Tech spending headed for a slump?
There's an old investment adage: When Wall Street sneezes, London catches a cold and some of my UK colleagues are already complaining about 'man flu.' Economic indicators coming out of the UK suggest the technology sector could be in for a rough ride during 2008. Finextra reports that:
The latest research from Celent shows that IT spending by global financial services institutions slowed in 2007 to stand at US$342.1 billion, a year-to-year increase of 5.9%, but substantially lower than the 8.7% growth achieved in 2006.
Jacob Jegher, senior analyst in Celent's banking group says IT spending growth rates have dropped across all regions, but US banks have been hit particularly hard and "challenges in this region are contributing to growth declines".
The Financial Times (subscription required) goes much further in its assessment of general economic conditions:
Britain this year faces the most difficult economic conditions since the dotcom bubble burst, according to the Financial Times’ annual survey of leading economists, which shows deepening pessimism about the impact of the global credit squeeze...
...Many of the problems stem from abroad, especially the likelihood of a housing market slump in the US. Sir Howard Davies, director of the London School of Economics, saw a high probability of a recession in the US and added: “That would be likely to spread to the UK and some other European countries, notably Spain, where property prices seem similarly out of line.”
The size of vertical markets like financial services and telco utilities mean that the likes of SAP, Oracle, HP and IBM could weather any storm; provided they get products and services to market. To date, Oracle has shown the most appetite having referenced financial services as a key growth market at its last earnings call:
Safra Catz, Oracle's CFO noted that:
...Oracle was benefiting from the weak dollar, but added that the company is diversified enough to weather a downturn in some verticals like financial services.
The key for all the major players will come from ensuring that deals currently in the pipeline don't get moved into the discretionary spend category. Drivers like governance, risk and compliance could play a major lead but only if buyers don't get tired of the rhetoric and if vendors come up with products rather than opportunistic consulting engagements. We get to test SAPs resilience in the coming days when its results come out.
In the meantime, BusinessWeek claims that:
If a recession finally hits, Web 2.0 companies will find there are neither enough ad dollars out there for all of them to survive on, nor enough big corporate buyers such as Google (GOOG), Microsoft (MSFT), and traditional media companies to buy them all out. What's more, venture capitalists may decide that momentum looks better for clean-tech investments than for Web startups that depend on a cyclical business like advertising. So more will join the "DeadPool," as the Web startup blog TechCrunch calls its list of failed companies.
There is no way to tell at this early stage whether BusinessWeek is right but TechCrunch's deadpool is certainly one to watch.