies, working with clients as they make this change will solidify the financing company’s role as a trusted advisor. However, it will require a shift in thinking as well, leading to a need for new innovative programs and IT consumption models, not just programs that offer low interest rates and deferred payment options.
Worldwide IT Spending Trends
During 2015, the markets have experienced many disruptions, ranging from Greece’s unstable economy to the slowdown in China and the Fed’s plan for interest rates. These disruptions are impacting the economic outlook. When reviewing IT equipment trends, the weakness in China and other emerging markets will impact overall demand cycles, and it is the main concern with global equipment trends. IDC research indicates that in 2015, IT spending for the top 25 countries will reach $1.9 trillion and is forecasted to reach $2.1 trillion by 2018. On a regional level, spending in the U.S. market continues to outpace other countries in the top 25 and is forecasted to reach $766.3 billion by 2018 at a 3.2% CAGR. Other IT trends are listed below:
Key Equipment Segments
The two product segments that experienced the most dramatic shift in 2015 are servers and PCs. In the server categories, economic and political events have affected the U.S. less than other geographic regions, which allowed revenues to remain on a steadier trajectory. In 2015, richer configurations are being sold, including more memory and disk, resulting in higher average selling prices over the forecast period. In 2014, the average price of a server was $6,200. In 2019, it is projected to be $6,612. The x86 portion of the server market is expected to grow 7.2% during the 2014 to 2019 period in terms of customer revenue.
One of the changes from past growth trends is the impact of original design manufacturer (ODM) and density-optimized systems have been one of the major drivers of server growth. Virtualization and consolidation will continue to have a dampening effect on the overall server growth rate. Density-optimized x86 servers will grow 22.2% during 2014 to 2019, increasing customer revenue from $2.3 billion in 2014 to $6.3 billion in 2019. IDC expects that through 2019, non-x86 revenue (RISC, CISC and EPIC) will decline. EPIC revenue is forecast to decline from $260 million in 2014 to $158 million in 2019. The CISC market is one of the more challenged CPU types. There are still some users that require a CISC-based server for increased security and reliability, and they may have homegrown application software that would make it very difficult to migrate to an alternative infrastructure at this time or in the near future. The RISC space will see decline in revenue and units over the forecast period from $1.8 billion in 2014 to $1.1 billion in 2019. The bottom line is the server space will face challenges over the next five years.
Comparatively, the PC segment experienced measurable declines. According to the IDC worldwide quarterly PC tracker, worldwide PC shipments are expected to fall by 8.7% in 2015 and will not stabilize until 2017. The latest forecast has growth declining through 2016, which will make five years of declining shipments. Growth should resume in 2017, led by the commercial market, while consumer volume continues a small decline through the end of the forecast in 2019. To date, the U.S. PC market continues to suffer from soft demand in both the consumer and commercial segments. The July launch of Windows 10 had an immediate suppressive impact, as many consumers took advantage of the free upgrade. In the commercial space, IT budgets remained focused on other projects including mobile-readiness and digital transformation initiatives. However, there are some bright spots in the market. New designs running Windows 10 and powered by Intel’s new Skylake processors are coming to market and may represent the most compelling reason seen in years for consumers to upgrade their PCs. However, enterprises that just completed an upgrade to Windows 7 will hold off for a few years before moving to Windows 10.
Another bright spot is the detachable 2-in-1 tablet category. (Detachables are tablets that offer first-party keyboards, and Microsoft’s Surface Pro 3 is currently leading this segment). Commercial buyers have shown great interest in the form factor; however, the highly negative reaction to Windows 8 has kept this market from growing quickly. This adverse experience leads IDC to believe that this launch is unlikely to drive sizable numbers of PC purchases in the U.S. commercial market in the near term. But as enterprises begin to review PC upgrade plans, we expect the 2-in-1 category to be a key asset category in the next migration.
Continued Third Platform Disruption
The IT leasing and financing forecast for the top 25 countries continues to experience steady growth and is expected to reach $173.4 billion by 2018 at a 4.4% compound annual growth rate (CAGR). The U.S. continues to lead the IT leasing and financing market and is forecast to reach $89 billion by 2018 with a 4.9% CAGR.
By category, the fastest-growing leasing and financing segment in the U.S. is packaged software with an 8.3% CAGR through 2018. Forecast growth for the services and hardware segments is at 2.9% CAGR and 2.8% CAGR, respectively, with smartphones delivering the majority of the growth for the hardware equipment category.
The continued decline of hardware growth is indicative of the disruption that the third platform transformation is having on the traditional technology buying cycle. Enterprises are striving for predictable IT expansions with less overprovisioning to reach the overall goal: reduced IT spending. During next five years, a majority of organizations will stop managing their infrastructure and will increase their use of dedicated and shared cloud offerings.
Beyond the aspects of how IT is consumed, customers now require diverse payment options to meet changing business needs. Consistently, customers have also asked for two requirements when it comes to payment options: flexibility and simplicity. The shift to a services-based model has increased the need for flexibility because, typically, the usage will change over the length of the agreement. Therefore, customers are looking for a payment model that recognizes that payments up front are no longer desirable. In fact, by the end of 2016, IDC expects that 50% of companies will demand payment models based on usage for major IT and datacenter investments and will base vendor selection on these programs. Another factor driving this change is a shift from CAPEX to OPEX budget models that are gaining traction in most organizations, which is driving the requirement for new payment options. CFOs are already demanding this from their internal business unit partners and they are turning to their IT vendors for more innovation and flexible payment solutions.
However, customers that require flexibility also recognize that this type of relationship may contain premium pricing, a trade-off that we have discovered they are willing to bear, but they will require complete transparency about future costs. Regarding simplicity, enterprises need less complex arrangements that provide details about monthly or quarterly costs and details about usage that can be easily understood. As a response to these requirements, more vendors are offering new financing programs that meet the current market realties. Many of the offers are based on capacity usage models and reducing up-front capital outlay, which address the new business models. Change is never easy, but in 2015, IT leasing and financing companies can no longer offer only traditional business options. Success will come to those that embrace this new business paradigm and work with their clients as trusted advisors to build third platform success stories.