There’s some good news for the IT and networking sectors from Wall Street, but it’s not unqualified good news. Generally, 2022 numbers are not only looking better than 2021’s (no great feat) but more significantly, they’re looking better than they were earlier this year. However, there were still a significant number of enterprises who expected a decline in spending versus last year, and that was true in every category. Storage was the only product category that managed to get an expectation of growth versus 2021 from a majority of CIOs.
IBM’s surprise beat of expectations is likely related to the same shift in attitude. As I’ve noted in past blogs, IBM has strong strategic influence in its major accounts, but the biggest factor in its growth is clearly Red Hat’s contribution. IBM is indeed becoming Red Hat in a strategic sense; it’s Red Hat products that represent the biggest upside for IBM. In a tactical sense, it’s also IBM’s account control in major enterprises and verticals.
Software is doing way better in terms of expected spending growth than hardware. The only category where hardware spending upside expectations beat downside expectations is storage. In software, every category of software shows a stronger upside potential than downside potential in terms of spending.
If you look at buyer expectations from 2020 onward, you can see a steady uptick in expected spending growth in all spaces except communications, and so it seems that networking isn’t necessarily going to enjoy the same upside this year as the rest of the markets. The view on the Street, consistent with what I hear myself from enterprises, is that there’s still a COVID influence on network spending. The Street surveys don’t show the details, but what enterprises tell me is that they’re still building web/cloud portals for their applications, and still supporting more work-from-home than before the pandemic. However, this trend is slacking off.
There’s a general view that public cloud spending will growing more slowly this year. The number of enterprises who expect an increase in spending is roughly half what it was last year. However, the number who expect to spend more on the data center components related to cloud usage is up roughly 50%. This fits into what I hear from enterprises, which is that it’s time now for enterprises to do more in the data center, partly because they held off during the pandemic and partly because there are some things they know they need to do to optimize the relationship between data center and cloud. The Street tends to characterize this as “private cloud”, but that term has no solid meaning to enterprises, who think more in terms of virtualization and “back-end” transformations.
There’s a common technology piece to this, which is BaaS, meaning “back-end as a service”. Here, of course, the back-end reference relates to the fact that the public cloud has been growing largely because enterprises have built cloud front-ends to legacy applications, making them the back-end piece of the new software model. However, there’s growing interest in beefing up the front-end element by pushing some back-end features forward. So far, that’s focused on validation and optimization components that require some database access, and this seems to be a big driver behind continued cloud spending, and also a driver of a redesign of some data center elements.
Database software and storage hardware are linked to this, I think, and so is apparent increased focus on analytics tools. One of the undercurrents of the pandemic has been a shift of focus from sales to marketing overall, driven by the need to support customers who didn’t want to go to stores. Yes, this means more money for online retail, but it also means more online focus for all of retail, and that means understanding more about things like ad targeting versus older considerations like shelf placement. Browsing online sites offers consumers a way to research remotely, and statistics on what’s happening online thus could offer retailers a window into customer thinking.
The notion of shifting work makes it hard to decode Street data on the details of software and hardware budgets, because the Street doesn’t generally understand technology planning details or reflect them in surveys of buyers. For example, Street research talks about “private cloud” which enterprises tend not to talk about in my own interactions. They also talk about “repatriation” of cloud apps back to the private cloud, meaning the data center, when in fact there isn’t really much net movement out of the cloud at all. A lot of the stuff the Street sees as moving back aren’t what most would consider “applications” at all; it’s things like virtual desktop, databases and storage, and security tools.
Repatriation is a marketing myth, IMHO. It’s not that users are spending less, or even trying to spend less, on the cloud, but that they’re largely done with the front-end-building process, and BaaS has only started to impact cloud spending. I think BaaS will pick up in the second half of 2022 and create another uptick in cloud spending growth in 2023.
The Street sees Microsoft as being most likely to see more cloud spending than the other major providers, which is consistent with what I hear and also with the analysis of the prior paragraph. Microsoft has always been the top-rated cloud player in understanding hybrid cloud applications, and that not only continues but seems to be accelerating slightly in 2022. However, Amazon began 2022 as a slight leader over Microsoft in terms of influence on buyer cloud policy, according to my own interactions.
Security spending is generally up, which of course benefits security products in general, and those offered by network equipment vendors in particular. The primary network vendors like Cisco and Juniper seem to be gaining traction in security spending relative to IT software players, and even relative to more specialized security-network vendors. Enterprises tell me that network vendors are doing a better job of proactive security marketing, which is facilitating their sales initiatives. Security as a driver for spending is gaining traction in the IT integrator space, rivaling cost reduction.
Spending on other network equipment is more complicated; generally it appears that Street research is forecasting roughly flat to slightly down trending in routing and flat to slightly up in data center switching. That’s fairly consistent with what I hear from enterprises. There is a general view that last year saw a relief rally in networking and also in computer systems, as companies caught up with projects held back by virus uncertainty, and that this is largely over in 2022. The Street isn’t seeing much in the way of specific trends in network device spending other than in the data center, but I’m hearing more about SD-WAN and virtual networking.
Overall, it appears that enterprise tech spending will be healthy in 2022, so broad-based tech companies will probably do a bit better than last year. It also appears as though there are forces creating market shifts within the sector overall, and since the Street isn’t saying much about that, I have to assume that vendors aren’t either. Does that mean they aren’t planning for those shifts? If so, there is both a risk and an opportunity in the offing for this year, and next year as well.