TBR 2015 ICT Predictions: Industry evolution reaches tipping point

1 | 2015 PREDICTIONS | ©2015 TECHNOLOGY BUSINESS RESEARCH, INC.

TECHNOLOGY BUSINESS RESEARCH, INC.

2015 ICT PREDICTIONS

INDUSTRY EVOLUTION REACHES TIPPING POINT

AU T H O R S F E B . 1 7 , 2 0 1 5

Stuart Williams Vice President of Research [email protected] @s2_williams

S O F T W A R E S E C U R I T Y T E L E C O M D A T A C E N T E R

D I G I T A L P R O F E S S I O N A L S E R V I C E S DEVICES AND PLATFORMS

C L O U D

The reports outlines three areas of business trends for 2015:

continuing or accelerating trends, maturing trends, and net new emerging trends.

Segments covered in our 2015 Predictions series:

INFORMATION AND COMMUNICATIONS TECHNOLOGY

These special reports are part of TBR’s 2015 Predictions series, in which our analysts

share insights about business changes within key markets for the coming year.

Allan Krans Practice Manager & Principal Analyst Cloud [email protected] @allankrans

Geoff Woollacott Practice Manager & Principal Analyst Software & BI [email protected] @gwoollacott

Christian Perry Content Manager Software & BI [email protected] @ITwriter

Patrick Heffernan Practice Manager & Principal Analyst Services [email protected] @TBR_PatrickH

Ezra Gottheil Principal Analyst Devices & Platforms [email protected] @TBR_PatrickH

Matt Healey Principal Analyst [email protected] @mhealey_TBR

Michael Sullivan-Trainor Executive Analyst Telecom [email protected] @mikest


TBR 2015 ICT PREDICTIONS

The information and communications technology (ICT) industry is evolving rapidly as new technologies

and economic models disrupt traditional businesses. In 2014 TBR benchmarks tracked flat or declining

revenue across traditional segments such as servers, telecom and IT outsourcing, while new segments

such as cloud, software-defined data center and digital business grew at double-digit rates. Industry

stalwart Oracle performed an about-face and went all-in on cloud, while titans Cisco, Microsoft, IBM and

SAP shifted from core businesses to new technologies and business models. The old product, service

and business models are being cannibalized at an accelerating rate. New products, services, value

chains and business models sell to new types of buyers. Evolution is shaking the foundations of the IT

vendor hierarchy. ICT companies searching for share, revenue and profit in the new economy must

evolve and compete in new ways.

Technology and business disruptions have been building for the past three to five years, and broad

adoption among individuals and corporations that buy and consume ICT amplifies the business impact.

Vendors that can evolve past the old models to serve new buyers will lead. Vendors that focus on

traditional models will linger but not lead the new markets.

TBR ICT PREDICTIONS OVERVIEW:

VENDOR RISE AND FALL DETERMINED BY ABILITY

TO EVOLVE


Driver: Large-scale adoption of simple, granular and low-friction economic models

among ICT buyers

ICT Vendor Results:

Requirement to offer product and service versions of their portfolio

Requirement for multiple ways to purchase offerings

Requirement for multiple routes to market across the portfolio to fully address opportunity

2015 EMPOWERED BUYERS WILL FINISH TIPPING THE

ICT MARKET

In 2015 enterprise IT budgeting will be flat or will increase by low single digits.

Customer spending, however, is shifting rapidly from traditional products and services

to a new mix of offerings. Figure 1 illustrates TBR’s estimates of 2014 revenue growth

for segments of the IT industry — traditional segments inclusive of higher-growth

cloud segments grew by single digits or declined.

THE ENVIRONMENT: ICT budgets are flat, but dollars are shifting from traditional to new offerings


Figure 1


Buyers are shifting their budgets, as much and as quickly as possible, away from

buying, assembling and integrating piles of different components. They are

purchasing vendor offerings that deliver their needed outcomes while reducing their

struggles with assembly, integration or customization risks. Buyers are focusing their

innovation dollars on core processes that offer competitive differentiation (Figure 3).

