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IT Spending Forecast, 2Q15 Update: Why Is Global IT Spending Shrinking? John-David Lovelock, Ranjit Atwal, Dean Blackmore, Bianca Granetto, William Hahn, Jon Hardcastle July 14, 2015

This presentation, including any supporting materials, is owned by Gartner, Inc. and/or its affiliates and is for the sole use of the intended Gartner audience or other authorized recipients. This presentation may contain information that is confidential, proprietary or otherwise legally protected, and it may not be further copied, distributed or publicly displayed without the express written permission of Gartner, Inc. or its affiliates. © 2015 Gartner, Inc. and/or its affiliates. All rights reserved.

IT Spending Forecast (Constant Dollar): 2Q15 versus 1Q15 2015 IT Spending = 3.6 Trillion in Constant US Dollars 4,500

1.6%

4,000

-5.5%

2.3%

2.9%

2.7% Data Center

3,500

Software

3,000

Devices

2,500 IT Services

2,000 1,500 1,000

Telecomm 500 0 4Q14 1Q15

4Q14 1Q15

4Q14 1Q15

4Q14 1Q15

4Q14 1Q15

4Q14 1Q15

2013

2014

2015

2016

2017

2018

Source: “Gartner Market Databook, 2Q15 Update”, June 2015 4

This Looks Like a “Crash” Story … Global IT Spending in Current US Dollars 4,400

2015 Growth: 4,200

4Q14  +3.2% 1Q15  -0.9%

4,000

2Q15  -5.5%

3,828

3,800 3,662 3,600

3,507

3,400 3,200 3,000 2012

2013

2014 4Q15

2015 1Q15

Source: “Gartner Market Databook, 2Q15 Update”, June 2015 5

2016 2Q15

2017

2018

… But It Isn’t a Crash • US Dollar growth inflicts growth reductions in other Regions;

• IT budgets are not being changed

4Q14  -1.2%

• Need for IT to support/grow business is unchanged

1Q15  -4.5% 2Q15  -8.3%

GDP Growth in 2015 +4%

+3% +2% +1 0% negative

© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.

6

How Much Do USA Vendors Want to Raise Prices? Covering Price Increases at 20 Percent Devaluation

140%

Local Cost US Dollar Cost Increase Margin Increase

US Dollar Cost Margin

• Large dollarized costs must be covered– the currency shift eats all profits

120%

22%

21%

20%

9% 100%

5%

• Companies would like to maintain repatriated profits • The chart shows how much prices must increase to maintain margins on each sale

80%

60%

• Hardware vendors must raise prices

40%

• Software vendors can be flexible 20%

• Services vendors need only a small increase in price

0%

4Q141Q15

4Q141Q15

4Q141Q15

4Q141Q15

4Q141Q15

Devices

Servers

Software

Telecom

IT Services

CONFIDENTIAL AND PROPRIETARY © 2015 Gartner, Inc. and/or its affiliates. All rights reserved.

6

Impact of Strong USD on the PC Market: Pricing Pressure in Many Segments Share of PC Spending by Buyer Type

•

Large Businesses - Framework agreements - Price increases likely, given minimal de-specification of PCs

• SME Consumer

SME - Some prices increase but likely to delay purchases or downgrade

•

Consumer - Retailers want lower price-points - Vendors to absorb currency impact

Large Businesses

•

Cost Structure - Components purchased in USDs - No local vendor advantage

•

- Increasing in depreciated countries - Stable in non-depreciating countries

Source: “Gartner Market Databook, 2Q15 Update”, June 2015 CONFIDENTIAL AND PROPRIETARY © 2015 Gartner, Inc. and/or its affiliates. All rights reserved.

Divergent Pricing

8

The Enterprise Client is Disappearing … But Enterprise Client Computing Will Continue Devices Buying Centers Moving from IT to Business Units

Business Client Computing is changing :

100%

• Separating the Device from Applications

90% 80%

• Buying centres looking for flexible delivery of applications to different devices

70%

60% 50%

• Users want to upgrade their device, not just replace it (especially in a BYOPC scenario)

40% 30% 20%

• Windows 10 is it; there is no Windows 11

10% 0% 2010 Internal IT

2015

2020

Business Units

CONFIDENTIAL AND PROPRIETARY © 2015 Gartner, Inc. and/or its affiliates. All rights reserved.

9

Significant Profit Challenge for Server Vendors Selling into EMEA EMEA Server Vendor Revenue by Vendor HQ Location

• US providers account for 75% of the EMEA server market • Component prices for all vendors are mainly dollar based

• 1H15: Vendor price rises saw increases in committed spending

ROW

• 2H15: Planned spending will be lower to balance annual budget

EMEA

• 2016: Continued dollar strength - Vendors have limited scope to adjust local market pricing

US

- Continued elevated pricing in currency depreciated regions

• Constrained budgets - Weaker product mix Source: “Gartner Market Databook, 2Q15 Update”, June 2015 CONFIDENTIAL AND PROPRIETARY © 2015 Gartner, Inc. and/or its affiliates. All rights reserved.

