The IT and Communications (ITC) market has held up well during the pandemic to date; total spending worldwide grew by 1% in Q1 and declined by 1% in Q2 2020 (see my Figure above, which includes my current forecast to 2022 for spending on a rolling 4-quarter basis). In this research post I look in more detail at the movements in hardware, IT service, software and telecoms, look back for comparisons to the effects of the Credit Crunch and make some predictions for how the coming economic recession is likely to hit us in the next few years.
The Credit Crunch in 2008-9 was a significant failure of the many financial systems worldwide, resulting in a significant decline in spending on almost all types of ITC offerings, with spending levels returning to ‘normal’ in the second half of 2009. It accelerated smartphone adoption and the adoption of cloud computing, which was in its infancy at that time.
When the COVID-19 pandemic hit Asia, then Europe, then the Americas from the end of 2019 onward, governments attempted to limit infections and consequential hospital admissions by ‘lock-downs’, in which whole populations were required to stay at home – typically only leaving for essential activities such as food shopping, medical intervention and/or daily exercise. ‘Non-essential’ businesses sent a large proportion of their employees home to work (or not in the case of those who used public funds to furlough them).
The ITC market is one of the largest markets – worth $6.8 trillion – in the world, but had zero percentage growth in 2019. There were fewer new types of kit or services to buy – forcing vendor strategies to shift to selling more of the same, or replacements for older products. Telecom suppliers have seen diminishing returns from fixed-line and mobile voice and data services, leading them to expand into providing content in the form of movies and TV programs (which I don’t count as ITC).
Looking at the $1.7 trillion sales by category in Q2 2020 (see my Figure above), we can see that:
- The largest – Telecom ($548b) – saw the biggest decline (-3.7%) over the year.
- Software ($316b) had the strongest growth (+10.2%).
- Hardware ($299b) saw a decline of 5.0%
- IT Service ($541b) had a growth of 1.4%
I expect Hardware to regain its position ahead of Software for the year due to its stronger fourth-quarter sales seasonality. However we’re approaching a time when it will be overtaken.
Looking at the Hardware market in more detail (see my Figure above), there were few products that experienced sales growth.
- Gaming consoles grew by 13%, despite the fact that only one of the three suppliers (Nintendo) had a relatively new console. Lock-downs fueled usage, software spending (which I include in hardware) and spending.
- PC sales grew by 1.5% – driven by the purchasing of machines by companies for many of those sent to work from home for the first time. There were very strong sales of Web cams and microphones, which I include in the PC market.
- Peripherals (including printers) saw the strongest sales decline (12.1%) in the quarter.
- Networking (-10.5%) and storage systems (-9.2%) also did badly.
- Converged Devices (including smartphones, tablets and wearables) – the largest area, worth $105b – declined by 5.3% in the quarter. Users, forced to remain at home, had less need for the advanced features the new products offered.
In the enterprise market Server sales remained level, although lost more ground to cloud services – as we will see below.
IT Services (see my Figure above) saw:
- Strong growth in IaaS (26%) and PaaS (27%), but this was not unusual – these offerings have consistently expanded at double-digit rates since their creation. Although they were worth $39.4b in Q2 2020, this was only 7% of the overall IT Services market.
- Implementation services – the largest area worth a staggering $158b – grew 1.3% in the quarter. Sales to governments introducing new track and trace processes accounted for some of this growth.
- Hardware maintenance sales grew 2.1% – based partially on users extending the life of older products, rather than purchasing new ones.
The growth in IT Services sales in the quarter (1.4%) was significantly less than it was in the year (5.5%) – a gap which is likely to grow as the recession bites in coming quarters.
Software product areas all saw growth in the quarter. In particular:
- SaaS sales grew by 18.3% driven by the expansion those working from home. Microsoft Office 365 sales grew by 18% and Dynamics 365 by 38% for instance.
- Application software – at $170b, the largest offering in this category – grew by 10.6% in the quarter.
- Infrastructure Software also grew strongly (6.2%) partially due to the need for organizations to add VDI and VPN licenses to accommodate those moved to home working.
Clearly software has been the winner in terms of the four categories during the lock-down phase of the pandemic. It has the advantage of being able to be downloaded, rather than physically delivered, to purchasers. As we can see from the forecast, spending on software was already growing faster than other areas; the pandemic has accelerated that trend.
Spending on Telecom offerings all declined in the quarter despite communications being an essential tool in handling the initial stages of the pandemic. It will recover as 5G becomes more widely deployed; however the need for much faster wireless communications has so far been less than it was before the pandemic.
Overall the ITC industry has been a godsend during the crisis with digital interactions making up for some of the suspended physical ones for individuals and organizations alike. It also has a vital role in track and trace applications needed for society to find some kind of ‘new normal’. However the significant maturity of the market was already limiting the forecast. I expect the market to decline steeply in coming years as the recession bites, companies go out of business and millions lose their jobs. Beyond that it will also play a major role in recovery as we discover innovative ways of building a more protected world.