Tech analyst and consultant Mark Stahlman has been around the computer industry for 30 years, so he knows how to look beyond the current quarter. Now an analyst at investment bank Caris & Co., he contends that the recent earnings misses by IBM (IBM), Sun Microsystems (SUNW), and many others can't be blamed solely on the weak economy. Instead, in his view, the industry is on the cusp of a sweeping change to new information technologies such as true mainframes-on-a-chip, Web services, and open-source software.
Stahlman spoke recently with BusinessWeek Silicon Valley Bureau Chief Robert D. Hof about how this transition will affect IT spending and suppliers for the next few years. The upshot: It won't be pretty (see BW Online, 4/18/05, "Tech's Gathering Gloom").
Q: Why are IBM and so many other companies missing their earnings numbers? Is it macroeconomic factors or a structural shift in information technology?
A: The macroeconomics are really only important when there's nothing important happening in the technology. When the technology is lively and there's some significant product or architectural transitions coming, that always trumps the economy. We're in a period of really intense technology change -- probably the most concentrated period of technology change yet.
Q: What are the most important changes going on?
A: The most obvious event is the 64-bit transition in Intel (INTC) chips. It isn't just 64 bits -- it's actually big-computer capabilities suddenly finding their way into commodity microprocessors. This is million-dollar-machine sort of stuff now in chips for a couple hundred dollars. The computer architects that used to build the big machines are now employed at Intel and AMD (AMD).
This is happening in a very short period of time. It's combined with everybody writing much more capable operating systems and tools. So truly remarkable, never-before-affordable, high-end computer architectures are now heading to desktops. Everything we talked about in the '70s, '80s, and '90s -- putting together clusters of PCs to replace big machines -- is finally happening. And then there's open source and Web services.
Q: Sounds promising for tech suppliers. So what's the problem now?
A: We aren't fully there yet. Just as we have experienced with individual product transitions causing customers to stop and wait, this platform transition is causing freezes on the part of customers. That's more important than any oil-price change for IBM not being able to close the quarter.
Q: These technologies are much cheaper to buy and operate. Will that put a damper on tech spending?
A: The fact that the next generation is less expensive does not mean that growth disappears. If you wind up uncovering significant new ranges of applications and you end up deploying them far more widely, you're going to dramatically expand digital services.
Right now, banks, hospitals, stores, governments, and schools aren't yet using much of this technology in providing services. So you might end up with 5 to 10 times as much being used if it's at one-third the price per unit. The total still winds up growing fairly healthily. But as in any transition, things never go smoothly.
Q: So it sounds like we might even have a few years of disruption in tech spending.
A: Oh, absolutely. We have a couple of years of probably single-digit growth overall in tech spending. But we're going to have reallocations within it. But the transition from old IT to new IT will involve many categories that are easily growing 20% or 30% on a sustained basis.
Q: What will that mean for established players such as IBM and Sun?
A: IBM, being everything, contains both old IT and new IT. The challenge for IBM is how to mitigate the downside of losing the old IT at the same time that they try to emphasize the benefits of the new IT. Nobody has as much of both as IBM does.
Q: Any good news in all this in the short term?
A: All corporate customers now are aware of these things. So they've begun to hire, which is evident in the IT hiring statistics.
The buyers of these technologies aren't apathetic. They aren't nickel-and-diming. They are strategically mobilized. They recognize they can't compete in their own businesses unless they do this. This is an expansive imperative for them.
Q: You mean tech customers are starting to hire internally to implement these technologies, rather than just outsource it?
A: Yeah. The whole community of open-source software guys now have jobs. So there has been a reversal of that "I don't want to hear about it, you take care of it" attitude. IBM is well aware of all of this. It's their whole effort to reposition their services organization. They're trying to [tell] customers, "We will help you do it yourself."