CRN Monthly Channel Research Report, June 2005
Executive Summary:
Solution providers' overall sales expectations once again came under pressure in May. The overall spending expectations index came in at 78 in last month (with May 2000=100), down from 94 in April. This marks the fourth decline in the past five months; so far this year, only April has shown an increase in overall sales expectations.
Additional data show solution providers sales expectations declined in May compared to April in all major market segments—small business, midsize companies, large firms and the government. While the magnitude of the decline in expectations was not that large (except in the government area) expectations are significantly below year-earlier levels in all segments except the midmarket. The midsize company segment is likely to be a bastion of spending strength in coming months, as these firms appear to be gearing up their spending plans.
Are solution providers underestimating the future? CRN thinks so. Midsize companies are scaling up their spending plans. Nearly half of large firms surveyed by the Business Roundtable expect to boost capital spending over the next 12 months. Economic growth remains solid, though it has slowed slightly from last year's pace and high oil prices remain a drain on business pocketbooks. Finally, interest rates could level off soon as the Federal Reserve pauses to assess the impact of past rate hikes on the economy and inflation.
After a one-month hiatus, peripherals rejoined the list of the top 10 products and technologies that solution providers plan to sell or recommend to their business clients over the near term. Branded servers, in contrast, dropped off the list. Branded systems in general were less prominent on the list, consistent with other CRN research data from May showing that custom systems made something of a comeback against branded vendors, after several months of steep market declines.
Networking software, wireless LANs and storage hardware all moved up the list last month, with networking software making the biggest move, from ninth place to fifth place. This is consistent with data from CRN's Sales Expectations Index, which showed that solution providers boosted their near-term sales expectations for both networking hardware and software last month. Solution providers were also more optimistic about storage sales.
Solution providers continue shifting their sales expectations in response to changing market conditions. The reappearance of custom systems on the list is an indication that solution providers are not giving up on white boxes, and that they are likely to remain a strong presence in the SMB market. Indeed, solution providers' sales expectations for custom systems increased in May compared to April, and a larger percentage of VARs reported custom systems were their overall best selling desktops, notebook and servers.
Solution providers also need to add new skill sets to take advantage of opportunities in areas such as business class communications services, where sales expectations are solid but fewer solution providers indicate they plan to sell or recommend. Those that are early to the game will likely reap the greatest rewards when it comes to sales and profits. [Read more]
The midsize company market (those businesses with between 100 and 999 employees) is likely to remain a pillar of strength as far as technology spending is concerned, according to the May CRN Business Spending Survey. Security, Web services, application/database development, and CRM hold the strongest promise for near-term sales growth. Hardware and software categories such as desktops, PC servers, networking and storage also offer strong and growing sales opportunities for solution providers. [Read more]
1. Monthly Solution Provider Survey
A. Near-Term Sales Outlook
Solution providers' overall sales expectations once again came under pressure in May. The overall spending expectations index came in at 78 in last month (with May 2000=100), down from 94 in April. This marks the fourth decline in the past five months; so far this year, only April has shown an increase in overall sales expectations.
In addition, a new sales expectations index that CRN will debut in next month's Report also showed a decline last month. This index covers 29 different product and service categories and will provide a much more comprehensive picture of trends in sales expectations compared to the current index.
Additional data show solution providers sales expectations declined in May compared to April in all major market segments—small business, midsize companies, large firms and the government. While the magnitude of the decline in expectations was not that large (except in the government area) expectations are significantly below year-earlier levels in all segments except the midmarket. The midsize company segment is likely to be a bastion of spending strength in coming months, as these firms appear to be gearing up their spending plans.
While the data looks rather gloomy, two points need to be made. The first is that a significant portion of the decline in the Index in May was due to a plunge in sales expectations for Unix/RISC servers.
In this always-volatile category, some 15 percent of solution providers surveyed expected sales to actually decline more than 10 percent in the coming three months. This was one of the most negative outlooks seen in this category in nearly three years. It remains to be seen if this was merely a one-month blip in the data or a truly negative turn in sales expectations in this category.
In addition, near-term sales expectations soared to record levels last December, as solution providers experienced a sudden burst of enthusiasm for future sales growth subsequent data showed to be unsustainable. As a result, comparisons of current sales trends with these abnormally high expectations can give a distorted picture of recent trends.
Even if this is all taken into account, however, there is no getting around the fact that solution providers are scaling back their near-term sales expectations compared to where they were even a year ago at this time.
But are solution providers underestimating the future? CRN thinks so. As the analysis in Section Two of this Report shows, midsize companies are scaling up their spending plans. A recent survey by the Business Roundtable, an organization made up of CEOs at the largest U.S. firms, showed that half of the 160 members surveyed still expect to boost capital spending over the next 12 months. Economic growth remains solid, though it has slowed slightly from last year's pace and high oil prices remain a drain on business pocketbooks. Finally, interest rates could level off soon as the Federal Reserve pauses to assess the impact of past rate hikes on the economy and inflation.
Storage HW and SW—There are no index figures here, but sales expectations were higher in May compared to April. In May, 47 percent of respondents expected an increase in storage hardware sales of six percent or more in the following three months, up from 44 percent in April. For storage software, 44 percent of VARs surveyed in May expected a sales gain of at least six percent in the following three months, up from 39 percent in April.
