CRN Monthly Technology Spending Outlook, January 2005

1. Near-Term Sales Outlook
(based on a CRN survey of 347 VARs in December 2004)

As 2005 gets under way, the channel is feeling pretty good about its prospects.

Last month, solution provider expectations for near-term sales reached their highest level in the four and a half years that CRN has collected data. The overall spending expectations index came in at 128 for December, surging from 93 in November and eclipsing the previous record of 111 last May.

The December index represents a breakout from the narrow range of spending expectations during the past six months. What's more, the increase was broad, as expectations jumped in all seven hardware and software categories surveyed as well as in all four customer segments.

Networking saw an especially strong gain in near-term sales expectations last month. In fact, both networking hardware and software reached multiyear highs, breaking out of the relatively low range of expectations seen over the past two years. Desktops, peripherals, PC servers and Unix servers hit all-time highs in terms of sales expectations. Yet notebooks topped all categories, although the December sales expectations figure was slightly below the June 2004 record.

On the customer end, sales expectations in the small-business segment hit their highest level in several months, while those for the midsize- and large-company arenas strengthened considerably in December vs. November. Though year-over-year data isn't available for the government segment, monthly trends exhibit a clear upward pattern, and outside research data show the federal sector as a key market for solution providers this year in terms of sales growth.

The big question, of course, is whether these results are merely a one-month blip or signal the launch of a sustained increase in sales expectations at a new, higher level. Additional information will shed more light in the coming months. At this point, economic and market data still point to continued steady--but modest--growth in technology sales for 2005, although some areas, such as VoIP, stand to see higher growth rates compared with other categories.

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2. Large-Company IT Spending Plans
(based on a CRN survey of 125 enterprise IT executives in December 2004)

Large companies appear ready to boost their level of technology spending over the next few months, according to the December CRN Business Spending Survey.

Sixty-eight percent of large firms (those with at least 1,000 employees) polled said expected to hike their IT budgets over the next year--the highest figure recorded in the three years CRN has gathered data on this segment. Moreover, that figure is up 16 percentage points from September, the last time the enterprise space was examined. Only 11 percent of large firms said they expected to cut technology spending in 2005.

For the companies planning to boost spending, the gains are likely to be sizable. Two-thirds of enterprises expect to raise spending by more than 15 percent over the next year, and four out of five said they're "extremely" or "strongly" committed to carrying out planned increases in spending.

In terms of IT categories, networking hardware/software and storage rose sharply as enterprise spending priorities in December. Other areas offering strong enterprise sales opportunities for VARs include security, desktop PCs, Web services and Web site design/development. However, the relative importance of spending in Internet-related categories, as well as hardware and software, remains below year-earlier levels.

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3. Channel Satisfaction And Loyalty
(based on December CRN Channel Satisfaction Survey, with at least 20 VARs polled for each company listed)

In December, solution providers were about as satisfied with vendor channel programs as they were in November. But they didn't seem to get as much satisfaction from distributors.

Channel partners' overall level of satisfaction (defined as the percentage of solution providers satisfied with a company's channel program minus the percentage dissatisfied) for distributors came in at 29 percent in December, plunging from 44 percent in November. Vendors, on the other hand, saw a 1-point uptick to 46 percent in that time frame, according to CRN research. Solution providers generally give higher satisfaction ratings to vendors than distributors.

All major distributors tracked by CRN--Ingram Micro, Tech Data, Synnex and D&H Distributing--saw their channel satisfaction ratings fall in December. Reversing a sharp gain in November, Synnex had a decline of more than 20 percent in December, as did D&H.

Nine of the 20 vendors tracked showed increases in their overall satisfaction rating, and 11 registered declines. As in November, the December data showed strong volatility, with many individual vendors showing significant changes on the upside and the downside. 3Com, for example, saw a 27-point increase in its satisfaction rating, while Citrix Systems, ViewSonic and Sun Microsystems also posted big gains. Intel, AMD and Dell, however, suffered significant declines.

These trends illustrate that month-to-month data can show unusually wide swings and that the use of three-month or six-month moving averages, which involve a much larger respondent base, gives a much clearer picture of channel satisfaction trends. These averages will be available soon.

Channel loyalty showed a similar level of volatility and the same overall trends as channel satisfaction. The level of channel loyalty for all 20 vendors as a group rose to 49 percent in December, up from 46 percent the previous month. 3Com, Citrix, Sun and Computer Associates International saw major increases in channel loyalty, while Dell, AMD and Red Hat experienced sizable declines in loyalty--as did the four major distributors.

Although channel satisfaction plays a key role in channel loyalty, the data demonstrate that it's not the sole factor. Intel saw a 15-point drop in its satisfaction rating in December, but the chip giant's loyalty rating showed no change. Similarly, Hewlett-Packard had a 2-point gain in its satisfaction rating last month, but its loyalty rating dipped 3 points. IBM, Novell, Symantec, Lexmark and Samsung experienced such situations as well.

4. Best-Selling Hardware Brands
(based on a CRN survey of 347 VARs in December 2004)

The custom-system market had a robust performance in December--unlike the major system vendors, which showed mixed results at best.

The percentage of solution providers citing custom systems as their best-selling desktop, notebook, PC server and Unix/RISC server increased in December from November, with the biggest gains in the desktop and PC server segments. And in each category, the December percentages were considerably above year-earlier levels, a sign of the growing dominance of white boxes in the small- and midsize-business market.

Of the three major PC hardware vendors, Hewlett-Packard had the best performance as it realized increases in the percentage of VARs citing its desktops and notebooks as their top-sellers. Yet that measure declined for PC servers and showed no change for Unix/RISC servers. Over the past year, HP managed to boost its presence in the SMB notebook market as it battles Dell head-to-head, but it hasn't fared as well in its efforts to enlarge its presence in the desktop and server markets.

Dell saw declines in its channel best-seller percentages in the desktop, notebook and PC server categories. The vendor maintained its edge over HP in the desktop market, but the margin has narrowed significantly during the past year. Dell also has made little headway against HP in the PC server market over the past 12 months.

IBM generated a mixed bag of results in December, seeing an increase in the notebook arena but a drop in Unix servers. PC servers saw no change. During the past year, IBM has seen great success in penetrating the Unix/RISC portion of the SMB market and has established itself as the No. 1 branded vendor. And in the same time frame, the percentage of solution providers citing IBM as their top-selling Unix/RISC server vendor has more than doubled.

5. Custom Systems & Component Availability
(based on a CRN survey of 347 VARs in December 2004)

Shortages of several key components eased in December, including microprocessors, motherboards and video graphics cards.

Less than one in four white-box VARs reported moderate to severe shortages of components such as memory, hard drives and motherboards. Hard drives was the only category to see an a significant increase in shortages. Still, 85 percent of white-box VARs indicated that supplies were adequate. These trends are a major factor behind the continued growth of custom systems in the PC hardware market.

A trend toward white-box VARs building their own custom notebooks also may be developing. In December, for example, 11 percent of white-box VARs said they build their own systems exclusively, and another 26 percent said they use a hybrid model--building their own systems in some cases and outsourcing construction to system builders in other cases. In October, those figures were 10 percent and 18 percent, respectively. However, most solution providers operating in the custom notebook market still rely exclusively on outsourcing construction to system builders.