If a workload is not a point of differentiation for the business, then the buyer can

purchase innovation from the provider (an outcome) and let that party be an expert

in the workload and the delivery (e.g., Salesforce). If a workload can benefit from

buyer and vendor innovation (e.g., a delivery app using Google Maps), then the buyer

will build a solution using platforms.

THREE KINDS OF BUYERS DRIVE THE NEW ICT ECONOMY


Figure 2


At the root of all ICT delivery is a buyer who chooses to innovate and differentiate

based on a workload. They may keep this innovation secret, as a stock trading house

will keep its trading platform closely guarded, or they may choose to package and sell

that innovation to other businesses as a service or a product.

For any given workload investment, a firm will settle into one of the three categories:

buyers who want an outcome (either a business or IT outcome); buyers who will build

their innovations on top of vendor technology platforms; or buyers who need to own

& control their ICT to fully maximize and differentiate their business. The traditional

model was to sell to the own & control buyer, who bought technology and integrated

it in their data centers to create solutions. Every traditional ICT vendor built its

business by serving the own & control buyer.


Figure 3


The IT market is shifting from traditional business models that sell to own & control

buyers to selling to outcome and solution build buyers. The migration of spending

shifted billions away from traditional vendors and set the stage for how firms will

evolve to win in 2015 or linger at the margin.

Making the shift is extremely difficult, requiring cultural change, portfolio evolution

and changes in how vendors engage with customers. To maximize their addressable

markets, revenue and profit, vendors need to build high-performing businesses that

can productize the core IP into appropriate outcomes, platforms or products; and

successfully connect and sell to each buyer type. Figure 4 shows how needs — not

roles — drive buyer behavior. Vendors must first adapt their portfolios to offer

product and service offerings of the same IP. Traditional vendors such as IBM and

Microsoft are well along on this path, as customers can consume the portfolios as a

service, a platform or a product. Salesforce and Amazon, on the other hand, have no

own & control business and face very high barriers to direct entry, therefore will miss

the opportunity to support the most critical, customized and differentiating

workloads.


THE CHALLENGE: Evolve or fade away

Figure 4


Winning vendors not only create offerings for each buyer category, but they also

adapt their go-to-market messaging and routes to market to best serve the needs of

the buyer types. Figure 5 outlines the desired benefits and key sales messages for

each buyer category. The framework shows baseline examples for just how different

the new outcome and build buyers are from the traditional own & control buyers.

Vendors that align their customer engagements with all three journeys will win the

greatest range of opportunity. The means to address each buyer category will vary for

each vendor; some can manage all three directly (e.g., SAP, IBM and Microsoft), while

others will support partners and ecosystems to build up their own & control base

(e.g., HP sells technology but leverages open-source communities for its cloud

platforms).

Partnering and acquiring are two key strategies for traditional vendors. A vendor may

not be able to create an outcome-focused offering, yet its partners can create the

offering. The risk is loss of relevance, as the outcome buyer does not care deeply

about the underlying technology. The challenge is to build up the ecosystem and

reduce transactional costs between partners while increasing the buyer’s cost to

switch to a different ecosystem. The platform wars that started in 2014 are the

beginning of this process and a market struggle TBR believes will increase in 2015.

Acquisitions harvest the innovation developed on the underlying platforms and

enable the core vendors to buy a customer base and offer outcomes at the same

time. SAP succeeded in this strategy with its Ariba acquisition that brought a

marketplace platform and a customer base.


WINNING VENDORS MOVE TO SELL TO ALL BUYER CATEGORIES

Figure 5



By developing offerings that span outcome, build and own & control buyers, ICT

vendors can jump out of their traditional siloed value-chain relationships and enter

further upstream, closer to the ultimate buyers. Figure 6 shows the traditional

technology value chain that proceeds from silicon to hardware to software and

services.

WINNING VENDORS CAN JUMP CATEGORIES

Vendors that can add elements across the silos and create offerings for the build and

outcome buyers will disrupt the old industry value chain. Figure 7 shows how a

component manufacturer can add a network service and a software development

platform to its hardware to enter the growing Internet of Things (IoT) market as

a platform.