Sales Expectations by Market Segment
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(percent of solution providers expecting sales growth of at least six percent*)
Base: 197 responding solution providers in May 2005
B. Solution Provider Recommendations to Business Customers
After a one-month hiatus, peripherals rejoined the list of the top 10 products and technologies that solution providers plan to sell or recommend to their business clients over the near term. Branded servers, in contrast, dropped off the list.
Branded systems in general were less prominent on the list, with notebooks falling from fourth place to a tie for eighth place, and desktops dropping from sixth place to a tie for eighth place. This is consistent with other CRN research data from May showing that custom systems made something of a comeback against branded vendors, after several months of steep market declines. Future data will show whether this is merely a one-month pause in a new trend toward braded systems that began earlier this year, or the start of a reversal, with solution providers looking more toward custom systems.
The other categories making up the top 10 list were all unchanged in May compared to April. Security categories, in particular firewalls and anti-virus, continue to hold prominent positions on the list, as is the case with networking categories. Storage hardware rounds out the top 10.
Networking software, wireless LANs and storage hardware all moved up the list last month, with networking software making the biggest move, from ninth place to fifth place. This is consistent with data from CRN's Sales Expectations Index, which showed that solution providers boosted their near-term sales expectations for both networking hardware and software last month. Solution providers were also more optimistic about storage sales.
Top 10 products/technologies solution providers plan to sell or recommend to their business clients over the next 90 days
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(percent of solution providers citing each)
New to the list in May is peripherals. Dropping off the list in May is branded systems.
Base: 197 responding solution providers in May 2005
C. Hot Growth Categories
Solution providers continue shifting their sales expectations in response to changing market conditions. In May, four new categories joined the list of the top 10 categories where solution providers have the highest near-term sales expectations. These included wireless LANs (reappearing after a one-month hiatus) managed services, intrusion detection, and custom systems. In last month's Research Report, CRN indicated that customs systems dropping out of the top 10 list was a potentially significant development, given the inroads that branded systems have been making against white boxes in the small and midsize company PC hardware market. The reappearance of custom systems on the list in May, however, is an indication that solution providers are not giving up on white boxes, and that they are likely to remain a strong presence in the SMB market. Indeed, solution providers' sales expectations for custom systems increased in May compared to April, and a larger percentage of VARs reported custom systems were their overall best selling desktops, notebook and servers. Managed services sales expectations strengthened in May, marking the second consecutive monthly increase in expectations after some weakness earlier this year. The 52 percent of solution providers expecting sales growth of at least six percent of the next three months in this category is the highest figure since February. Web services, in contrast, took a breather last month after strong recent gains in sales expectations.
Even with these changes, six of the top 10 categories where solution providers have the highest sales growth expectations are either networking or security related. Under these circumstances, it is not surprising that the list of the top 10 categories that solution providers plan to sell or recommend to their business customers is also dominated by these two technologies. But solution providers need to add new skill sets to take advantage of opportunities in areas such as business class communications services, where sales expectations are solid but fewer solution providers indicate they plan to sell or recommend. Those that are early to the game will likely reap the greatest rewards when it comes to sales and profits. Along with the hardware and software categories listed in Section 1 above, CRN asks solution providers to rate their near-term sales expectations for a much wider range of product and service areas as part of its Monthly Solution Provider Survey. From this data, the list of the 10 categories with the highest near-term sales expectations can be derived.
Top 10 Categories with the highest sales expectations over the next three months
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(Percentage of solution providers expecting sales growth of six percent or more in the three months following the date shown)
New to the list in May: Wireless LANs, managed services, custom systems/white box, intrusion detection. Dropping off the list in May: Web services, notebooks, hosting, remote access
Base: 197 responding solution providers in May 2005
Source: CRN Monthly Solution Provider Survey
Each month, CRN randomly surveys its readership on a wide range of topics, including (but not limited to) near-term trends in sales expectations, best-selling technologies and market segments, and how solution providers are incorporating custom systems into their business models. Several hundred responses are received from solution providers on a monthly basis.
2. Midsize Company IT Spending Plans
The midsize company market (those businesses with between 100 and 999 employees) is likely to remain a pillar of strength as far as technology spending is concerned, according to the May CRN Business Spending Survey. Fifty-seven percent of midsize companies surveyed last month expect to boost their IT budgets over the year, up from 50 percent in February, the last time these companies were surveyed. Only 12 percent of midsize firms expect to reduce their budgets over the same period.
More importantly, three-quarters of midsize companies that expect to boost technology budgets over the next 12 months said they are "strongly" or "extremely" committed to doing so. This is down only slightly from the 81 percent figure recorded in the February survey.
’Do you expect your company’s IT budget to increase, decrease, or stay the same over the next 12 months?’
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(percent of midsize companies citing each choice)
Base: 200 midsize company IT executives surveyed in May 2005 Source: CRN Business Spending Survey
’How committed is your company to making the planned changes in IT spending?’
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(percent of midsize companies citing each choice)
Base: 114 midsize companies planning to increase spending, 24 midsize companies planning to decrease spending, surveyed in May 2005.
Source: CRN Business Spending Survey
Each month, CRN surveys between 125 and 200 business technology executives in a different market segment. The market segments are rotated on a monthly basis, so that each segment (small businesses, midsize companies, and larger firms) is surveyed once per quarter, or four times a year. CRN asks technology executives a wide range of questions, including sending priorities for hardware, software, and Internet-related categories, potential changes in technology budgets, and the factors that influence business technology spending plans.
John Roberts is CRN's director of research. He can be reached at [email protected].