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International Data Corporation
IDC Predictions '98: New Power Brokers Reshape the IT Industry
What are the key IT market events that IDC predicts for 1998?
In 1998, the Web will reach critical milestones in terms of number of users and amount of commerce activity, and new "power brokers" will challenge today's IT suppliers, dramatically reshaping the IT industry in the following ways: Online consumers and consumer electronics suppliers. One in four U.S. households will be online by yearend 1998, driving even lower PC prices ($500-700) and a proliferation of information appliances and forcing major changes for Intel and PC suppliers as well as new competition from consumer electronics giants and startups. Microsoft's likely victory over DOJ may, ironically, hurt the software giant's long-term viability in the consumer market.
Telephone companies. After stumbling badly with ISDN, they'll get a second chance to wield power as consumer digital subscriber line (DSL) rolls out in 1998, finally competing with cable companies for consumer high-speed Web access business and ushering in the era of megabit consumer Internet access. Internet service providers (ISPs). ISPs will be the biggest customers for network equipment in 1998, as well as becoming bellwether customers for servers and software. ISP choices will shape the outcome of Windows NT vs. Unix, Netscape vs. Microsoft, and other key IT battles.
IS organizations. They are re-exerting influence on businesses' IT budgets and radically reassessing vendor preferences in the "era of the Web." To improve their position with IS organizations, key IT suppliers will execute mega-mergers in 1998.
A Look Back
What a turbulent period it's been since our first IDC Predictions in 1995. It's been so turbulent that our most "out-on-a-limb" predictions of the past two years have come true: Consumer PCs will dive to $800-1,000 (December 1995). In 1996, PC leaders assured us this would not happen; however, by 1997, they were all hopping on
board.
Information appliances will emerge at under $100 (December 1995). In 1995, the talk was of $300-500 appliances; now, WebTV's $99 price point is just the beginning of the long-awaited merging of IT and consumer electronics.
IBM, Compaq will sell PCs direct via the Web (December 1996). In 1997,
both vendors tried to finesse their shifts to avoid channel unrest, but their direction is clear: Direct sales via the Web will be a bigger part of their channel mix.
Intel will do an "about face," embracing NCs (December 1996). Can you
believe it? In 1996, Intel et al. launched the NetPC in an attempt to kill NCs. Just two weeks ago, however, Intel made the "about face" we predicted. Intel's still short of where it needs to be (see this year's predictions).
We made these predictions because they were natural conclusions from our "wired marketplace" scenario _ that the IT industry is being fundamentally reshaped by the construction of a pervasive electronic marketplace on the Internet, one that will connect over 1 billion people by 2005. Our predictions were also driven by IDC's extensive primary market research, which allows us to focus less on what suppliers say they plan to do and more on what the needs of the marketplace will require them to do.
This Year's Predictions Highlight the New Power Brokers
This year, we continue to use our vision and our primary research as the drivers for a new crop of predictions, including a few that some may find a little bit crazy _ just as the ones above once seemed.
The key theme that links this year's 10 predictions is that 1998 will see a major shift in IT market power, with growing presence and importance of online businesses, consumers, consumer electronics suppliers, telephone carriers, ISPs, and _ yes _ IS organizations as, through online commerce, the Web meets enterprise computing.
1. The Web will edge toward 100 million users while Web commerce
exceeds $20 billion. The Web will hit major milestones as an electronic marketplace in 1998. In 1997, there were over 50 million users on the Web, up from 28 million in 1996. In 1998, the Web population will continue to surge. Draft data from the IDC Internet Commerce Market ModelTM suggests that the number of users may reach 90-100 million by yearend. This will keep the Web population on target to exceed 200 million by 2001. In turn, the Web's killer app _ online commerce _ will continue to surge. In 1998, over $20 billion in transactions will be completed on the Web, almost triple 1997's $7 billion.
Implication: In 1998, having an ability to do business online will no longer be a luxury; it will be a necessity. The message for IT suppliers is that it will be increasingly important to build strong mindshare among corporations that are leaders in online business because they will drive their industries' use of the Web and new investment in IT. IDC research indicates that some suppliers have
already begun to claim disproportionately high mindshare among these crucial leading Web users.
