CRN Monthly Technology Spending Outlook, December 2004

1. Near-Term Sales Outlook
(based on a survey of 227 VARs in November 2004)

Heading into next year, "steady as she goes" is likely to be the phrase governing sales growth in basic hardware and software categories.

Solution providers' overall near-term sales expectations deflated in November as the overall expectations index fell to 93, compared with 103 in October and the benchmark reading of 100 in May 2000. After strong gains in April and May, the index has held within a narrow range over the past six months. So the channel's sales growth expectations are at a strong, sustainable level and remain solidly above year-earlier levels. CRN sees this trend continuing at least through the first half of 2005.

Six of the seven individual hardware and software categories showed declined sales expectations in November, but most of the decreases were mild. Desktops were the exception, showing a slight increase in sales expectations. As in recent months, solution providers see their best hardware sales opportunities in notebooks, which are likely to be the focus of the PC refresh cycle next year.

The top 10 "hot growth" categories--that is, those with the highest VAR expectations for sales growth of at least 6 percent over the next three months--are wireless LANs, antispam, antivirus, firewalls, application integration, IP telephony, intrusion detection, Web site design/development, managed services and convergence/CTI. Unsurprisingly, the list is dominated by security, which likely will remain one of the top growth categories for solution providers.

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On the customer side, channel sales expectations are stronger for the small-business market than for midsize and large companies, as has been the case for more than a year. Yet solution provider sales expectations have become much more balanced over the past 12 months in terms of customer segments. VAR sales expectations in the enterprise space, which had lagged considerably behind those for small businesses and midsize companies, are now nearly equal to those two segments. Although small and midsize firms are likely to hold the best sales opportunities next year, sales growth to enterprises could surprise.

Spending Expectations Index CHART

Sales Expectations By Customer Segment CHART

2. Midmarket IT Spending Plans
(based on a CRN survey of 201 midsize company IT executives in November 2004)

In the near term, midsize companies appear ready to focus their spending plans on specific products and technologies, while keeping overall growth of tech spending steady.

Segments such as Web services, wireless, hosting, security and online payment systems are seeing increased spending priority levels among midsize firms. Security remains the top priority, followed by Web services. In terms of hardware and software categories, areas such as networking hardware, storage and PC servers offer the best sales opportunities for solution providers in the near term.

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Overall, 46 percent of midsize companies polled in November expect to raise their IT budgets during the next year, down sharply from 58 percent in August, the last time this customer segment was surveyed. Still, nearly three times as many midsize businesses plan to hike their tech budgets compared with those planning decreases. What's more, those expecting to boost spending are likely to make significant new technology investments. More than two-thirds of those companies plan to raise spending by more than 15 percent, and 79 percent say they're "extremely" or "strongly" committed to carrying out the increases.

As a result, the overall growth of midsize company spending should be relatively stable over the near term. That's consistent with solution providers' sales expectations for this customer segment, which were nearly unchanged in November vs. October, according to CRN research.

Midmarket IT Budget Forecast, Next 12 Months CHART

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

Overall, solution providers' level of satisfaction with vendors' channel programs--defined as the percentage of VARs satisfied with a vendor's program minus the percentage dissatisfied--dipped to 45 percent in November from 48 percent in October. Six of the 18 vendors showed increased satisfaction ratings, 11 showed declines and one (Computer Associates) remained unchanged.

November's data was unusually volatile, with many vendors showing big swings up or down. For example, the channel satisfaction rating for 3Com fell 20 percentage points, and Oracle saw a 10-point drop. In contrast, Veritas saw a 10-point gain, Intel's rating rose 9 points and AMD's climbed 8 points. Because of such wide swings in month-to-month data, three-month averages will be available starting next month in order to give a clearer picture of channel satisfaction trends.

Channel loyalty showed the same volatility among vendors, yet the overall loyalty level inched up to 45 percent in November from 42 percent in October. IBM, AMD, Microsoft and Veritas saw hefty gains in their loyalty ratings in November.

On the distributor side, all four major distributors--Ingram Micro, Tech Data, Synnex and D&H Distributing--posted gains in their channel satisfaction ratings in November, with Synnex's 26-point increase leading the way. The same was true with channel loyalty, except this time Tech Data had the biggest gain with a 31-point increase.

It should be noted that channel satisfaction plays a key role in channel loyalty, although it's not the only factor affecting loyalty. For instance, a 5-point change in a vendor's satisfaction rating results in a 4-point change in that vendor's loyalty rating, on average. Therefore, vendors need to improve the level of satisfaction among channel partners in order to boost their loyalty.

VAR Satisfaction With Channel Programs CHART

VAR Loyalty To Vendors And Distributors CHART

4. Best-Selling Hardware Brands
(based on a CRN survey of 227 VARs in November 2004)

Dell came through with a robust performance in November, as the percentage of solution providers citing Dell as their top-selling desktop, notebook and PC server rose in November, with the laptop segment showing a particularly strong gain for the Round Rock, Texas, computer giant.

IBM saw its brand gain in PC servers and Unix/RISC servers for November. Over the past year, IBM has boosted its presence dramatically in the SMB server market, especially in Unix/RISC servers (including Linux-based servers). In contrast, the percentage of solution providers citing IBM notebooks as their best-selling declined slightly in November, while desktops showed no change. In the past year, IBM has made little headway in the SMB desktop and laptop markets, so it's no surprise that the company is selling a majority stake of its desktop and notebook businesses to China-based Lenovo Group.

Hewlett-Packard's performance was on the downside in November, with the company seeing declines in the desktop, Unix/RISC server and notebook areas. PC servers was the only category where a higher percentage of solution providers cited HP systems as their best-selling brand.

Custom systems, or white boxes, were generally weak as well, especially in the area of PCs servers. Still, custom systems continue to hold a dominant position in the desktop and PC server market and have recently overtaken IBM to become the leading system in the Unix/RISC server market.

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

5. Custom Systems and Component Availability
(based on a CRN survey of 227 VARs in November 2004)

Custom-system builders report that the supply of LCD panels is improving--a key factor behind recent price declines. Only 4 percent of white-box builders indicated severe shortages in November, down from 11 percent as recently as September. Greater availability and lower prices should give the custom notebook market a boost in the coming months. Whitebooks is the only PC hardware category where custom systems aren't yet the market leader, and there is plenty of room for sales growth.

Most other component categories showed little change in availability for November, with supplies more than adequate in all categories. For example, less than one in four white-box makers reported moderate to severe shortages of microprocessors.

The data also reveal that a trend toward white-box VARs building their own custom systems may be developing. In the white-box desktop market, for instance, 29 percent of VARs say they build their own systems exclusively, up from 23 percent in September. The percentage that rely exclusively on buying custom desktops already assembled dropped from 37 percent to 30 percent during the same period. It should be noted, however, that most white-box builders still use a hybrid model, building their own systems in some cases and outsourcing construction in other cases.

White Boxes: Build Or Buy? CHART

Component Availability CHART