The Ovum View: IT's all over now?

Richard Holway presented his annual industry snapshot at the end of last year. As we begin 2003, just what are this well-known analyst's views on the long term prospects for the IT industry?

Ovum Holway research has always concentrated on past, current and near term future forecasts for UK IT.

The 'excessive exuberance' of the high growth rates of the IT sector of late have now come to a grinding halt. Indeed, growth is now negative and this serious recession is likely to last three years. But what then? Will we see the 20 per cent p.a. growth of 1998 returning? We think not.

If you study any sector which is based on an engineering or technological development (railways, automotive sector, airlines, telecoms, TV, radio etc.) you will find growth goes through four phases:

- Pioneer

- Mass market

- Maturity

- Post maturity

The IT industry entered its pioneering phase after the war. We contend it was the introduction of third generation computers, like the IBM S/360 in 1964, that started the mass market phase as it made IT accessible to many businesses. All the major S/ITS companies we know of today were founded in the 1960s. The introduction of the PC in 1981 accelerated growth in this phase by making IT affordable to SMEs and individuals too.

In 1964, IT was

Indeed, S/ITS have grown three times faster than the UK economy since 1964 - four times faster in the 1990s.

If S/ITS continued to grow at that rate it would equal 100 per cent of the economy by 2050. Now, we think there is one thing that all readers will agree upon - that is impossible! After all we all need to eat, drink, be housed, move around etc..

We looked at every other engineering or technology-oriented sector of the UK economy over the last 100 years and couldn't find one that has managed to exceed 5 per cent of the economy. They go to reach a kind of maturity level - and stay there.

The UK economy has grown on average by 2.5 per cent p.a. in the last 40 years. It has only exceeded 5 per cent in one year and has been negative on a number of occasions.

We contend that IT has now entered its maturity phase. IT's percentage share of the UK economy will stay at, or around, 4 per cent, which means that growth for the next 40 years will be quite closely aligned to GDP growth. That means that we see growth mainly in the 0-5 per cent p.a. range; with growth closer to 10 per cent only in rare and exceptional years.

For an industry used to double digit growth rates year in, year out, this may come as something of a shock. Indeed, we suspect it will require quite a different set of management skills to take full advantage (or even survive) in such an environment.

But for those that can both accept maturity and adapt, the future could well be very rewarding.

First, companies will need to be run for cash and profits. Not for growth alone.

It was positive sentiment towards the IT sector which sent shares prices into orbit. It was negative sentiment which plunged them to earth again. We do not see such a degree of positive sentiment returning. Investors will look upon IT just like they regard other sectors in their maturity phases. Indeed, as we explained last month, dividends and yields will become the order of the day.

Second, do not think maturity will put an end to innovation. We expect innovation to continue apace. The IT of 10, 20 years time will show major advancements.

Indeed, the main one will be reliability. Maturity has meant increased reliability in every other similar sector. Indeed, users will expect reliability and punish harshly vendors who don't deliver.

The IT industry has profited massively from its own unreliability. These days will end.

Indeed, the days when fee rates, contractor rates and even wages are several times the national norm will rapidly come to an end. We have already seen the first evidence with average wages in IT declining by 7 per cent in the last six months. We see this as an irreversible trend. We see the skills required in the vast majority of IT-related jobs becoming much more similar to those associated with a 'trade' (like being a skilled motor mechanic) - and pay will fall accordingly.

The one thing that can be guaranteed during a maturity phase is consolidation. At the moment the top three suppliers worldwide have around 15 per cent of the market. We see this rising to >50 per cent within 20 years. In other words, the recent consolidations, like HP and Compaq or IBM and PwC Consulting, will look trifling compared to the couplings we will report in the years to come. You have to be big or niche in a mature market. The mid-sized players cannot survive.

Consolidation within software or hardware or IT services is one thing but we see the unrelenting trend towards convergence accelerating too. IBM is a prime example at the moment and we see this model being attempted by others. We see telcos increasingly being drawn in. But we do not believe it will be the telcos doing the buying (as in DT and T-Systems). In the future, the telcos will be acquired by the IT companies.

Increasingly, IT services companies are moving into business process outsourcing (BPO). Indeed, we reckon that you just cannot survive as an IT outsourcer alone without a BPO operation or partner. So, over time we see all these sectors converging.

This new breed of mega companies will be 'serviced' by a huge number of 'component suppliers'. Being a component supplier will be increasingly uncomfortable. Price pressure will be enormous. However, if you don't play the mega company's game, you will exclude yourself from most of the market. You will have to be content with a local presence or a niche.

Success in the future will come from:

- spotting and exploiting shifts in the market. But remember in a mature market for every sub sector getting a larger slice of the cake, another sub sector will go hungry.

- increasing market share. Clearly consolidation will play a vital role here. But IT companies will need much more capable management with experience in the market share game. In our view the current IT sector has few managers with such capability.

We don't anticipate IT's maturity phase ending in our lifetime. But remember that it has for other sectors like the railways. There then followed 50 years of decline.

Ovum Holway has for a long time linked its views to musical themes. "There may be troubles ahead", "Stormy weather" and "Yesterday".

"IT's all over now" is a particularly appropriate theme, being a Rolling Stones hit in 1964 just as IT entered its mass market phase. Few would expect great things of Mick Jagger in the future as he turns 60. On the other hand, Jagger seems quite capable of making the most of his 'maturity'.

So should we.

Richard Holway is a founder member of the Princes Trust Technology Leadership Group which helps disadvantaged young people set up in IT.

For more information, email info@ovum.com or visit www.ovum.com