Market Size AND Trends
The Total Market
The UK computer market grew by 4.6% in 2001, to a value of £60.94bn. The market saw its rate of growth decline in both 2000 and 2001, with an especially sharp scaling-back in IT expenditure in the latter year. The slowdown in spending was felt particularly in the hardware sector and in project-related IT services.
Four factors led to this reduction in growth:
Companies cut back sharply on their IT spending after 3 years of heavy expenditure to cure the Millennium Bug. Upgrade projects were brought forward during the period from 1997 to 1999, resulting in less new work in 2000 and 2001.
The UK economy was hit by a worldwide economic slowdown.
The financial problems besetting the telecommunications and financial-services sectors led these traditional heavy investors in IT products and services to scale back their expenditure plans.
The bursting of the `dotcom bubble' had a major impact on e-business development.
The largest sector of the market remains computer services, followed by personnel costs, hardware, software and network charges.
In 2001, the UK market for computer hardware contracted by 5.1% as corporate spending on the Year 2000 problem came to an end and as the economic slowdown caused companies to reduce their hardware budgets. In difficult times, it is easy for a company to put off a hardware purchase. In addition, prices have continued to decline relative to performance and features.
The effects of the economic slowdown have been felt across the sectors of the hardware market. The PC sector was the first to be affected, followed by the server market and then the peripherals market.
Data-processing equipment is the main category of computer hardware purchased in the UK. However, since 1997, peripherals have generally taken a growing share of the market.
The UK market for computer software grew by 12.9% in 2001, and by a total of 73.8% between 1997 and 2001.
The general picture in the software market since 1999 has been one of gradual deceleration in growth - particularly in the systems-software sector. Sales growth peaked in 1999 as a result of spending on new software to deal with the Year 2000 problem. In 2001, the rate of growth declined to a level similar to that last seen in 1998.
In 2000 and 2001, the computer-services sector was very badly hit by the end of Year 2000 spending and by the economic slowdown, both of which reduced demand for project-related work. The market grew by only 7.8% in 2001 - well below the rate of growth seen in the late 1990s.
Outsourcing remains the main engine for growth in this sector. In 2001, total outsourcing represented 34.2% of sector sales, compared with 28% in 1997. Outsourcing is based on contracted work and, therefore, has not been affected by the downturn in ad hoc work.
Operational services is the largest sector of the computer-services market, followed by professional services, systems/solutions and hardware maintenance.
This section examines the main factors that are currently shaping each sector of the UK computer market.
The Total Market
The terrorist attacks on the US on 11th September 2001 exacerbated the global slowdown in IT spending and reduced the value of stock markets worldwide, thereby impacting adversely on potential IT mergers and acquisitions. The impact on the UK will be short lived, but it will undoubtedly have reduced IT spending at the end of 2001 and into early 2002.
Staffing problems, including the continued existence of skill shortages (especially for e-skills), could slow the deployment of new technologies in the next few years.
Corporate IT budgets are being squeezed, and UK companies are wasting a substantial proportion of their funding through inadequate management of their IT assets.
The slowdown in hardware sales is putting pressure on companies to consolidate, so as to exploit economies of scale. Hewlett-Packard, for example, is proposing to take over Compaq.
The growth in data-intensive and memory-intensive technologies is increasing the importance of data-storage technology, and data-storage companies have become a focus for venture-capital investment in IT.
In an effort to improve sales of PCs to the corporate market, PC manufacturers are introducing products with technologies and features that lower their total cost of ownership.
Some of the leading software companies, such as Oracle and Microsoft, are seeking to develop the Application Service Provider (ASP) business model. This is leading to new pricing models for software, although Microsoft's experience with Windows XP shows that shifting to a service model for software will not be easy - especially if it is seen by users as purely a revenue-generating ploy.
The legal battle between Microsoft and the US Justice Department has been settled. However, some of the US states involved in the case are continuing their action, and Microsoft still faces possible legal action in Europe.
At the end of 2001, Microsoft launched its new operating system, Windows XP, which includes new features offering easy access to voice over the Internet, instant messaging, videoconferencing, digital music and photography. However, the fact that these features are built into the operating system is raising the same concerns about Microsoft's practices that sparked the 1997 anti-trust case against the company.
The market has seen the growth of new software products, such as Linux, which is now a serious threat to established server and PC operating systems such as Microsoft Windows and Unix. Other growth areas of the market include Customer Relationship Management (CRM) software.
The computer-services industry has seen an increase in partnering between service companies, driven by the need for companies to offer a comprehensive set of services and solutions to increasingly sophisticated clients.
Acquisitions have grown in number and scale, with notable deals including Sema's acquisition of LHS for £2.7bn, the subsequent takeover of Sema by Schlumberger, the acquisition of Druid by FI (now Xansa), France Télécom's acquisition of Freeserve, Cap Gemini's acquisition of Ernst and Young, and CMG's acquisition of Admiral. In addition, there have been rumours about a sale of Syntegra by British Telecommunications (BT), and about a possible bid for CMG.
Increasingly, clients want their computer operations to be integrated with their overall business strategies. The result is that there are now greater synergies between IT services and management consulting.
Demand for IT professionals fell in 2001. This has hit sectors such as the IT staff-agency market.
The services industry continues to suffer from bad publicity, resulting from the failure of high-profile government outsourcing and service contracts. The crux of the problem appears to be the clash of cultures between the private sector and the public sector, and the inability of the public sector to learn from its past mistakes.
The ASP outsourcing sector, once seen as a major growth area of the market, has failed to take off. It is now clear that the ASP model only works for simple, standardised services such as e-mail, or for services delivered by industry experts to vertical markets.
Computer services and computer software will be the main growth sectors of the UK computer market over the period to 2006. Services, and to a lesser extent software, will benefit from the growth in ongoing IT projects.
The key factors shaping the computer industry over the next 5 years will be:
moderate growth in the UK economy
the search for profits, which will call for the cutting of costs (and jobs) in areas such as hardware manufacturing
the expected strong growth in IT spending in the public sector
the reluctance of many companies to undertake one-off projects in 2002
growing consolidation in sectors such as hardware.
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Market Size AND Trends