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IT spending stagnant until 2003: study
Friday, May 31 2002
by Ciaran Buckley

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IT spending has been flat so far this year and chief information officers expect no increased spending until 2003, according to a new study by Merrill Lynch.

The Merrill Lynch TechStrat Survey of 75 US and 25 European chief information officers (CIOs) found that IT budgets are flat this year to date, despite a two percent increase at the beginning of the year. Many companies have under-spent their budgets, but they do not intend to go on a spending spree at the end of the year. Nevertheless, the survey predicted some tech resurgence at the end of the year based on seasonal strength.

The survey found that companies are increasing the duration of their PC upgrade cycle from 36 to 40 months. As a result, PCs that were upgraded in anticipation of problems with the millennium bug won't be upgraded again until 2003.

Software growth is running at eight percent. Ominously, 40 percent of companies admitted to having unused software licences, which dampens demand for further licences. But storage utilisation is running at 60 percent, which means companies will need to upgrade soon -- good news for IBM and EMC, the dominant players in the storage industry.

"We agree with that analysis," said Barry Dixon, technology analyst at Davy's Stockbrokers. "On the hardware side we're finding that companies have excess capacity in servers and PCs. These companies won't upgrade until their hardware reaches its limits."

The Merrill Lynch report contrasts with a recent report by IDC, which predicted that the worldwide IT services industry would rebound significantly by the end of 2002, driven by pent-up demand resulting from earlier cutbacks. But in the Merrill survey, when CIOs were asked where they would put their IT investment when spending improves, they rated IT services as the second-last spending area, followed only by PCs.

"Last year people were hoping for a recovery in 2002. Now it's been pushed out to 2003. Realistically, you're not going to see a recovery in the tech sector until the economy improves," said Dixon. "Although a lot of over-capacity has been washed out of the system, profitability is still weak and telecoms and banks aren't going to spend until the economy recovers. There is no chance of a recovery to the levels we saw between 1998 and 2000. A lot of the demand for hardware and software during that period was led by software companies who were predicting annual growths of 40 percent forever."

The IDC report predicted long-term growth of 12.4 percent annually to exceed USD626 billion worldwide by 2006. It also predicted that the United States will continue to lead the industry on a geographic basis and the country will experience an 11.8 percent growth rate through 2006.

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