Figure 6

Figure 7



ICT vendors will adapt or lose relevance if they cannot evolve to serve all buyer types

in 2015. By serving all buyer categories, vendors will win the greatest range of

opportunity, build an interconnected ecosystem and maximize revenue. The

requirements are simple, but vendors need to attack the business and cultural

challenges across their organizations — from strategy to engineering to sales and

marketing — to bridge the disruption.

VENDOR RECOMMENDATIONS: Evolution challenge

Offer product, platform and service versions of the portfolio.

Convert IP development from product to service and platform offerings.

Develop opportunity models that move from the own & control base to the solution builder

and outcome consumption patterns.

Create multiple customer journeys and messaging appropriate for the three buyer types.

Evolve the value message and the customer journey from a single own & control pathway to

include solution builder and outcome buyers.

Connect the inbound value proposition of one buyer to the value proposition it provides to

their buyers downstream. For example, a solution builder needs a platform vendor on which

to build and manage a platform even as they build a solution that delivers an outcome to

their customer.

Enable multiple routes to market to fully address each buyer type opportunity.

Develop competencies to support the different buyer types with appropriate routes to

market. For example, move past traditional “blue suit” sales to add self-service, OEM, partner-

led, developer-led and inside sales-led motions.

Make all routes to market equally viable by revenue-neutral sales compensation across

different contract types. For example, commissions on a one-time contract versus fee-based

or metered contracts.

ICT VENDOR REQUIREMENTS & STRATEGIES FOR RELEVANT EVOLUTION:

These are a few of the major challenges vendors face in 2015 as they evolve to survive the customer-

driven tipping point. Each industry sector will take different pathways, and TBR developed deeper

analyses for each of our ICT coverage areas.


TBR 2015 SECTOR PREDICTIONS OVERVIEW:

The shift of buyers is reshaping ICT business segments. TBR research practices assembled their 2015

predictions for key continuing, evolving and emerging trends into special reports. Each of the eight TBR

2015 Predictions reports is available under Special Reports on the TBR website.


Trends that will continue into 2015: These are current trends TBR expects will continue or

accelerate in the coming year.

New trends for 2015: These are maturing nascent trends from 2014 that TBR believes will

expand in 2015.

Longer-term trends: These trends are opportunities that TBR believes will begin in 2015 but will

not have a full effect on the industry for several years.

Over the year, enterprises will look to leverage investments they made in

transformation — such as cloud capacity for applications, analytics and other

workload-related spending — with new but evolutionary additions to their

environment. In many cases, investment will be in the integration of and addition to

the large cornerstones deployed.

SOFTWARE: The year of evolution and integration

2015 will be a year of retrenchment and renewal as customers and vendors

reinforce established security strategies and take discriminating steps to future

security developments around advanced technologies such as forensics and

analytics. Even as security vendors scramble to deliver cutting-edge solutions that

address growing security expectations, customers will continue to purchase many of

the legacy security products, such as malware prevention products, and services,

such as compliance tracking services, that have evolved over the past five to

10 years.

ENTERPRISE SECURITY: Retrenchment and renewal



At the same time, weighty M&A activity will be replaced by more fluid partnerships

between IT and security vendors. Initiatives that will one day expand use cases for

security, such as the IoT, will just be getting off the ground in 2015.

Cloud stands at a tipping point between the broad horizontal public platforms that

drove the market and the fragmented private and hybrid capabilities that will form

its future. The market is shifting to provide services that are customizable for the

individual end customer, whether adding security, performance, features or

management. These shifts will have implications for competitors across public

private, and hybrid clouds and associated services in 2015 and beyond.

CLOUD: Fragmented capabilities

The global digital advertising market will reach $145 billion in 2015, with ad tech

platforms capturing $50 billion in spend. Media agencies and advertisers licensing

software for in-house operations drives market growth. As a result, established

enterprise software companies such as Oracle and SAP are making acquisitions in

digital marketing services and the ad tech space, while systems integrators such as

IBM, Accenture, Deloitte and PwC continue to build out digital capabilities.

DIGITAL MARKETING: Digital in disarray

As data center owners grapple with unprecedented levels of complexity in their

ecosystems, they are looking beyond the traditional hardware stalwarts for

solutions to their challenges. Although dedicated servers, storage arrays and

switches remain core to many data centers, customers are discovering business-

changing innovation can be found most often in system software. This spurred

hardware vendors to re-evaluate their long-term strategies. Some vendors are

exiting market segments that were previously strategic to their goals, while others

are shifting their resources to focus on software or new iterations of hardware

standards.

