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IT exhibitors at CeBIT 2002 will be reflecting on a very different outlook than at CeBIT 2001. At that time, optimism was still high and there were still doubts that any US recession would even impact Europe. However, the outlook is not all bad. The chart below, from IDC, shows that IT spending in Europe in 2001 showed a mixed picture. Spending, particularly from 2003, shows a strong improvement. A consensus is forming in the IT industry that after a difficult first half to 2002, the situation will begin to improve.

Devil in the detail



It is clear from the chart that IT services will continue to increase its dominance as a proportion of IT spending. Vendors have already re-positioned to focus more on services and less on hardware. Within the three categories, different segments of the IT markets will grow at very different rates in 2002 and beyond.

The slowdown in 2001 has caused a fundamental re-think by many corporate IT departments, and ultimately boardrooms and senior executives, on their expectations and budgeting for IT. Returns from IT investment are often extremely difficult to measure, yet in 2002 businesses will be looking to gain tangible returns on their investments.

The industry is very aware of this fact, and IT salespeople now push the 'Return on Investment' (RoI) as a key element of their sales pitches. The impact of this will be seen in a number of different ways.

First, outsourcing will grow strongly in 2002. Vendors have often underestimated the reluctance of businesses to trust a third party with something as important as their IT. Yet, difficult times cause for more radical measures. Corporates, perhaps pushed by the finance director, will look to cut costs and capital expenditure by outsourcing more elements of their IT spending.

Second, they will look at solutions that can cut costs by integrating the disparate networks and solutions that they currently use. Many businesses have trialled many different solutions and standalone software packages. Part of the reason that these investments have often been disappointing is that they have not been integrated into either the rest of the IT spending or into the wider businesses processes. Integration packages that can maximize the effectiveness of existing investments will be widely deployed in 2002.

Third, corporates will be far more wary of proprietary offerings and unproven companies and technologies. This does not mean a lack of innovation, although it may mean a slower uptake of new services. Users know that standards can reduce prices and ensure futureproofing, while vendors have often convinced them that proprietary offerings can offer far greater functionality and offer it today. Users are becoming wary of the latter claims as they know the dangers of being stuck with single vendor solutions, and expensive and difficult integration challenges. Users will also be more reluctant to trust unproven companies, and are far more concerned about whether their IT suppliers will still be around in 2-3 years time. One impact of this will be to help consolidate the power of the larger vendors.

Fourth, the balance of power between buyer and seller will remain against the IT vendors in 2002. Reduced revenues in IT segments in 2001 often reflected falling prices rather than falling demand. Increased competition meant prices being cut across the board by many suppliers. Users also took advantage of the state of the IT industry, and their own increased pressure on budgets, to negotiate better deals. Larger users are increasingly asking IT vendors to 'share some of the risk'. For example, in a large deployment that promises significant cost-savings, for the vendor to be paid on meeting the cost targets. Such moves are unsurprisingly disliked by the IT community, but will increasingly be sought by corporates in a buyers market.

The longer-term outlook

The IT market has always been cyclical, and some commentators are already saying that the market downturn has been beneficial in weeding out weak companies and over-hyped, under-performing technologies. That's highly debatable, but there are exciting times ahead for the IT industry as the impact of Internet services and IP (Internet Protocol) traffic really take effect.

According to a study by JP Morgan and McKinsey, 80% of all traffic over the US backbone network will be IP by 2005, rather than traditional voice or data. This will have a great impact on the use of e-business within companies. Web services - software components that can interact with one another dynamically via standard Internet technologies -- will become prevalent in the next three years. By the same timeframe, companies will utilize such technologies as e-learning and e-sales to increase productivity and reduce costs. The IT budget will become far more ingrained with other expenditure -- for the benefit of both corporates and the IT vendors.

The dot com boom and bust, has made many company executives wary of the ubiquitous 'e' tag and Internet solutions. The two issues are barely linked. The usage of Internet-based solutions will transform the productivity and effectiveness of businesses

The mobile device battle

The European market had a tough 2001. The Ericsson CEO has stated that the outlook for the first half of 2002 is, in his own words, 'grim'. In 2001, markets grew more slowly and revenue per user fell due to competition and the increased number of pre-paid users. In terms of future outlook, the market has been dented by the slow uptake in demand for the mobile Internet, and widespread concern that operators had paid far too much for 3G (the new third generation of mobile services) licenses. More worryingly, investors have fretted over whether there was really demand out there for 3G services, when the networks and devices would really be ready for commercial usage, and which vendors would ultimately be the winners.