2. The Web will finally reach "mass-market" proportions in the United
States, with nearly 25% of households online. With nearly two-thirds of the world economy coming from consumer spending, a key goal for the Web is to become a true mass market. In 1998, the "mass-market Web" will materialize in the United States as nearly 25% of all U.S. households get online _ and the consumer will shift into the center of the universe for many important IT suppliers.
Implications: First, and for the first time, the Web will be a critically important "location" for businesses selling to consumers; second, the consumer's wants and needs will reshape major segments of the IT market, notably PCs and semiconductors (see predictions below).
3. Information appliances and suppliers will invade, challenging PC unit volumes in three to five years. If you think $999 PCs turned the market on end, see what happens at $199, with the arrival of a wide range of information appliances _ devices aimed as simplifying and reducing the costs of accessing the Web.
In 1997, WebTV was a pretty lonely product in this category. However, in 1998 IDC predicts that the market will see an explosion of new products introduced in the form of TV set-top boxes, Web-enabled TVs, Web-enabled screenphones, Web-enabled videogame consoles, Web-enabled personal digital assistants (PDAs), and more.
This invasion of consumer electronics (and CE suppliers) will have a profound impact on the IT industry. Appliances will redefine "high volume" for PC suppliers, just as PC suppliers redefined high volume for minicomputer and mainframe suppliers. By 2002, annual shipments of information appliances will outnumber those of PCs in a key indicator segment: U.S. consumers. By 2005, information appliances (including network computers (NCs)) will challenge PCs in total annual unit shipments. And by 2010, IAs and NCs are very likely to
outnumber PCs by at least 10:1.
Implications: First, PC suppliers, chip suppliers (notably Intel), peripherals suppliers, and software suppliers must establish a position in the appliances space or risk marginalization. Second, these suppliers must adapt business models to support much higher-volume sales and lower unit costs. Third, Windows will struggle to maintain its current position as the de facto standard client platform as more appliance-centric operating systems (including, but not limited to, Java OS) compete in this space.
4. PC suppliers will aim for consumers with $500-700 PCs and appliances; the business-centric PC model will die. Sub-$1,000 PCs drove U.S. household penetration of PCs to the 45% level, but that's not good enough. As originally forecast at the IDC Directions conference '98 last March, in order to get penetration to the 60-80% level, the PC industry must drive prices down to the $500-700 range. We predict the first-tier PC suppliers will achieve these price points within the next 18 months. For PC suppliers to do less will stifle growth in the key growth segment: the home.
As suggested in Prediction #3, we also believe that the long-term survivors in the PC business will establish a stronger presence in key categories of information appliances.
Implication: The consumer is now replacing the business user as the center of the PC universe. Suppliers that withdraw from the consumer PC segment or cannot establish top-tier share in consumer PCs will effectively no longer be in the PC business three years from now. (We say this even as several key PC suppliers have just withdrawn from the consumer segment!)
5. Intel will launch a major non-Pentium chip business targeted at
appliances. As noted earlier, last year we predicted that Intel would address the low-end PC business and the NC/appliance business by creating a low-cost Pentium chip and, perhaps, introducing a completely new low-cost chip family. On December 3, 1997, Intel dropped one shoe by announcing plans to redesign the Pentium to
support both low-cost PCs and NCs/appliances. The new Pentium will be an excellent offering in the low-end PC space. However, we think it will not make it in the appliance space, where chips are priced at $10-20 or less. Intel must approach the appliance space with a blank sheet of paper. (Microsoft faces a similar issue with regard to Windows and appliances; see Prediction #6.)
We predict that in 1998 Intel will drop the other shoe and surprise the market by announcing a non-Pentium product line aimed specifically at the low-cost, high-performance appliance space. One candidate for this product line is the StrongARM chip Intel received in its settlement with Digital, although many close to Intel feel that the company does not currently have plans to push StrongARM in any major way. But to Intel's credit, as we have seen in 1997, plans can _ and, we believe, probably will _ change.
