Due Diligence: The End of IT Growth
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During the past two years, business has dramatically cut back on information technology spending, and next year is shaping up to be nearly as bad. Considering the dismal state of the economy and the exorbitant IT spending that immediately preceded the slump, that should come as no surprise. No one expects IT spending to go through a boom like it did during the late 1990s.
But what may come as a surprise is this: Even when IT spending turns around, its prospects don't look so good. Spending over the long haul will likely grow at just half the rate it did during the last four decades. Consider the numbers: For 40 years, from 1960 to 2000, IT spending in the U.S. grew an average of 13 percent a year, peaking in 2000 when it jumped 23 percent, according to Morgan Stanley Dean Witter. Since then, it's been downhill. In 2001, IT spending dropped 10 percent, according to the U.S. Department of Commerce. This year spending is expected to drop another 2 percent, and in 2003 spending will probably be flat, according to Goldman Sachs. (And don't be surprised to see 2003 spending go into the negative if the economy continues its current slide.)
That's bad enough, but here's the rub: "In the long term, IT spending will grow about 6 percent to 7 percent a year," says Laura Conigliaro, an analyst with Goldman Sachshalf the rate it grew from 1960 to 2000. And even that may be optimistic: "Demand will be up maybe 3 percent a year," says Howard Anderson, senior managing director of YankeeTek Ventures. "The old days are over."
We just might be witnessing the end of an erathe end of tech as a growth industry. That is a heretical view, particularly here in Silicon Valley, where hope springs eternal. The mantra of the faithful continues to be that as long as computer chips keep getting faster and cheaper, and programmers keep finding new uses for all that power, business will keep writing bigger and bigger checks. But that is all in the past.
If one had to pick a single reason why growth will dry up, it is this: The IT industry has simply gotten too big. Consider this statistic: In 2000, IT accounted for 47 percent of total capital equipment spending by U.S. business, according to the U.S. Department of Commerce. For every dollar businesses spent on trucks, planes, machinery, fixtures, furniture and other equipment, almost another dollar was spent on computer hardware and software.
Granted, 2000 was the height of the bubble, when business seemed to have an insatiable appetite for everything tech. Yet even before the excesses of 2000, spending on IT may have reached its natural level. From 1990 to 1999, IT accounted for an annual average of 43 percent of total capital equipment spending in the U.S.
As integral as computers are to running a modern corporation, this is still a material world. Goods must be manufactured, shipped and sold. Consumers still go out to restaurants for dinner and to stores for groceries. Workers continue to fly on planes and work in offices. Not every human activity can be encapsulated in a computeras the dot-coms found out. And that won't change until we can say, "Beam me up, Scotty."