Demand for new handsets

In 2001, global sales of mobile handsets were around 400 million, and in Europe around 150 million. The European figure fell around 10% from 2000 sales. The consensus view is that global sales will rise between 5-15% in 2002, while European sales will be fairly flat. Part of the problem was that Christmas 2001 proved better than expected for many consumer electronics products, and the mobile phone was no longer the 'must have' present. For example, Japanese vendors sold 42.7% more digital cameras in 2001.

Longer-term, forecasters believe that mobile penetration will continue to grow strongly as countries such as India and China further embrace the mobile device. For example, estimates of the total number of mobile subscribers in 2006 are around 1.8 billion. However, it is worth pointing out that in cities such as Shanghai in China, around one in three of the inhabitants already has a mobile phone, so attracting new users will prove more of a challenge. Forecasters also believe that Europe will return to growth. Researchers Yankee Group believe the European market will grow by 7% a year to reach 196 million in handset sales by 2006. Illustrating the saturation of the European market, they estimate an incredible 99% of sales will be replacement (rather than new) handsets.

The device war

Exhibitors at CeBIT 2002 will be keen to show their new product ranges, and that their devices can lead businesses and users towards 3G. European vendors have continued to enjoy great success in mobile terminals -- Nokia has a global market share of around 35% - but responded to a torrid 2001 with a series of joint ventures, cost-cutting and plans to outsource their manufacturing.

The success of the European manufacturers is threatened in three main areas; from the computing giants, from the Japanese and Far Eastern vendors and from the very low-cost and 'clone' manufacturers.

The computing giants see mobile as a natural extension of their marketplace. Some analysts have dubbed the struggle to develop the winning 3G mobile devices as the battle between Microsoft and Nokia. There is no doubt that as the mobile market develops towards corporate business solutions and mobile Internet applications, that the computing giants have some clear strengths. The battle is also a broader one, in that all vendors want to move up the value chain from devices, and offer their software, services and solutions. The battle is not all 'one-way' either. By the end of 2001 the Nokia Communicator had surpassed Palm as the most popular handheld computer in Europe.

The Japanese and Far Eastern vendors have two main advantages in 3G. First, the Japanese market is widely considered to be 1-2 years ahead of the European mobile markets. 3G services were commercially introduced in October 2001, and mobile devices incorporating cameras are widely used. Second, the skill set required for 3G ties into the strengths of the Japanese and Far Eastern vendors such as consumer electronics, gaming and high resolution graphics. Japanese vendors are also winning acclaim for their design capabilities -- for example, Sanyo won the two major wireless phone awards at the 2002 International Consumer Electronics Show in Las Vegas.

There is a widely held view in the mobile market that the device will become very commoditized. This will be partly due to the market converging on the 3G standard, although this will still vary around the world. Not only will margins erode, but the market will become very fragmented and 'clone' manufacturers (cheap producers as found in the PC market) could start to dominate. Companies such as Ericsson are already outsourcing their technology to manufacturers such as LG Electronics. Operators such as BT Cellnet are going to use low-cost manufacturers to build handsets, and then put their own brand on the device.

Branding and services

A key issue in who wins the device battle will be the ability to develop brands, and ultimately 'own the customer'. Nokia has done an excellent job in developing its brand, and ensuring that consumers often see it as a 'must have' purchase. Other vendors have also worked hard to develop their own brands. Fashion-conscious mobile phone buyers are not going to be want to be seen with unbranded devices.

Device vendors are also desperately trying to extend their relationships with customers. For example, Nokia offers Club Nokia to its users and currently has over 10 million members. Nokia aim for 50 million members by 2004. Other functionality and services such as music downloads and special fascias will extend this loyalty to individual brands. This will also become a battle between the device vendors and the mobile operators, who are wary of their relationship with consumers being weakened in any way.