DATA CENTER: The shift to software continues



After seven years of explosive growth in smartphones and tablets and two years of

precipitous declines in PCs, the market for computing devices stabilized. TBR

expects activity for those form factors to remain the same as in the past year: slow

growth in PCs, faster growth in smartphone units combined with a drop in ASPs,

and a reduction in sales of tablets. At the same time, the ongoing growth of the IoT,

which has been going on for at least a decade, will accelerate.

Two critical platforms are productivity and content distribution. Two vendors are

defining cross-device productivity platforms. Microsoft defined the productivity

platform around its client-based and cloud-based Office products, and Google

established a competing cloud-based platform with Google Apps. Microsoft

dominates productivity, but Google is tenacious. Three vendors are defining content

-distribution platforms. Google, Amazon and Apple have content-distribution

platforms, including mobile device apps as content. All three content platforms have

strong, defensible bases, and TBR believes this situation will continue for at least the

rest of the decade.

DEVICES & PLATFORMS: Consolidation and proliferation

In the next few years, telecom operators will face the realization that they must

transform or fade away, becoming bit pipe utilities or dissolving altogether. Most

are awakening to the need to transform and accelerating initiatives to do so. During

the next few years, this acceleration will create opportunities for suppliers such as

Ericsson, Huawei, Cisco, Amdocs, Hewlett Packard, IBM, Dell, EMC, Accenture, SAP,

Oracle, Alcatel-Lucent and Nokia Networks to deliver new technologies.

The telecom industry is in a state of disruption with the traditional business models

of wireless and wireline operators under assault through price wars and regulatory

obstacles. Strengthening competition from cable operators, cloud, and commerce

and over-the-top (OTT) service providers is limiting growth and crimping margins in

video, data and content-based services. New opportunities to enable the IoT and

TELECOM: Transformation accelerates



leverage higher data speeds and greater network capacity are blunted by slow-

developing business models. This is not an industry resigned to its fate, but one

coming to terms with its challenges and embarking on a profound series of

transformations from inside out to discover new business models.

The evolution of the “as a Service” model enables service providers to achieve above

-average growth. However, TBR believes service providers will need to target the

right verticals and ensure they develop or strengthen partnerships with technology

providers to achieve this growth. For example, avoiding verticals like the North

American federal sector and becoming the first choice of partners for specific

services will enhance a service provider’s ability to grow.

PROFESSIONAL SERVICES: “as a Service” drives growth opportunities


Report: TBR 2015 Data Center Predictions: The shift to software continues; published

Jan. 6, 2015

Report: TBR 2015 Enterprise Security Predictions: Retrenchment and renewal; published

Jan. 7, 2015

Report: TBR 2015 Devices and Platforms Predictions: Devices and platforms consolidate

and proliferate; published Jan. 8, 2015

Report: TBR 2015 Software Predictions: The year of evolution and integration; published

Jan. 9, 2015

Report: TBR 2015 Telecom Predictions: Transformation accelerates; published

Jan. 12, 2015

Report: TBR 2015 Professional Services Predictions: ‘As a Service’ drives growth

opportunities; published Jan. 15, 2015

Report: TBR 2015 Cloud Predictions: Fragmented capabilities; published Feb. 5, 2015

Technology Business Research, Inc. is a leading independent technology market research and consulting firm specializing in the business and financial analyses of hardware, software, professional services, telecom and enterprise network vendors, and operators. Serving a global clientele, TBR provides timely and actionable market research and business intelligence in a format that is uniquely tailored to clients’ needs. Our analysts are available to further address client-specific issues or information needs on an inquiry or proprietary consulting basis.

TBR has been empowering corporate decision makers since 1996. For more information please visit www.tbri.com.

©2015 Technology Business Research, Inc. This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. The information contained in this report and all other TBR products is not and should not be construed to be investment advice. TBR does not make any recommendations or provide any advice regarding the value, purchase, sale or retention of securities. This report is copyright-protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.


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