<I>CRN</I> Monthly Technology Spending Outlook, October 2004


1. Near-Term Sales Outlook
(Based on a CRN survey of 197 VARs in September 2004)

After three straight months of declines, solution providers' near-term sales expectations rebounded in September. The overall spending expectations index came in at 98, up from 86 in August and near the benchmark of 100 in May 2000. However, the September index was well below the all-time high of 111 last May.

CRN believes the economy has weathered the summertime soft patch and is poised for solid--yet unspectacular--growth in the months ahead. The rise in VAR sales expectations reflects that view.

On the technology side, VARs polled in September exhibited stronger sales expectations in five of the seven individual hardware and software categories, led by notebooks, networking software and PC servers. The spending outlook for PC servers, in fact, reached its highest level since CRN began collecting data on that segment more than four years ago. The channel's improved expectations across multiple categories indicates that the hardware and software refresh cycle has yet to run its course, at least in the small- and midsize-business market. The volatile Unix/RISC server category was the only area to see declined sales expectations in September, and peripherals show no change.

In another positive sign, solution providers' sales expectations increased in all three business segments. Though the near-term outlook remains brightest in the small-business market, VAR optimism for the enterprise market surged last month. That's consistent with other CRN research showing that large firms planning to hike spending are more committed to doing so than those expecting to decrease spending.

Spending Expectations Index CHART

Sales Expectations By Market Segment CHART

2. Hot-Growth Tech Categories
(Based on a CRN survey of 197 VARs in September 2004)

Seven of the 10 categories where solution providers had the highest sales expectations in September were the same as in August. Security again led the way, accounting for five of the top 10 segments and three of the top four. Antispam moved to the head of the list last month, swapping places with antivirus. That's not surprising, since security remains the No. 1 spending priority for businesses of all sizes.

Three new categories made the top 10 list in September: VPNs, PC servers and Web site design/development. Those areas displaced Linux, IP telephony and peripherals.

In addition, three of the top five categories that solution providers plan to sell, resell, specify or recommend are also on the list of categories where solution providers expect the fastest sales growth. Profitability, after all, remains the driving force for businesses of any size.

Top 10 Categories With Highest VAR Sales Expectations CHART

3. Enterprise IT Spending
(Based on a CRN survey of 125 large-company IT executives in September 2004)

In September, 52 percent of technology executives polled at large companies (1,000 employees or more) said they expect to raise their IT budgets during the next year. That's down from 61 percent in June, the last time CRN surveyed the enterprise market. However, the percentage expecting to decrease IT spending didn't change in September compared with June, and four times as many large businesses plan to boost spending vs. those planning to decrease spending.

 
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What's more, the IT budget increases stand to be larger than the reductions, which should keep overall enterprise spending on an upward track over the next year. For example, four out of five companies expecting to hike IT spending project a gain of at least 15 percent over the next 12 months, whereas 68 percent of companies that forecast spending decreases expect a drop of more than 15 percent.

Another plus for the channel: 91 percent of large companies planning to raise spending are extremely or strongly committed to doing so, compared with 63 percent for businesses expecting to lower spending. That should give solution providers plenty of latitude to sway enterprise customers' minds when it comes to spending reductions.

Enterprise IT Budget Forecast, Next 12 Months CHART

4. Best-Selling Hardware Brands
(Based on a CRN survey of 197 VARs in September 2004)

September's star performer was IBM, which saw increases in the percentage of solution providers citing its desktops, notebooks, PC servers and Unix/RISC servers as their bestselling in those segments. Even better for Big Blue, the September figures were above year-ago levels in all four categories.

Dell also registered a solid performance last month. The vendor's top-seller percentages in the desktop and PC server categories showed modest gains from August to September. Dell's notebook percentage, however, didn't change in that time. And unlike IBM, Dell's September figures in the desktop, notebook and PC server areas were all below year-ago levels.

Hewlett-Packard didn't follow up on its strong August performance, as the vendor saw its best-selling percentages in desktops, PC servers and Unix/RISC servers decrease in September. Still, the declines didn't wipe out all of August's gains, and HP saw an increase in its notebook percentage, once again overtaking Dell in their neck-and-neck battle for first place in the SMB notebook market.

Custom systems took a breather last month, with the category experiencing declines in all four hardware categories. The drop was particularly evident in notebooks (also called "whitebooks") and Unix/RISC servers. Nevertheless, the September figures were well above year-ago levels, except for notebooks. And even in the laptop arena, CRN sees no let-up in the pressure that whitebooks will put on branded vendors' products in coming months. System builders have a big opportunity in this segment. Only 4 percent of solution providers that sell whitebooks build the units themselves, 40 percent buy custom notebooks assembled by another VAR and 5 percent do both.

Percentage Of VARs Citing Each As Their Top-Selling Computer CHART

5. Custom Systems and Component Availability
(Based on a CRN survey of 197 VARs in September 2004)

New CRN research data show that a sizable chunk of solution providers that sell white boxes don't build the computers themselves, but instead turn to system builders to assemble the products.

That spells opportunity for many VARs, especially in the custom notebook or "white-book" space. Half of all solution providers polled in September said they participate in this market, and more than four out of five of them are buying computers assembled by another system builder and then reselling the products to customers.

In the white-box desktop and server segments, a significant percentage of solution providers are selling both home-built systems and computers assembled by other system builders. Yet the percentage of white-box sellers tapping other makers of custom systems is high, amounting to 74 percent in the case of servers.

On the component availability front, custom system builders reported bigger shortages in September in every category except LCDs, where shortages eased a bit. Still, a third of white-box builders reported moderate to severe shortages in the LCD segments, whereas roughly a quarter of respondents reported the same for microprocessors and memory. Higher component shortages probably played a role in the declined top-seller percentages for custom systems in September.

White Boxes: Build Or Buy? CHART

Component Availability CHART