IBM and Sun Face ‘Reckoning’ as Budgets Shrink

SAN FRANCISCO - I nternational Business Machines Corporation, Sun Microsystems Inc. and SAP AG may be among the hardest hit technology companies in 2009 as spending on computers, software and services drops for the first time in six years.

By (Bloomberg)

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Published: Sun 21 Dec 2008, 12:43 AM

Last updated: Sun 5 Apr 2015, 11:14 AM

Spending will decline 4 per cent, led by an 8 per cent slump in developed markets, Goldman Sachs Group Inc. estimates. The first quarter may be one of the worst ever for software makers, which may cut 5 per cent of workers or more in 2009, said Brent Thill, an analyst at Citigroup Inc. in San Francisco.

A worsening economy and the bankruptcies of Wall Street icons such as Lehman Brothers Holdings Inc. have prompted companies in all industries to curb purchases and preserve cash. While demand has slowed, budget cuts haven’t yet had their full impact on technology orders, Gartner Inc. analyst Ken McGee said.

“There’s going to be a period of reckoning that’s not going to be pretty,” he said.

“There is an unhealthy incongruence between the state of economy and the number of companies that are saying their information technology staffs are extremely busy.”

The US economy, in a recession for a year, may suffer its longest slump in the post-World War II era as job losses mount.

The economic decline will cause companies to cut technology budgets in the US, Western Europe, Canada and Japan, Goldman Sachs said in a December 1 report. In emerging markets, such as China and India, growth in technology spending is slowing.

Projects Cancelled

“I’m not sure if I am going to have any money to do any new projects, and we will be reassessing our existing projects,” said Chris Vein, chief information officer for the city of San Francisco, which is contending with a $576 million budget shortfall.

Half of CIOs are looking to cut consulting-services costs, 35 per cent want to reduce computer and server expenses, and 23 per cent want savings on software, according to a Goldman Sachs survey.

Financial companies, accounting for the biggest single chunk of technology spending, will cut budgets as much as 20 per cent in the US next year, the survey showed.

Equifax Inc., looking to trim its more than $200 million in annual technology operating expenses, is cutting some consulting projects with IBM to use in-house staff, CIO Robert Webb said.

The Atlanta-based company, which calculates consumer credit scores, is also demanding price cuts of about 20 per cent, Webb said.

“I expect our suppliers to participate in helping me achieve a lower operating expense,” he said.

“Those who do will remain in our portfolio. Those who don’t will be worked out of our portfolio.”

Smaller Share

Goldman Sachs’s survey indicates that IBM, the biggest computer-services provider, will get a smaller share of companies’ software spending, the first time in 43 such surveys since 2002.

Ian Colley, a spokesman for Armonk, New York-based IBM, declined to comment.

The company said in October that its subscription sales provide a steady source of profit and cash.

Sun Microsystems’ server computers are losing out because companies are switching to cheaper Hewlett-Packard Co. and Dell Inc. machines that use Intel Corporation chips, said Sarah Friar, a Goldman Sachs analyst in San Francisco.

“Sun makes big expensive boxes with very poor features that compare very poorly to the comparable Intel-based boxes,” Friar said.

“CIOs we speak to have already been switching off of Sun, but now they’re going to accelerate getting off of them.”

Pay a Premium

RealNetworks Inc. Chief Technology Officer Edmond Mesrobian said he prefers Hewlett-Packard machines to Sun’s because they are cheaper and work well with the Linux operating system.

“I don’t need to pay a premium for Sun,” he said.

Sun contends that it saves customers money by using open-source technology. That means the underlying code is available freely and isn’t controlled by one company.

Sun provides an “important alternative today to customers feeling trapped by expensive and proprietary software and storage,” spokesman Shawn Dainas said. “Sun has a growing global customer base.”

IBM, down 21 per cent this year before today, fell 75 cents to $85.09 at 1:42pm in New York Stock Exchange composite trading. Santa Clara, California-based Sun, which has dropped 77 per cent this year, rose 10 cents to $4.29 on the Nasdaq Stock Market. The Standard and Poor’s 500 Information Technology Index has lost 43 per cent in 2008.

Some companies are better positioned to weather the slump. Those may include VMware Inc., whose software lets companies save money on hardware, and Oracle Corporation, whose sales are buttressed by multiyear contracts, Friar said.

Upgrade Delays

RealNetworks, which is eliminating 7.5 per cent of its workforce, will keep paying Oracle the same amount for maintenance contracts even as it delays upgrading to the company’s newest business applications.

The city of Seattle is using VMware to consolidate its existing servers, instead of buying 139 new ones from IBM. Next year, CIO Bill Schrier wants to use more of VMware’s so-called virtualisation software, which lets computers run multiple operating systems, saving costs. VMware shares have dropped 71 per cent this year before Friday.

Other parts of the software market, including SAP business applications and Microsoft Corporation operating systems and office programme packages, may fare worse.

Last week, Gartner cut its 2009 enterprise software growth forecast to 6.6 per cent, or $244.3 billion, predicting slowdowns in those areas. That’s down from a September forecast of 9.5 per cent.

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