IT industry is dying (…again)

Five key facts that suggest that the IT industry is heading toward a news business model. Should you be worried ?

It is difficult to admit that the IT industry in its traditional form may be dying. For more than 25 years, I have been an observer, industry analyst, and a promoter of IT technologies and of the IT industry with IDC, IDG (and more recently with Techtarget), and during that time I have witnessed a number of crises, transitions, and shakeouts.

However, if you look back on the great technology waves of the past 50 years, the IT industry and the leading vendors seem to have the ability to survive and re-invent themselves permanently. While many of the early IT vendors have disappeared along the way (think of some of the mainframe and mini-computer vendors, network specialists, and even more recently major PC vendors), the leaders have survived: Cisco, Dell, EMC, HP, IBM, Microsoft, Oracle, SAP, and many others, are alive and going strong.

However, here are 5 facts that lead me to think that the IT industry in its current form will disappear, and its ecosystem with it.

  1. The most worrying. IBM has recently announced its 15th quarter of sequential decrease in revenues. Despite record amounts invested to finance the shift towards a software-centered business model (acquisition of Cognos, SPSS, and tens of start-ups), IBM’s transition to a software model is still far from being a success. The shift to cloud computing is so slow at the operational level, that IBM’s image is still far behind those of other cloud specialist vendors. This trend is perhaps one of the most worrying for an industry analyst, as it is the first significant crisis at IBM since the mid-1980s, when the company failed to recognize the importance of the PC in the corporate information system.
  2. Investors’ attitude is another hint of the changes taking place in the IT industry. Apparently, the financial community has never been more optimistic about technology sectors. Numerous records have been broken in the past two years, with the largest amounts invested in tech companies since pre-crisis levels, and even since the Internet bubble of 2000. According to Venture Pulse (KPMG), $129.5 billion were invested in 8,367 venture deals globally in 2015. Most of this capital inflow is going to small and medium sized companies in the digital sector. During the same year, according to Venture Beat, $11 billion have been invested in the digital and marketing automation sectors. No less than 380 new players have emerged to take advantage of this great opportunity, most of them positioned on market niches. So investors have not been so bullish about the tech sector since the Internet bubble days. However, when we look more closely, the so-called « Unicorns » (start-up companies with a valuation of more than $1 billion) are mostly positioned on the digital and marketing automation sectors, but not on infrastructure markets. The Wall Street Journal “Billion Startup Club » and Dow Jones keep track of the ‘unicorns’ or ‘billion dollar babies’ (companies with more than US$1 billion valuation), and of the 145 companies tracked in this index, only a handful are operating in the hardware or traditional IT sectors. In fact financial investors are still investing bullish amounts in unicorns (74 investments in unicorns in Q4 2015) but they are becoming prudent about mega-deals in traditional IT sectors: One of the largest IT deals of history, the $65 billion acquisition of EMC by Dell, has been a difficult financing round, even for Michael Dell, despite his leadership and charisma. Although the disposal of some key assets such as EDS or VMware could help Dell to free a lot of cash and finance the deal, it seems that bankers and investors are becoming defiant of mega-deals in the infrastructure sector. The strategy behind Dell’s acquisition, to offer clients an integrated service to merge infrastructure, servers and storage, is not as convincing or attractive to investors as it was a decade ago. This is a strong hint that, although investors’ appetite for companies in the digital sector is still very strong, the time of mega deals in the IT sector, at least at the infrastructure level, may be over. IT companies managing to attract capital are positioned on specific segments such as cloud or security, but the traditional view that companies want to buy their technology infrastructure from a single vendor, seem to be gone.
  3. Traditional IT vendors will be competing against their own clients — Cloud computing and web-based computing have created a unique situation, where large corporate clients become potential infrastructure vendors. Amazon is a prime example of a company which has evolved from being a large client to being a provider on the cloud market, by offering its own cloud infrastructure to other clients, and we can safely assume that Amazon has led the way and that other vendors will follow that path. For IT vendors, the worst is yet to come. Pure players from the digital sector, such as Uber and AirBnB, and probably other « unicorns », will become competitors of the IT vendors that are hosting their infrastructure. Add traditional industrial groups from the automotive sector, the tourism sector, or utility companies as potential players in the future, and the infrastructure services market may become a cutthroat business. The US$182m investment of Ford Motor in Pivotal Software as part of its effort to become an “auto and mobility” company, is another sign that industrial corporations will invest significant amounts to secure their digital transformation in the next few years. All these converging trends will contribute to further fuel innovation, competition (and high valuations) in the digital sector. Expect this trend to continue: according to KPMG’s venture pulse report corporate venture capital investments in private sectors keep increasing at a rapid pace (+27% in Q1 2016).
  4. The IT industry is heading towards a slow cycle. According to Gartner Group, the sales of hardware, software and services (« IT spending »), should reach US$ 3.54 Trillion (US$3,536 billion) worldwide in 2016, a decrease over 2015 (-0.5%), and while this is partly due to currency fluctuations, it will be in any event far below the rate of global economic growth. This may not seem like major news to outside observers, but this is the equivalent of a disaster for an industry which has been growing at 8% to 15% per annum for most to the past decades. According to Gartner, the growth in constant dollar terms will be below 3% per annum until the end of the decade. Even though the weight of informal and shadow IT may be under-estimated in this industry forecast, this slow growth in traditional IT spending should be particularly worrying to IT vendors, in particular if we consider the capital investment needed for digital transformation in the coming gyears. In fact, we may be paying the price of the past. The IT industry has been under pressure for most of the past decade to reduce prices and squeeze margins in a pure « cost cutting » perspective, and no emphasis was put on to help CIOs and managers in defending the return on investment, or at least the value proposition of IT investments in their organizations. CIOs will be the first victims of the coming shakeout.
  5. What does it mean for our organizations? The CIO is (once more) an endangered species. The end of the CIO has been predicted so many times in the past decades, and yet, looking back, the CIO has proved a very resilient species: From the mainframe to web-based applications and digital on demand, the capacity of the corporate CIO to adapt and survive in a fast-moving environment has been staggering. In truth, a great part of the CIO role in today’s organizations has changed, with more impact on cost cutting, on negotiations with key IT vendors and contractors, and more say in the overall business strategy. But the current shift in the industry is entirely different from previous transitions: the digital transformation of businesses happening in organizations (impossible to control for traditional CIOs), and the increase of informal IT in corporate environments (so-called ‘shadow IT’), are key trends which continue to weaken the position of CIOs and undermine their role in technology as well as in business decisions. Is it good news? — probably not. But the IT industry will have to adjust to this change to adapt and survive in the current environment.