10

Data Center Market Disrupters

CONFIDENTIAL AND PROPRIETARY © 2015 Gartner, Inc. and/or its affiliates. All rights reserved.

11

Loss of Market Power by the Top 3 US Applictions Software Vendors • Top 3 US Vendors

Share of Enterprise Application Revenue, 2014

- 31% of the Application Software Market (Microsoft, IBM, Oracle) - Decline in combined share of 0.5% per year on average for the past 5 years

US Vendors (Top 3), 31.3% WW, 48.9%

• Software Application markets costs of entry have been lowered

Europeans, 19.8%

- As a result of software industrialization and web application development breakthroughs

Source: Gartner, Enterprise Software Market Share, March 2015 CONFIDENTIAL AND PROPRIETARY © 2015 Gartner, Inc. and/or its affiliates. All rights reserved.

11

Intense Competition in SaaS: No Scope for Price Increases Non-Depreciated Countries

Depreciated Countries

• SaaS prices steady due to increased competition

• SaaS prices unnaffeceted due to competitive pressue

• License price steady

• License price steady

• Maintenance price unchanged

• Maintenance prices rising to preserve margins

• US market now a «Cash Cow» for Global Vendors 12

US Providers Account for 42% of the Continental Europe IT Services Market Sellers in Continental Europe by HQ Location

ROW

• 300 – 500 basis points of expected profit pressure on U.S. IT Services providers • U.S. providers have limited pricing power

US

Continental Europe

• Provider switching common • Indian providers high growth, but low market share

Source: “Gartner Market Databook, 2Q15 Update”, June 2015 14

"Exploiting the New" Will Drive Renovation Opportunities, Not the Way It Was in the Past • IT Services still labor intensive • Through 2013: labor arbitrage • 2014 onwards: automation and platforms • Long-term outlook: single-digit growth; with higher growth in cloud services, digital business and mixed pricing 15

Communications Services: Dominated by Local Market Service Provision Huge Local Currency Market Shift

Regulated Pricing

Strong Competition

Little direct impact from currency changes • Local market dynamics

• Non-discretionary spending • Multi-year contracts • Bundling 16

Small Market Impact

Communications Services: Home and Work Boundaries are Melting Enterprise Services Policies are Changing

Consumers

• Some mature markets are turning to reimbursed/BringYour-Own-Service accounting… … but some require employees to absorb the internet access cost

CSPs

• Enterprise lines still cost ~1/3 more than Consumer service… Businesses

… but home workers with reimbursed service tend to take premium packages

16

Excluding Telecom Services, Overall IT Spending Will Be 2.1 Trillion US Dollars in 2015 Data Center Systems Spending ($B) Annual Growth (%) Devices Spending ($B) Annual Growth (%) Software Spending ($B) Annual Growth (%) IT Services Spending ($B) Annual Growth (%) Telecom Services Spending ($B) Annual Growth (%) All IT Spending ($B) Annual Growth (%) All IT (excl. Telecom Services) Spending ($B) Annual Growth (%)

CAGR (%) 2014-2019

2013

2014

2015

2016

2017

2018

2019

139

142 1.8%

136 -3.8%

138 0.9%

139 0.7%

139 0.3%

139 -0.1%

-0.41%

677

693 2.4%

654 -5.7%

665 1.7%

675 1.5%

680 0.8%

689 1.4%

-0.10%

297

314 5.7%

310 -3.8%

329 0.9%

350 0.7%

372 0.3%

396 -0.1%

4.74%

937

955 1.9%

914 -5.7%

948 1.7%

988 1.5%

1033 0.8%

1081 1.4%

2.52%

1,604

1,607 0.2%

1,492 -7.2%

1,509 1.2%

1,540 2.0%

1,566 1.7%

1,586 1.3%

-0.27%

3,654

3,711 1.6%

3,507 -5.5%

3,589 2.3%

3,691 2.9%

3,790 2.7%

3,891 2.7%

0.95%

2,050

2,104 2.6%

2,015 -4.2%

2,079 3.2%

2,152 3.5%

2,224 3.4%

2,306 3.7%

1.85%

Source: “Gartner Market Databook, 2Q15 Update”, June 2015

17

All Gartner’s IT Spending Forecasts Can Now Be Accessed via Gartner Market Statistics Online

1 2

3

18

Recommended Research •

Gartner Market Databook, 2Q15 Update

•

Forecast Alert: IT Spending, Worldwide, 2Q15 Update

•

Market Definitions and Methodology: IT Markets

•

Forecast Overview: IT Spending, Worldwide, 2014 Update

•

Richard’s blog @: http://blogs.gartner.com/richard-gordon/

•

View all upcoming Gartner webinars: http://www.gartner.com/explore/events

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Dedicated Landing Page: www.gartner.com/technology/research/it-spending-forecast/

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