The IT industry is experiencing “seismic shifts” that are altering the entire segment. As IDC’s Susan Middleton notes, transformations in cloud services and mobility are two key trends that will significantly impact IT leasing and financing markets and provide growth opportunities, as customers look for help managing this rapid pace of change.
Susan G. Middleton, Research Director, Technology Valuation Service, IDC
The information technology (IT) industry is in the early phases of a major transformation — similar to the seismic shifts the industry experienced with the introduction of the PC — that will alter the IT technology segment. This transition to what IDC refers to as the “Third Platform” is founded not on one technology, the PC, but on four key technologies that are collectively redefining the IT ecosystem. These “Four Pillars” — cloud computing, mobility, big data and social media — together embody a fundamental shift in both the underlying technology and equally important, in how individuals and companies communicate, collaborate and apply technology to their daily tasks.
For IT leasing and financing providers, the two pillars that will significantly impact their markets are cloud services and mobility. Both of these areas are actively disrupting the traditional equipment segments that represent the lion’s share of IT equipment that is financed. In the last year, IDC has seen this momentum increasing as both adoption and shipment rates of these new platforms grab a portion of customer mindshare and budgets.
Worldwide IT Spending Trends
In 2013, the biggest news in the worldwide economy is the slower growth of the emerging economies. For the past few years, the double digit growth in these regions provided much-needed revenue that offset the slower progress in the mature economies. Currently, IDC’s forecast for U.S. IT spending is expected to be at 4.2%, an improvement over 2012 but off from previous year’s growth of 5.5%. However, domestic IT spending is outpacing the GDP forecasts of approximately 2% for 2013.
Worldwide, the recent stabilization of Western Europe’s economy and better news coming from China about spending may buoy overall IT spending trends as we enter the fourth quarter. However, the equipment types that are boosting IT sales have shifted. Traditional hardware markets, such as servers and storage, remain under pressure in 2013, and infrastructure hardware sales are in a cooling phase.
The Movement to Integrated Systems
Complicating these trends is the introduction of a new IT equipment option — integrated or converged devices. Integrated infrastructure and platforms are pre-integrated, vendor-certified systems containing server hardware, disk storage systems, networking equipment and basic element/systems management software. Fundamentally, integrated systems are differentiated from traditional hardware platforms and architectures in that they are designed to be deployed quickly using a modular building block approach to rapidly scale up resources and workloads, which is a top requirement for many IT managers. Integrated architectures will continue to expand and gain traction in enterprise IT organizations and datacenters, as IT organizations seek solutions that are flexible and efficient. IDC forecasts that integrated systems will grow at a compound annual growth rate (CAGR) of 54.7% through 2016, whereas general-purpose IT will grow at a modest CAGR of 1.2% over the same period.
Currently, many IT organizations considering deploying an integrated solution are experiencing “sticker shock” with the higher initial capital outlay of the solution. Over time, the reduced maintenance and service costs will offset the higher initial capital outlay, but some IT organizations are looking to leasing and financing providers for financing options that would enable them to better match their expense with the business value of the solution. IDC expects this to be a solid opportunity for financing companies that are willing to embrace the nuances of this new platform. Specifically, for the IT financing community, integrated infrastructure and platforms may be somewhat more difficult to underwrite as they contain a larger percentage of software compared with traditional server or storage systems.
The Shift to the Third Platform
When reviewing traditional equipment types, a key product segment that’s been on a downward vector is PCs. In the second quarter of 2013, PC shipments declined by 7.2%. Many factors are contributing to the decline in PC spending:
The slow adoption of Windows 8: The lack of PCs that supported the touch interface hindered this rollout. Enterprise customers are sticking with Windows 7 and will evaluate new products as the user interface improves and becomes available in more products, but we do not expect enterprise customers to move to Windows 8 in 2013.
Strong tablet sales in both enterprise and consumer segments: IDC data indicates that tablets are being used to support employees in many different markets such as sales, marketing, medical and transportation. This is impacting the demand for PC refresh cycles.
BYOD (bring your own device): BYOD reduces the enterprise spending on PCs for certain industries, and it also changes end-of-life strategies because the asset is no longer owned by the enterprise. This is an important consideration for leasing and financing companies.