However, the real winners in this battle will be those companies that are able to offer a wide range of services to their consumer and business users. Margins on the basic device will fall, but providing the device offers the opportunity to offer a whole host of other mobile commerce, entertainment and information services. Many users keep their mobile devices permanently switched on and new mobile networks allow permanent connections to the Internet. Despite all the limitations of mobile devices, they have key advantages such as personalization, immediacy and interactivity. In developing services to take advantage of these areas, mobile companies can enjoy a prosperous future.

Challenging for telcos

The European telcos faced up to some harsh realities in 2001. For the incumbent telcos, the former PTTs such as Deutsche Telekom, it was a very difficult balance between trying to minimize the loss of domestic market share, while trying to expand into new areas and into new geographies. For the alternative telcos, the new companies set up to offer services ranging from local telephone services to vast pan-European and global networks, it was often a harsh reality; investors have limited patience. The nature of telecoms is that investment costs are massive and positive earnings often four of five years away.

Investors became spooked by the period to profitability and by the realization that growth expectations required a growing market and increasing market share. Instead, many European markets had become incredibly competitive. For example, over 25 alternative telcos had funding to build pan-European networks. By the end of January 2002, Global Crossing, a global alternative telecoms company valued at nearly $50bn, had sought Chapter 11 protection under the US bankruptcy code. 2002 will see many more alternative telcos face similar problems. As ever in European telecoms, the exact situation will vary widely between countries.

The herd effect

In many industries, companies respond in similar ways to the competitive pressures they face, and copy ideas and strategies from competitors. Across European telecoms, this 'herd effect' has been taken to new levels.

Most of the incumbent telcos have had to face up to a painful combination of their markets opening to competitors, and moving from state to private control. They tried to diversify in similar areas -- for example, forming global alliances which have often ended in failure. Mainly through these international investments and the cost of mobile licenses, the major incumbent telcos such as BT, Deutsche Telekom and France Telecom are all straining under debts of more than 40 billion euros. In 2001, many tried to spin-off divisions, particularly in mobile and Internet businesses, and re-structure debt to try and overcome investor concerns. Most are still cutting jobs -- for example, BT will continue to cut 5,000 jobs a year.

The alternative telcos similarly were often guilty of showing little imagination. Those building international networks tended to concentrate on the same cities and routes, and usually offered similar product portfolios. Alternative telcos competing nationally tended to focus on their price advantage over the incumbent telco, and the fact that their networks were more modern.

In 2002, the first mergers of incumbent telcos will start to take place. Government interference has often been one of the main barriers -- being a key obstacle in such proposed mergers as Deutsche Telekom and Telecom Italia, KPN and Belgacom, and Telenor and Telia. A large number of alternative telcos will exit the market in 2002, and consolidation will also be commonplace. The alternative telcos still around by the end of 2002, will be in a far stronger position than they are today.

Challenges bring opportunities

Demand for telecom services is closely linked to economic trends. As European economies recover, then so will demand for telecoms. The incumbent telcos start with a number of key strengths such as size and customer access. They also have the advantage that customers perceive them to be more reliable than the alternative telcos. As alternative telcos exit the market, the incumbent telcos will further benefit from their status as credible long-term providers. But the incumbent telcos need to be more ambitious, more focused and more skillful in choosing partners and acquisition targets.

Broadband is a classic example of the lack of ambition of many incumbent telcos. Most incumbent telcos, with honorable exceptions such as Deutsche Telekom, have been slow to offer broadband services. One of the main incentives has tended to be competitive offerings from cable operators, rather than any desire to meet user needs. This competition from cable operators is likely to weaken in 2002 as the cable industry suffers its own funding and investor worries. Yet, the incumbent telcos need to seize the opportunity to fully commit to broadband which will undoubtedly provide long-term benefits.

The incumbent telcos have tried to offer a full portfolio of services, and have typically made tentative attempts to go further up the value chain by offering managed and IT services. Again, they have tended to copy each other in this strategy. The telcos need to be far more focused in their approach, and look to become far more specialized in particular areas rather than trying to offer many services in an ill-defined manner.

The incumbent telcos have tended to be very narrowly focused in their acquisition policies -- typically acquiring companies that offer similar services but in a different geography. As part of a more focused approach, they need to acquire and partner to gather skills that they do not currently possess.