6. Microsoft will win the DOJ battle and create a new non-Windows
appliance platform. We predict that the temporary injunction preventing Microsoft from bundling Internet Explorer will be very temporary in its effects. Why? Because users do want browser capability included as a base function within their systems. However, they want browsers that don't create islands but are compatible with
other browsers and servers. Microsoft's got some work to do with Netscape and others to meet this need (see
http:// www.anybrowser.org/campaign/).
In the meantime, it is ironic that Microsoft's drive to bundle more function into the operating environment may make it more difficult for the company to compete effectively in the nascent but important information appliance business. Microsoft's primary operating system value proposition _ Windows compatibility from appliances through servers _ may lose in the appliance space to suppliers that optimize around specific appliances and provide less comprehensive but adequate links to the Windows PC world. PalmPilot's PilotOS is currently demonstrating the success of the latter approach against
WinCE in the PDA market.
Implication: Pushing Windows into the appliance space may stress the
Windows technology and brand to its limits. Our "out-on-a-limb" prediction for 1998 is that Microsoft will rethink its appliance strategy and launch a new non-Windows platform focused on appliances.
7. The era of megabit consumer Internet access will begin (goodbye,
ISDN) as telcos' DSL challenges cable companies. Today, less than 0.5% of online U.S. homes have megabit Internet access. However, IDC predicts that in 1998, the era of megabit consumer Internet access will begin in earnest as digital subscriber line (DSL) _ the telephone
carriers' alternative to high-speed data over cable _ will have successful, widespread U.S. trials and begin rapid adoption in 1999. In 1998, DSL will reach only about 16,000 homes, similar to the number reached through cable modems in 1996 and by ISDN in 1995. By 2000, however, DSL volumes will rival those of both data over cable and ISDN; by 2001, DSL will significantly exceed both ISDN and cable penetration. By 2002, DSL and cable _ the dominating consumer megabit technologies _ will be present in almost 15% of the 45-50 million U.S. online households at that time.
Implications: First, broadband will come to the consumer more quickly than many now think. Second, and ironically, even as ISDN is just now gaining broader acceptance, it is doomed _ squeezed by analog (56K) modems at the low end and DSL and cable at the high end.
8. ISPs' power will grow as IT customers tip the scales in some key IT
market battles. Will Cisco remain king of the hill in networking equipment? Will NT bury Unix? Will Microsoft defeat Netscape? Start asking the Internet service providers (ISPs).
In 1996, public data network carriers accounted for only 36% of all WAN equipment purchases. With the rise of the Internet, public network providers are spending a lot more on equipment: By 2000, we predict that they will account for fully 51% of all WAN equipment spending.
ISPs are also increasingly important consumers of other IT: servers, database management systems, Web server software, management tools, and so on. In 1998, as the power of ISPs over the IT market increases, we predict surprising resurgence of some market underdogs that uniquely support the Internet-scale needs of ISPs, particularly Unix (vs. Windows NT) and Netscape (vs. Microsoft). Conversely, we predict that Microsoft will crank up its efforts to recruit major ISPs to Windows NT and Microsoft's Web server software.
Implication: If you're a major network equipment, server, or software supplier, you'd better know how to sell to ISPs and support their unique Internet-scale demands. ISPs will represent a central battleground for server and software market share _ just as they inhabit a make-or-break space for network equipment suppliers like Cisco, 3Com, Bay Networks, and Ascend.
9. Key Internet technologies for 1998 will include digital certificates, thin software, Web sound, and language translation.
In 1998, among the key technologies and products that support the growth of the Web as a marketplace will be the following:
Digital certificates. Commerce needs security, and security needs to be both strong and relatively painless to be implemented. IDC predicts that in 1998, digital certificates will begin to catch fire, with the certificate authority business growing from about $130 million in 1996 to over $2 billion by 2000. Beneficiaries include GTE, Entrust, Verisign, and xCert.