The shift to IT’s Third Platform is significantly impacting traditional equipment demand and end-of-life behaviors; however, there are domains of strong demand among enterprise and SMB customers. Both mobile devices and cloud are fueling IT growth.
The explosive growth in mobile shipments further underscores the shift away from traditional equipment types. According to IDC data, in 2013 mobile devices alone will count for 57% of worldwide IT growth, making mobile the fastest-growing equipment segment; the rub is that these are relatively low-cost items. The emerging economies are driving the growth for smartphones, as the newly established middle class in these regions ramps up demand. For example, China surpassed the United States as the leader in smartphone shipments last year. For U.S. leasing and financing providers, smartphones do not represent a growth opportunity due to the American-based carriers’ existing relationships and lower prices, although IDC does see demand for smartphone financing in Europe.
IDC believes the most significant financing opportunity is in the IT cloud. This market has experienced steady growth over the past few years as IT customers have embraced this solution that addresses many of their pain points. In 2013, IDC’s research reveals that over 71% of U.S. companies are in the process of using, planning or researching an IT cloud project. IDC forecasts that IT public cloud infrastructure spending will reach $20 billion by 2017 and that IT private cloud infrastructure spending will be equally robust, at $22 billion by 2017.
What factors are driving IT cloud growth? Today’s intensely competitive and rapidly changing business environment demands agility and a new level of flexibility to meet evolving business needs. Many companies are leveraging various cloud strategies to increase the efficiency and effectiveness of IT operations and optimize business needs. The challenge of the IT cloud is advancing the dialogue to a more robust discussion of the opportunities, risks and potentially differentiating competitive advantages associated with using a new IT platform that can accelerate new capabilities, lower costs or reduce the need for major capital investments in IT infrastructure. Furthermore, the shift from older legacy models to new IT paradigms brings a high level of unpredictability into the equation, increasing the need for new financing vehicles to help companies manage this unprecedented change. This increased scrutiny, coupled with the introduction of new computing models, gives IT managers new options when configuring their datacenter requirements; these factors are altering the way that IT managers acquire and finance those assets.
Cloud Computing Drives New Opportunities
The appeal of the IT cloud for end users centers on faster deployments, cost savings (equipment, software, power and cooling) and improved ROI. Underscoring these points are IDC forecasts that indicate that traditional IT deployment and share of budgets are projected to decrease over the next two to five years, with corresponding increases for IT cloud projects. In IDC’s view, the next generation of IT investment models needs to have the flexibility to adapt to evolving business needs, providing customers with the flexibility to acquire, use and pay for IT in a way that best meets business requirements without cumbersome policies. CIOs and CFOs want a more agile approach to managing their data center capabilities with uncomplicated options. Put another way, they want flexibility and simplicity.
Therefore, IT cloud represents a growth opportunity for IT leasing and financing firms because of the inherent strengths of financing solutions that provide flexibility, simplicity and protection from technology obsolescence. IDC is already seeing customers turn to their financing providers to help them navigate this change. In fact, when IDC asked IT managers if they would use their current financing provider again, more than 56% said yes. Another need among IT customers is a consolidated monthly invoice that includes hardware, software and services to simplify managing expenses, an option that many IT leasing and financing companies already offer.
In summary, the IT industry is undergoing a significant transformation as IT customers adopt new platforms to meet their growing performance and business needs. IDC believes this shift represents a growth opportunity for IT leasing and financing companies, as customers look for help managing this rapid pace of change. In IDC’s view, financing is the perfect toolkit to overcome some of the financial obstacles customers will encounter as they move down this new path.
Susan Middleton is a research director for IDC’s Technology Financing Strategies and Technology Valuation Services programs. A 25-year veteran of IDC, her areas of expertise are understanding the market trends for the IT leasing and financing market and life cycles of mid-range, high-end servers and enterprise storage. For each of these technology segments, Middleton follows trends, technology changes and market forces that impact life cycles and IT portfolios. She provides insight and guidance to her clients and helps them manage their IT portfolio risk. Middleton is also the lead analyst on the annual global IT leasing and financing report that sizes the market opportunity in the top 25 geographies.
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