Management and culture

Perhaps the ultimate challenge for many telcos is to change the culture of the companies. Even in the alternative telcos, many employees have come from the incumbent telcos and their experience comes from a state-owned company. When the incumbent telcos have spun-off divisions to try and encourage a more entrepreneurial attitude, the board have been unable to really loosen their control of the company. A key determinant of telco winners will be which companies have the management that has not come from the traditional telco background, and who has the vision to see beyond the typically narrow view of telecoms companies.

Fulfilling CRM expectations

CRM -- Customer Relationship Management -- is either one of the most over-hyped technologies or one of the most under-utilized, depending on whom you believe. The Gartner Group estimate that 55% of CRM implementations 'fail', and some researchers would place the figure even higher. Part of the problem is the defining exactly what is CRM -- simplistically, it can mean anything to do with IT infrastructure and services to manage, monitor and influence customers. Researchers Aberdeen Group believe that it includes six elements; sales force automation, customer service automation, field service management, marketing automation, helpdesk, and partner relationship management.

More than IT

The fact that CRM requires far more than a hardware and software challenge has been one of the key problems in implementations. One widely stated rule of thumb suggests that only 30% of the investment is in the technology and 70% is in the processes and the people. Thus, successful CRM deployments usually require a company-wide plan, support and even culture change. This is not easy to instigate from the IT department. A particular problem for CRM has been that its benefits are very difficult to quantify. As companies have focused on tangible benefits from IT investments, then CRM has seemed less important.

This has also created something of a 'vicious cycle'. As companies' faith in CRM has weakened, they have tended to make smaller and one-off investments rather than try to deploy it across the company. This has created situations where different CRM implementations have not been integrated into other applications, have not received a proper budget for training, and have not been mirrored in other parts of the company.

Often, the CRM vendors have been guilty of causing some of these problems. They have over-hyped expectations, particularly for new areas of CRM such as mobile CRM applications and have been over-eager to jump on the Internet bandwagon and push unproven eCRM (electronic CRM) solutions. Many vendors have also been happy to sell piecemeal solutions, and focus on the technology rather than business benefits.

Providing the CRM payback

Many CEOs and finance directors have been sold on CRM as a way to not only reduce costs, but to increase revenues and profits. These increased profits can come from such areas as better customer management, focused sales efforts and increased customer retention. It is clear to most people in business that retaining customers is far cheaper than attracting new ones. It all sounds so simple to achieve, but the reality is far more difficult. Companies also face the challenge that their customers are unforgiving if they suddenly find their user experience declining as new applications are trialled.

Yet, CRM does offer some real benefits for companies if they can clearly develop the appropriate plans, budget and training. Such areas include: recruiting staff with relevant marketing and analysis skills; investing in detailed customer profitability, predictive modelling and data mining solutions; and utilising customer intelligence data across the organization. The latter point seems obvious, and yet look at the major European companies who have excellent data on their customers through loyalty programs, and yet barely take advantage of this data.

Successful deployment of CRM also requires a realization that it has limitations and is not a panacea for all customer issues. Even if all the cultural, management and IT changes are made, then there are limits to its capabilities. A good example is predicting customer behavior. Academics argue about how useful past customer buying data is in forecasting how they will make future purchases. The answer is that its usually a good indication, but certainly not conclusive. Unless you know the situation and drivers of a particular individual, past behavior can never be more than an indicator. Hence, companies need to allow for the fact that their predictive data from customer spending patterns is only an indication, and not a guaranteed insight into future buying behavior.

Future progress

The key question is whether the CRM industry can learn from these lessons, and users are prepared to carry on investing in CRM. Most research companies see the market continuing to evolve. Gartner Group believe that users still see CRM as a 'critical component of corporate strategy'. The chart below shows the growth potential of the market.

What should a PC vendor do?

2001 was a year to forget for the PC industry. According to Gartner Dataquest numbers, global shipments fell 4.6%, while in the US they fell by a horrendous 11.1%. Researchers IDC estimate the drop in PC shipments in Europe, Middle East and Africa (EMEA) to have been 3.6%. This was the worst performance by the industry for at least a decade. In the higher-end server market, although there was some growth, Gartner Dataquest estimated this was just 1.8% globally -- the slowest growth rate since 1996.

