Gartner Spells Out Changing Tech Scenarios

REDWOOD SHORES, Calif. – The coming few years will feature continued consolidation,
financial pressures and changes to the hardware business, requiring different IT
strategies for the future than what people have been using in the past.

IT consultancy Gartner made these predictions during its Hardware Insight conference
here Thursday. Employees of firms like Intel, HP and Sun listened to presentations that
often focused on where their companies may be headed in the coming years.

Some of the usual trends will continue, like market consolidation. Research Vice
President Roger Cox noted that 85 percent of the storage business is in the hands of
seven vendors, and “they are not advancing the technology. They are just moving along,
milking their huge user bases.” It’s the startups that are bringing out new, innovative
products, and will likely be acquired, he said.

In the next four years, Gartner sees continued consolidation of vendors, consolidation
of servers through virtualization, a move toward green IT, an expansion of cloud
computing and “hardware as a service” – i.e. hardware rental.

Green IT won’t be just confined to the U.S., it will be a global effort. Gartner
estimates two percent of worldwide carbon emissions are attributable to IT. “IT vendors
are seen as part of the problem, so it will be necessary to get your house in order,”
said Cox.

Even though it is viewed as an emerging market with a much smaller IT infrastructure
than the U.S., China is already concerned with power consumption and the government is
coming up with guidelines on for businesses on power consumption policies. Those policies
have not been released yet, but it shows the issue is one even for high-growth areas, not
just mature ones.

A late start to the slowdown?

Gartner Research Director George Shiffler then spoke of hardware spending as it
relates to the economy. He ate some crow and admitted Gartner’s earlier predictions of a downturn
in sales due to economic conditions didn’t manifest. Hardware spending remained strong in
the first half of 2008.

The U.S. did better than expected in the first half of this year, “despite some awful
headlines,” thanks to interest rate cuts, policy actions to give liquidity to banks, the
falling dollar making exports more appealing and the tax rebates for consumers.

Citing research from the financial analysis firm Global Insight, Shiffler said there
could be a notable drop in spending in the U.S. and Europe, which would result in
slowdowns in sales in the second half of this year and the first half of next year.
Hardware spending would rise 6.6 percent in 2008, down from the 10.0 in 2007, and fall to
just 3.8 percent in 2009.

However, it’s a slowdown, not a plunge like after the dot com bubble popped. “We don’t
see the bottom falling out in spending like we did in 2000-2001, even in the worst case
scenarios,” said Shiffler. How much impact it will have is an open question. “Spending is
not affected so far. The U.S. hasn’t slowed enough yet to impact the market,” he

He later told that the cost of energy, while dipping slightly
in recent weeks, remains a problem, people spent their tax rebates from the government
very fast, and Europe is now having housing problems of its own. But don’t panic yet. “It
isn’t people stopping, it’s people going slower and seeing how this plays out,” he

Changes in the server and desktop market

The server market has to deal with a number of changes all at once: the economy, the
decline of RISC and ascension of x86, the game changers that are virtualization and cloud
computing, and the drop in average selling prices (ASPs).

In the U.S., from the first half of 2007 to the first half of 2008, unit shipments
rose 7.1 percent, but revenue fell 4.3 percent. Dell was the leader in unit shipments
while IBM was the dollar leader. HP held steady and Sun declined in both units and

One reason for that, according to Heeral Kota (CQ), a senior research analyst at
Gartner, is that cheaper x86 servers are being sold. “A lot of times people buy more than
they are using. So now they are buying minimal and buying more if they need it. You can
always buy more capacity,” she told

The server market would be better off if the economy were better, but it hasn’t been
impacted that much to the down side, either, said Kota. Mostly it’s just that customers
are realizing they don’t need to buy super-decked out computers like they were buying
last year. “They realized they don’t need that much capacity,” she said.

Gartner believes cloud computing could be a disruptive force in the market,
particularly for server vendors, and that server vendors will need to target a range of
external and Web datacenter providers as customers try to avoid making commitments and go
to pay as you go cloud services.

On the desktop side of things, Principal Research Analyst Mikako Kitagawa said that
soon, China will surpass the U.S. as the single largest PC market. The U.S. is 22 percent
of worldwide PC sales but China is coming on fast.

The reason for that is the U.S. is a “highly saturated” market, where people own two
and three and four PCs, and much of the business is in upgrades and replacements. China
is still growing as a market and has not reached saturation.

There is also market saturation for vendors. HP and Dell combined hold about 55
percent of the total market, with Apple coming in third with around 10 percent of the
market, and the best annual growth rate of 37.9 percent quarter-over-quarter. Acer, which
now owns Gateway, has around 10 percent of the market, followed by Toshiba, a laptop-only
player, Lenovo and Sony in the high single digits.

That doesn’t leave room for much else. Kitagawa said there would likely be some
vendors exiting the market. “This is a scary picture if you are a small player, because
you’ve got no place to go. It shows the consolidation trend that has gone on recently,”
she said.

Kitagawa also predicted it would be very bad for white box PC vendors, locally-owned
and established stores that build their own PCs, to compete against juggernauts like Dell
and HP.

The mini-notebook boom

Gartner is predicting mini-notebooks, also sometimes called netbooks, will ramp up
significantly, led by ASUSTeK, with its popular Eee-PC. Mini-notebooks will be a consumer
phenomenon, with 89.1 percent of sales in 2Q08 going to consumers. ASUS had 50 percent of
the market in that quarter, but that might get spread around a little with the entry of
more players, including Dell.

The mini-notebooks sell in the $300-$500 range, which makes customers feel more
comfortable about buying them outside the traditional channels. Many of them are being
sold through Amazon, because the $300 price point is one consumers are comfortable with,
according to Angela McIntyre, research director in the client computing markets team.

Worldwide, Gartner expects mini-notebooks to hit more than 50 million units by 2012
under the best case scenario and around 25 million units under a most likely scenario. It
will be difficult to track because they will appear under the brand name of small local
vendors, so there won’t be a dominance of a few big players like with PCs and laptops. By
making them locally, costs can be kept down.

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