Executive Summary
They estimates that the UK computer market, as defined by this report, was worth £36.96bn in 2002 — a marginal decline on the figure for the previous year. In 2003, the market again saw little change in value, with sales reaching an estimated £37.11bn.
The market can be divided into three broad sectors: hardware, software and services. All three sectors experienced a sharp reduction in annual sales growth between 2001 and 2003, in stark contrast to the rapid growth that was experienced at the end of the 1990s. Hardware was hit especially hard: the sector saw a decline in value in both 2002 and 2003.
This sudden reversal in the industry's fortunes reflects a major contraction in growth in IT budgets, with buyers becoming much more cost-conscious. Overspending has been eliminated, and clients will only buy a new IT system after considering its return on investment. IT infrastructure (especially security, systems administration and data management) is a priority for the leading buyers today, and the key factors determining spending are value for money, getting the best out of existing investments, and low total cost of ownership.
In this environment, all three sectors are struggling to generate high profit margins, but the hardware sector is finding it the most difficult. Software and services (particularly services) are generally more profitable than hardware, with large organisations seeking to exploit their existing computing resources and also to lower their operating costs by outsourcing non-core activities. This explains why several major hardware/software manufacturers, including IBM, Hewlett-Packard, Oracle, Dell and Sun, have moved strongly into the services market in the past 5 years.
At the same time, the management of IT infrastructure is changing: in major organisations, senior data-centre managers are centralising purchasing decisions and the physical architecture is also becoming increasingly centralised, with new concepts such as utility computing and service-centric computing coming to prominence. This is adding complexity to the marketplace for vendors.
The slowdown in the computer market reflects the fact that large enterprises are the key purchasers of computer products and services, and these organisations' purse strings have been tightly drawn. Unsurprisingly, many companies that have traditionally sold only to large enterprises are now focusing on small and medium-sized enterprises (SMEs) — a market that, in turn, is becoming crowded and competitive.
Among the major organisational buyers, the Government has become an increasingly important client for the computer industry, given its large-scale plans to adopt e-government and its increased investment in IT infrastructure for public bodies such as the National Health Service (NHS).
In the future, the three sectors of the market — software, hardware and services — will increasingly merge. Already, the software market is seeing changes in its delivery models and licensing structures as two new concepts — software as a service (SaaS) and application services provision — begin to have an impact on the market. In the future, as utility computing develops, the hardware sector will see similar changes. Concepts such as `e-business on demand' will see core hardware and software systems delivered as a service to major data-centre users.
The computer market has experienced a change of gear: high annual growth rates have given way to more modest annual increases in revenue, and the market is entering a mature phase of growth. Even after 2004, when Key Note predicts that the fortunes of the industry will improve, annual growth in the market's value will be less than 7%.
Over the next 5 years, clients will have the upper hand in the market and will be less willing to tolerate underperforming products and services. Consequently, development costs will rise as vendors seek to bring to market `bug'-free products and fully-developed service offerings — all in an environment of slow annual growth in revenue.
The main vendors will be looking to retain or improve their profitability (i.e. cut costs), generate the research resources required to launch new products, and buy in the expertise needed to offer complete computer solutions (as clients will increasingly want to use organisations that can offer a completely integrated global solution). This will force consolidation in the industry and give a competitive advantage to companies of scale. The big will get bigger, while the small will either go out of business or target specific niches.
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