IT Recovery Is Tepid, as Expected

Tech giants reporting fairly solid financials, while Washington proposes some assistance to spur SMB hiring.

Well into the first quarter of this year, economic uncertainty continues to plague IT spending, though some of the leading suppliers are indicating that the worst may be over.

Economists are predicting a gradual improvement this year. Many see the IT industry poised to rebound stronger than others, incremental as the rebound may be. So far early indications of that optimism appear on target.

After one of its worst years in history, Microsoft posted a 14 percent increase in sales for the quarter ended Dec. 31. The company credited sales of the newly launched Windows 7 as a key driver.

Microsoft said it sold a record 60-million-plus Windows 7 licenses during the quarter. Meanwhile, Intel Corp. reported a 28 percent year-over-year increase in revenues for the same period with revenues of $10.6 billion. Cisco Systems Inc.'s revenues of $9.8 billion were up 8 percent for the quarter. And IBM Corp.'s revenues were flat, although its services business continued to show strength.

"We started the year in one of the deepest recessions in our history and emerged from it with better products, and technology driving new demand for computing worldwide," said Intel President and CEO Paul Otellini during the company's January earnings call.

Cisco Chairman and CEO John Chambers was also optimistic on his company's earnings call last month, saying the company plans to hire at least 2,000 employees this year. "Based on our business momentum and prior economic recoveries, this would indicate the recovery from a capital spending perspective is very strong, and moving into the second phase of a reasonably balanced across-the-board growth," Chambers said.

Overall IT growth remains tepid according to IDC, which predicts an overall worldwide increase in IT spending of 3 percent compared to an 8 percent decline last year.

Globally, hardware is predicted to grow 5 percent, software just 2 percent and services 3 percent. PC and mobile device sales will continue to be robust, driven by consumer purchases, according to analysts. PC refreshes by enterprises are expected to start to pick up in the second half of the year. While virtualization is stifling server sales, both IDC and Gartner Inc. say it's a key opportunity for growth moving forward.

Stifling the recovery is the fact that small and midsize businesses (SMBs) don't have access to capital as banks continue to tighten lending.

"We started the year in one of the deepest recessions in our history and emerged from it with better products, and technology driving new demand for computing worldwide."

Paul Otellini, President and CEO, Intel Corp.

Help on the Way?
In a move to get banks lending to SMBs, President Barack Obama proposed to Congress in his State of the Union address that $30 million be made available to give small businesses credit. The funding would come from the TARP money repaid by large Wall Street banks in recent months. "Financing remains difficult for small business owners across the country, even those that are making a profit," Obama said in his address.

The administration is also proposing a tax credit to SMBs that hire. Under the proposal, SMBs that hire new employees will be entitled to a $5,000 tax credit and will be exempt from paying Social Security taxes for the remainder of the year.

"This is a simple, easy to understand mechanism that will cut taxes for more than 1 million small businesses," Obama said in a speech at a Baltimore factory in late January. "It'll give them an incentive to hire more people and a little bit of extra money to pay higher wages, to expand work hours or invest in their company."

That certainly should help, says IDC analyst Stephen Minton, but that's not going to be an overnight fix, either.

"We obviously hope it will have an impact over time, but it's not going to instantly solve the problem, which those companies are facing today, which is having the capital to go out and spend on IT," he says.

About the Author

Jeffrey Schwartz is editor of Redmond magazine and also covers cloud computing for Virtualization Review's Cloud Report. In addition, he writes the Channeling the Cloud column for Redmond Channel Partner. Follow him on Twitter @JeffreySchwartz.