Canadian IT spending: Plan the next five years now

TORONTO – An overall slowdown in Canadian IT spending will be offset by an inevitable replacement cycle and a potential post-election surge, IDC Canada analysts predicted in the Future of the Canadian IT and Communications Market Forecasts

2003-07 Tuesday.

The Toronto-based research firm said it expects $35 billion to be spent on IT over the next five years, with the country’s IT market facing a compounded annual growth rate (CAGR) of 2.5 per cent. This is down from historical highs of eight to 12 per cent in the past.

“”We now see a one-to-one relationship between the IT market and GDP (gross domestic product) growth,”” said Vito Mabrucco, vice-president for IDC Canada. “”It may not be as a boom . . . but hardware will have to replaced over time, and that will drive software and services markets.””

Bottom line pressures and corporate shareholders driving companies to achieve higher profitability are two inhibitors, Mabrucco said. Business uncertainty will also provide roadblocks to profitability as customers who own their own businesses ponder where they may be in the face of IT consolidation eight to 18 months down the road, he said.

“”There’s going to be mergers and consolidations in their (respective) industries (also) and (customers will wonder) should they be spending on IT or should they just wait?”” he said.

Mabrucco said IDC expects IT investment plans to continue to recover despite two years of negative business growth. There’s a clear need among companies to invest in infrastructure upgrades in 2003. The previous boom in IT spending remains fresh in people’s minds and that it’s unclear whether end-users believe more IT investment is necessary this year, he said.

“”There’s much more focus on return on investment-type measurements to (consider if) IT really provides the return that it’s said to provide,”” he said. “”That’s a big question mark in many people’s minds.””

However, with two major elections forthcoming (Ontario’s and the federal election), Mabrucco said there may be more “”fiscal expansion as elections tend to drive spending (upwards) just prior to the elections occurring.””

Nowhere on IDC Canada’s radar is the industry-wide elusive “”killer app””.

“”We still don’t see any and we welcome anybody of who may know of any to let us know what those are,”” he said with a laugh.

Eddie Chan, the firm’s PC market analyst, said desktops accounted for 78 per cent of total PC shipments in 2002. “”On a total PC spend-basis, desktops represented 68 per cent in 2002,”” Chan said. “”Looking forward to 2007, desktops are forecasted to increase to 75 per cent of total PC shipments and 60 per cent of total PC spending.””

Canadian household PC penetration has reached 71 per cent, Chan said, adding it’s an uphill battle for this particular market segment.

“”Compounded with the element of good enough computing, desktop growth will be limited,”” Chan said. “”The mobile computing trend is definitely a big inhibitor as computing habits change with time.””

Dell, HP, and IBM comprise the desktop PC market’s top three vendors with 52 per cent of total shipments in 2002, while notebooks are predicted to increase in shipments by 2007, Chan said.

Security of WLANs remain a concern and could slow mobile market adoption, Chan said, but the WPA (WiFi Protect Access) specification released recently is viewed as an intermediate step towards the adoption of the 802.11i standard, slated for release in September.

IDC analyst Alan Freedman said opportunities for servers and storage in the SMB segment is estimated to grow at a CAGR of seven per cent, mid-range enterprise at four per cent, and high-end enterprise will decline at minus-seven per cent from 2003-07.

“”Customers are still looking at short-term requirements . . . they’re looking in the near term to only buy what they need through the next few months,”” he said. “”We don’t see spending patterns changing until at least the fourth quarter of 2003.””

Affordable technology, such as Linux, blades and IA64 is driving the server market, Freedman said. Linux is projected to have a GAGR of 25 per cent, blades 103 per cent, and IA64 58 per cent from 2003-07. However, the lower cost of these technologies is removing revenue from the Canadian server market place, he said.

According to IDC, the major players in the server market — IBM, HP, Sun, and Dell — comprise 95 per cent of revenue of servers sold.

Software storage management is driving the storage market, Freeman said, adding network storage is gaining traction (Storage Area Networks and Network Attached Storage) accounting for 44 per cent of revenues in 2003 and will comprise 73 per cent of storage revenues by 2007.

IDC also found the software market will see a CAGR of 3.1 per cent from 2003-07, with the application development and deployment market seeing a projected growth of 1.3 per cent this year over ’02, recovering to 2.2 per cent estimated growth in 2004.

Channel highs and lows

Hardware sales through channels will be about $7.9 billion in 2003, representing 63.5 per cent of all hardware sold in Canada, said IDC Canada’s Paul Edwards.

IDC expects hardware sales in 2007 to be $8 billion or 62.2 per cent share of the total hardware market. Edwards said this represents a decrease in channel share of .04 per cent from 2002’s figures. “”This is indicative of an increase in vendor-direct activity and continued market commoditization,”” he said.

Software sales through the channel will be about $2.7 billion in 2003, or 45 per cent of all software sold in Canada. IDC Canada expects those figures to rise by 2007 to $3.2 billion in sales or a 48.4 per cent share of all software sold here – an increase of channel share by 1.5 per cent.

Mabrucco said the economic impact of the United States’ war on Iraq could have worse but wasn’t. He did say there’s an “”unease about the current direction of that state of affairs.”” However, Canada is facing more budget surpluses than nosedives.

“”Canada, being very different from the U.S., we seem to be continuing to have budget surpluses while they’re going into a deficit freefall,”” he said. “”That can impact us in the long term.””

Adding to the list of inhibitors faced by the Canadian economy on the whole, Mabrucco said although the rate of inflation is expected to remain under the 2 per cent long term guidelines in conjunction with the Bank of Canada this year, IDC expects the “”spikes in inflation we face today potentially impacting the marketplace, at least in the short term.””

Interest rates continue to decline in Canada, he said, which is different from what’s happening presently in the U.S. economy and in other foreign economies. “”Today, it’s seen as a way of fighting inflation to ensure the longer term viability of the economic environment in Canada,”” he said. “”It’s also probably the major reason other than people getting out of (investing in) the U.S. dollar, that’s boosting the Canadian dollar today.””

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