capital expense

SaaS could be 2009 capex avoidance plan

Many are expecting that companies will turn to cloud computing to avoid capex in 2009, and there are certainly indicators that would suggest that at least some are doing just that. Past history and buyer research. however, shows that companies often stand pat on older strategies during a downturn and change only when things get a bit better again.

In past declines, companies have not switched technologies as fast as in good times, even to apply cost savings. The reason is that they’re afraid of disrupting operations when they need all the sales and profit they can get. We expect that cloud computing might do extremely well in 2009 relative to current levels, but not explode as some expect.

In 2010, we could see a considerable ramp in cloud computing use. Software as a service (SaaS), on the other hand, appears likely to have a noticeable surge in sales in 2009 as companies turn to the model to avoid short-term application investments and expansions in IT due to new software needs.

China to invest $40 billion in 3G network

China will likely invest at least $40 billion in a faster 3G network based on China’s own TD-SCDMA, which differs from the international standards. The investment is expected to benefit primarily Chinese manufacturers. This may be an indicator that some major economies will spend to support their own industry rather than simply erect trade barriers or take other overt steps.

The U.S. decision to aid the auto industry would be regarded by some as a subsidy, again showing that countries will tread carefully to avoid poisoning the free trade atmosphere but at the same time support their own manufacturing sector as a necessary part of economic recovery.

Questions on whether Huawei has ties to the Chinese government and the military (particularly the PLA) have swirled for some time and have now been raised again in financial circles, which suggest that the Chinese giant may plan an IPO.

Telecom spending 2009 - major cuts not evident

Both publications and research companies are jumping on a story that telecom is headed for a major slump, but we believe they are all seeing too many shadows at least for the present.

In our research, we have not found any concrete spending cuts from telcos, nor any major concerns that a recession of even a year’s length would create one. Telcos, like other industries, are worried about the possibility of a major systemic collapse in banking, credit, etc., but as that risk recedes, we believe they will then move to execute on their previous plans for 2009, which involved wireline capex increases from 0 to 4 percent and wireless from 2 to 8 percent.

In the meantime, they are pushing spending out. That means that if clarity in the recovery can be achieved by late spring, two-thirds or more of the 2009 plan could still be captured. If recovery is still not convincing by late summer, we believe that spending will indeed be down by perhaps 3 percent in wireline and perhaps flat in wireless.

Network spending forecasts: Where’s the logic?

UBS and other Wall Street research firms are issuing fairly dire forecasts on tech and network spending in 2009. UBS has tech spending dropping a “minimum” of 6-11% in the year, and the consensus for networking (including the service provider space) is a decline of about 10%.

At the same time, the firms are talking about a mid-year recovery in GDP and saying that tech will lead by a quarter, which would mean this is all happening in one quarter of bad news! Wireless spending is expected to be off by 7%.

Frankly none of this makes sense.

• First, there are no credible indications from our Tier One surveys that any provider has actually planned to cut spending in 2009. What has happened is that they have decided to slow-roll projects through the end of Q1 to try to get more visibility on the impact of the economic crisis on their monetization.
• Second, there is very little chance that the spending would dip by 10% even if there were to be a protracted recovery period because operators generally spend in proportion to revenue, and nobody expects carrier revenue to decline at that rate.
• Third, we believe providers would be happy to increase capex in 2009 if they could get a handle on monetization, and it is in the mobile area where they have the best chance.

In the enterprise, we believe there may be more persistent and systemic problems, but again we doubt a dip of 10% would be likely under any set of conditions that have a reasonable probability.

Metro and access drive ‘09 deployment focus

It is becoming increasingly clear that 2009 will see the most action in the metro and access space. Worldwide, operators are looking very hard at FMC and femtocells, and we believe that there will be some deployments even in the US by 2H09.

There are also a number of competitive initiatives from competitive access providers aimed at Ethernet services and enterprise customers, attempting to play off the corporate desire to gain headroom in access to leverage with later tactical purchases of services.

 Our research is showing that worldwide focus on infrastructure spending will be strongly in the access/metro direction in 2009 and even in 2010.

Who’s growing the managed services trend?

There are indications that some smaller providers are going to make an entry into the enterprise managed services and applications market, including Reliance and Tata. The goal is to make a wide-ranging network with ample capacity into a financial asset by relying less on its commoditizing bits and more on what can be done with the capacity—services, in short.

We believe that the decision is also linked to a slow response from incumbent providers to the sudden interest in managed services, interest that was mounting even before the current economic bust. In tough times, enterprises often want to trade expense for capital investment, particularly in markets where credit is tight or expensive.

IBM expands cloud computing offerings

IBM is expanding its cloud computing offerings, responding in part to the realization that during tough economic times, many companies will trade service expense for capital expense, particularly when credit is difficult.

We believe that SaaS and cloud computing could be a big winner in the IT shift that is likely to occur in 2009, and IBM and others will surely be positioning to take advantage of the shift. For IBM, cloud computing is a critical hedge since it would likely suffer if buyers were to slow capital programs.

AT&T reorg favors market-target structure

AT&T is reorganizing to eliminate its original service-based management structure in favor of market-target structuring. The move will put the former wireless head, de la Vega, as head of consumer services, and could thus also be interpreted as a shift toward a wireless-centric policy.

We think that a market-based organization is smart given the fact that symbiosis among services seems key to leveraging opportunity and creating new applications and services using componentized service-layer infrastructure, all goals of operators worldwide. It also comes at a time when AT&T and other operators are puzzling out their capex plans for 2009, which will depend on some notion of how to monetize network investment.

CIMI Corp. to issue tech spending report

We are developing a report on technology spending in the service provider and enterprise space, based on the assessment of the current market crisis, our analysis and modeling of future trends, our past and present surveys of enterprises and operators, and the historical information available from government sources.

The report will cover the market for the period from the present through 2011 and will contain information on overall spending, key areas of spending focus, and how to maximize opportunities in the current market. This report will be available in November 2008, and clients will have an opportunity to have a presentation of the findings at in-person consulting sessions beginning about the second week of November. Purchase of the report will be required for the presentations.

Recession unavoidable; tech slump will increase

Against all odds and the advice of party leaders on both sides, the House has failed to pass the rescue bill. The problem came as Republicans deserted their leadership en masse and failed to support the bill. Democrats had previously indicated they would not accept responsibility for voting a measure that a Republican administration recommended unless it was supported by Republicans in the House, which failed to happen.

As we have indicated earlier, failure to pass this bill promptly would in our view put the U.S. into recession, and we believe that unless the current situation can somehow be recouped convincingly today, there is little or no chance that recession can now be avoided. We will publish an updated model result in our October Netwatcher newsletter issue, but it now appears to us that the odds of a recession worldwide and a tech spending slump have increased.

Regulators in Europe stepped in to rescue Dexia, a bank that has specialized in loans to state and local governments, offering the bank nearly $10 billion in loans. Dexia was among the EU banks considered to be in trouble, and the U.S. credit crisis is expected to continue to have broader impact in Europe unless a quick solution is found.

Our readers know that we have viewed the 2009 tech market health as depending on the timing of a U.S. recovery versus an EU turndown, and it now appears that the U.S. recovery is delayed and the EU turndown is accelerated. That makes it much more likely that tech spending will be curtailed worldwide in 2009, not only killing growth but actually creating a small decline in constant dollars.

Hope for a new plan that will pass is widely held, and stock futures this morning and the experience of foreign exchanges both suggest that the market is pricing in such a conclusion. The question will be one of timing.