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THINK TANK: The gravy train departs

THINK TANK: The gravy train departs

Clearly, the global economy has taken something of a nosedive. While storage itself looks fairly robust at the moment, IT spending in Australia has contracted - significantly.

Two-thirds of businesses have either had a cut or no increase in their IT budget over the last six months, according to a Meta survey conducted in June. The research also shows an increasing number of IT projects coming unstuck and being relegated to the backburner, which means vendors across the board are watching their pipelines stall. "It's not that people are making decisions and buying competitors' products; they're just not making any decisions at all," laments one salesman.

In the context of storage, this has contributed to some interesting trends. Along with security, storage is currently the most bullish of all IT sectors. Still, over the last quarter even the previously impregnable EMC has had a shocker. Its revenues have been badly slashed but, more significantly, its margins have been crushed. As money gets tighter people are less willing to pay premium dollars for low-risk options and they're straying from proven pastures to test other, cheaper brands and experiment with unproven virtualisation offerings.

The knock-on effect has seen EMC pare down its gluttonous margins and undertake an interesting play with Dell, re-marketing the mid-range Clariion product through Dell's business philosophy of commoditisation. By leaning on the direct vendor's model of driving out costs and squeezing the competition by being the most effective low-cost producer, EMC is hoping to capture a new audience. If Dell's success in the PC market is anything to go by, EMC may very well succeed; IBM and Compaq have been left with sizeable wounds that vouch for Dell's ability in this space.

Meanwhile, consumers' desire to squeeze extra capacity out of existing systems is drawing out replacement cycles on hardware and shifting the value to software. Businesses are recognising their slipshod use of existing storage infrastructure and seeking to rectify it rather than dash out and buy another terabyte of space. Traditionally, people would replace their gear every three years, but they're now thinking, "Hmmm, let's see if we can't squeeze one more year out of it."

Buyers are also exhibiting unusually risky behaviour, placing trust in untried technologies like virtualisation in the hope of cutting costs. Even if they have no serious intention of utilising the solution, consumers are putting it on the table to use as a negotiating tool to drive price down.

While it's tempting to write this belt-tightening off to an economy gone bad, the real concern stems from the impossibility of predicting the IT market's recovery. We will inevitably and eventually pull out of global recession, but for now we're destined to participate in an IT depression. This industry has been growing at more than 30 per cent a year for the last 30 years and that's simply impossible to sustain. We've entered the information age, it's matured and that level of rapid growth is waving farewell from the tail-end carriage of the gravy train. But that doesn't mean the IT industry will disappear. It's going to be a large mature industry, but it will grow at 10 per cent instead of 30 per cent. The successful players will be the ones that are able to survive in this lower growth environment.

In these situations it's always good to go back to precedents to gain perspective. In the 1930s the industrial age became mature - there was massive growth that formed a bubble that finally burst and was promptly followed by recession. It took some time to settle down and if I'm right about the whole IT depression thing I'm placing bets on a good four-year timeframe before the industry rights itself again. When it does, however, a lot of players who participated in niches or who wrung money from the liberal margins available will find they just can't compete. A lot of marginal companies will fall by the wayside, the beginnings of which are already underway.


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