The PC industry suffered an unfortunate combination of events as its own cyclical downturn coincided with the economic slowdown. In Europe, the slowdown was worsened by the slowing down of employer programs. In 1999 and 2000, some large European companies had been providing free or heavily discounted PC and notebooks to employees. This was often encouraged by Government tax breaks. There are some signs that this activity will start to pick up again in 2002.

There are also signs that the cycle will start to improve for the PC manufacturers. For example, Dell estimates that, in the US market, 30% of desktops and 25% of laptops in use today are three or more years old. However, the big problem for the industry is that the PC is becoming heavily commoditized. There is little to differentiate suppliers, and many companies are content to use PCs that may have a fairly low specification but can adequately support current enterprise applications.

The vendor battle

Consolidation among suppliers has continued and, according to the IDC EMEA figures, the five main vendors now have over 45% of the market. Their clear #1 vendor is Compaq. Dell continues to be one of the only star performers. In recent years, it has outperformed the wider industry growth by 10-15%. Its success has been based around its positioning as a low cost manufacturer. Other manufacturers, such as some of the Far Eastern vendors, have also been successful in differentiating on cost.

The other obvious area of focus for PC vendors is to try and go up the value chain by offering such services as consulting, software and packaged services. Compaq is one example of this approach, and the quest to go up the value chain has been one of the main drivers in its desire to merge with Hewlett-Packard. Other vendors still seem undecided on what their focus should be -- and these are the vendors that will particularly struggle in 2002.

PC processor battle

A fascinating battle in the PC market has been between the processor suppliers. This is a good old 'David and Goliath' market duopoly. Intel is the global titan, with an immense marketing budget and strong and long-running relationships with the large corporates, retailers and PC manufacturers. It still has around 75-80% of the global market. The second player in the market is AMD. Its traditional strength has been with home users, and in some European markets it now has a market share of over 50% in this market, and small businesses. Around 25-30% of PCs are bought in Europe by home users. It has been desperately trying to increase its share with the larger, and higher margin, corporate market.

Intel has been clever in the usage of its 'Intel inside' campaign, which has now run for over ten years. It has also managed to generate lots of media interest with its release of ever higher frequency chips.

However, AMD has sought to try and move the battleground. It claims to have a technical lead of up to 18 months in some areas. AMD believes that the frequency of the processor is not the best measure of processor speed and performance. Instead, in October 2001, it launched its 'True Performance Initiative' and started using model numbers which indicate relative performance rather than providing a 'megahertz figure'.

AMD tends to outperform Intel in independent tests and its new metrics have some strong industry support. However, it still faces a daunting task in winning further market share against the marketing muscle of Intel.

The future of the PC

The PC seems to be facing possible substitution from lots of different products. Take the planned Microsoft HomeStation. This will play Xbox games, act as a digital video recorder, provide e-mail and Internet access, and play DVD movies and digital music. Many European companies see great potential for the use of a TV or similar device for Internet access. An increasingly common term is 't-commerce' (TV commerce) which encompasses all the online shopping and interaction that could be conducted through the TV.

For business users, there is again a myriad of choices. The Barco IntelliRoom provides a single display offering access to the internet, company intranet, laptops and PCs, video, live TV, and multi-site video conferencing. It allows real-time collaboration between users, and can save employees the bother of bringing their laptops to meetings.

However, in reality, many of these products will be complementary to the PC and laptop rather than replace them. After all, even after the amazing success of the Walkman, very few people ever replaced their hi-fi systems. However, there is little consensus on exactly how the PC will be used in the future. Vendors have been undertaking large scale research to try and understand the issue. For example, AMD has set up its 'Global Consumer Advocacy Board' to better understand how home and small business users plan to use the PC in the future. One of the big challenges is the personal usage issue. Could a whole family happily watch TV and surf the Internet from one device?

What the PC industry is really hoping for is that broadband becomes more widely deployed in Europe. This will really encourage users to upgrade and replace their existing systems. It is an example of another group hoping the telecoms companies have the ambition to invest heavily in broadband.