Forrester: Tech Slowdown Coming
Noting a "crash" in IT vendor profits, research group looks ahead to a dim scenario
Prepare for a coming slowdown in the U.S. IT sector, says Forrester Research.
Forrester recently noted a decline in its U.S. Tech Sector index, which went to 121.2 from 124.1 in Q1 2005. "A substantial drop in U.S. vendor profits was the main culprit for the weakening," Forrester said.
While that's an important data point in itself, Forrester's most alarming conclusion actually came in a footnote:
...the U.S. economy is struggling with many economic imbalances - - record large trade, current account, and U.S. budget deficits; a housing bubble that is due to deflate; high levels of consumer debt and low levels of household savings; rising interest rates; and high energy prices - - some of which are likely to tilt the economy into a slowdown by 2007.
This is big news for tech vendors, who will need to go deeper into cost-cutting and profit-seeking mode over the next few years. This could mean outsourcing more development to India, cutting salaries, or seeking increased efficiencies in M&A activity. It will also mean looking to foreign markets for increased share.
Meanwhile, tech companies will have to hope that tech vendors abroad and the spread of open source technology at home do not conspire to force price points down even further.
While we see no reason to believe that IT as a whole will become commoditized, it's impossible to deny that there is relentless long-term downward price pressure on tech goods (like software and hardware; less so, perhaps, with value-added services).
In 1927, it cost $280 (in today's dollar value) a minute to call London from New York. Today, it costs pennies. The key question now is how much longer enterprise software and hardware will be able to command big dollars.
For the phone companies, downward price and profit pressure wasn't a problem because of the vast potential number of customers. Phone companies made a lot of money when they charged a lot of money to a few customers, and made a lot of money when they charged a little money to a lot of customers. IT is in a slightly different position. Everyone on earth is a potential telephone customer; by contrast, only the largest companies can, or need to, pay a lot of money for IT.
When the next downturn comes, a lot of big technology vendors will face difficulties as customers and prospects turn to lower-cost alternatives (like open source) to get through the tough times. That should make the rest of this decade very interesting.
line56.com |