Thin (appliance-focused) software. The growth in information appliances has major implications for software. Software that wants to find a home on hundreds of millions of appliances will need to be "thin" _ supporting deep functionality in a narrow application or "80:20" functionality in broad application spaces. Lotus's eSuite is an early example of the latter. It is a precursor of the new software model, in which the 20% of the code that's used 80% of the time will be resident on the appliance. The 80% that's used 20% of the time will be downloaded as required from the network.
Web sound. While we're all waiting around for rich visual media experiences on the Web (better wait for DSL and cable to reach a wider base!), sound will be happening in a big way on the Web in 1998. Streaming audio (e.g., Real Audio) is already becoming commonplace on commercial Web sites. In 1998, users will also begin to access voice, e-mail, and scheduling and even tap knowledge bases or news sites on the Web via voice-based user interfaces (e.g., General Magic's new CTI service). All these make the cell phone a pretty handy information appliance!
Web language translation. The 42% of Web users who reside outside the
United States represent the fastest growing part of the Web population. Being multilingual is becoming a fundamental "skill" for any commercial site; this is increasingly true for individual surfers. We predict that in 1998, products and services that support translation of Web content (e.g., from Alis Technologies, Transparent Language, Digital's AltaVista site, and others) will become critical tools for the Web community.
10. The scramble for unclaimed customer mindshare will drive mega-mergers in 1998. As the Internet turns the IT marketplace upside down, corporate IS executives are rethinking their relationships with key suppliers. In a recent IDC survey of 11,000 IS executives, almost 60% could not name a single vendor they considered most important in helping them exploit the Web! The top vote getter was Microsoft, with only 11%. The next closest was IBM, with 7%. Customer mindshare won't stay unclaimed for long, however. Furthermore, in 1998, the desire to grab this unclaimed mindshare will drive a large number of mega-mergers. Two of the most likely: Netscape and Oracle. Netscape, which has achieved remarkable success in a short time, still needs greater resources to really establish itself as a long-term winner in the important enterprise computing space. In the past two years, it has struggled to balance limited resources with its goal of competing
in a broad range of market spaces. Oracle, although a successful company, still has major gaps to fill in its battle against Microsoft: a stronger Web software story, a better offering in the collaborative/messaging space, and a presence inthe client software space. Netscape offers all of the above. This marriage would be highly complementary and, if successfully executed, would create significant challenges for Microsoft. The greatest obstacle to this merger will be overcoming the "who's in charge" clash between two very successful management teams.
Sun and a leading "enterprise computing" supplier. Sun has a very high
profile in the Internet space _ with Webmasters, engineers, and other hands-on users. Yet IDC survey data shows that Sun's image within the traditional IS organizations _ whose influence in corporate IT purchases is resurging _ is relatively low. Given the high stakes and the unclaimed mindshare, the next two years are a critical time for Sun to bolster its image within the IS community. To do so, we believe Sun will look to merge with a supplier that can bring greater IS management mindshare. Digital is one possibility; Unisys is another.
Alternative candidates could come from the IT services segment or PC suppliers that have achieved strong IS visibility (e.g., Compaq). The challenge with all of these partners, of course, is that virtually all have made some rapprochement with Sun's arch rival, Microsoft _ so Sun would have to shift its hard anti-Microsoft line.
Implication: If you're betting on the roster of key IT players to look the same in 1998 as it looked in 1997, it's time to hedge that bet. As market power shifts in 1998, consolidation of forces and acquisition of key new skills will be extremely important. Look for quite a few more mega-mergers before 1998's done.
Conclusion: Keep Your Eye on the Big Picture
In an industry that's undergoing so much fundamental change, 10 predictions barely scratch the surface. When we look back next year, we will have undoubtedly missed quite a few of the most important changes that occur in 1998.
However, we suggest you focus on IDC's key "big picture" themes for 1998 and beyond:
The marketplace is completely reorienting around the goal of building and supporting a billion-user wired marketplace by 2005. In 1998, IT suppliers will need to reorient to that goal and adapt to the presence of a new crop of "power brokers" coming to the marketplace.
If you focus on these points, very few events will completely surprise you in the year ahead.
Best wishes for a prosperous 1998! |
