Software Price Inflation Helps Boost IT Spending In 2023

August 21, 2023 Timothy Prickett Morgan

Datacenter and client device sales are slumping and are expected to be down from spending levels in 2022, according to the latest prognostications for worldwide IT spending from market researcher Gartner. But thanks to exploding budgets for software and services, the market for IT spending across all categories is anticipated to grow at a fairly healthy rate this year – and will do better in 2024, if Gartner is right.

That is a big “if” of course. The only way to accurately predict the future is to live it – and even that is looking dubious sometimes. (Wink.)

Like other companies tracking IT spending and the states of the national economies on Earth, Gartner does an update on its forecasts for economic growth and the IT spending that is part of that from time to time. The latest one was done in late July and it has come to our attention. We have been tracking the Gartner public data since 2012 in the categories that it currently uses, and what we can tell you is that spending for datacenter systems – servers, storage, and switching – for 2023 has been downshifted every time Gartner has done an update to IT spending since January 2022. Everybody knew the coronavirus pandemic gravy train was going to run out of steam at some point and then there would be a period of digestion of existing capacity as well as a possible cooling of the economy as the central banks of the major economies would have to shift to fighting rampant inflation.

The inevitable inflation, which system makers and enterprise software makers by and large avoided passing on to customers during the pandemic, is part of what is driving the IT spending this year and next. Some of it is increased demand over this year, and some of it will be driven by price hikes that take full effect in 2024. Some of the delta between 2022 and 2023 is due to the spending in some categories in 2022 being raised, which closes the gap in terms of growth rates.

Here’s an example of what we are talking about. In the January 2022 forecast, Gartner expected for datacenter systems spending to be $226 billion, which was an increase of 11.4 percent. And then in July of last year, that number was chopped to $209 billion, then in January of this year it was revised upwards to $212 billion, and now Gartner says after analyzing financial figures from all the key players and capital spending from the hyperscalers and cloud builders that it was actually $221 billion – closer to the original estimate. At the same time, in the January 2022 forecast, spending for datacenter systems was expected to be $237 billion, and as we started coming out of the pandemic and IT shops started chopping spending, that was dropped to $216 billion, then $214 billion, and now it is at $218 billion in the latest forecast, a drop of 1.5 percent year on year.

Interestingly, the first forecast for datacenter systems spending for 2024 put out for Gartner has it rising by 8.1 percent to $236 billion.

As you can see from the table above and the chart below, enterprise software – big ERP, CRM, and SCM systems as well as spending on databases, middleware, and other systems software, either as perpetual licenses or software subscriptions – is a huge driver of the IT economy and is representing a larger and larger portion of IT spending.

Enterprise software is still not bigger than IT services (consulting and such) or telecom services (data and voice services for organizations). Despite a slump in device spending – PCs, tablets, and smartphones – that is projected to be much worse this year than in datacenter systems, overall IT spending is expected to grow by 4.3 percent to $4.71 trillion and the core IT market – datacenter systems, enterprise software, and IT services – is going to grow by 9.5 percent $2.55 trillion.

For 2024, Gartner is projecting that overall IT spending will rise by a pretty impressive 8.8 percent to $5.13 trillion and that the core IT segment (which is our definition, not Gartner’s) will rise by 12.1 percent to $2.86 trillion. There is a lot of optimism and a lot of pessimism in economic analysis right now and it is hard to say where these projections are on that spectrum, but we are hoping for the best and like many people are tempted to plan by that. But we also know that revisions are inevitable as sentiments change and cash flows with them.

Whenever global IT spending grows slower or crashes compared to global gross domestic product (GDP) growth rates, something is afoot. We looked at the World Bank global GDP projections for 2023 and they expect for 2.4 percent growth in the global economy this year and a slight improvement to 2.4 percent growth in 2024. A simultaneous decline in GDP and IT spending is rare, and in fact did not happen or is not forecast to happen in the years between 2012 and 2024 in the Gartner dataset. GDP tends to be around 3 percent a year, give or take a little, and in the past nine years, IT spending has an interesting pattern of a weak year that grows at GDP rate followed by a slightly better year where the IT spending rate is higher than GDP and then that is followed by a good year where IT spending is significantly higher than GDP, like on the order of 1.5X to 2X.

We think that cycle is coinciding with the hyperscaler and cloud builder cycles, which are in turn a reflection of CPU, GPU, and other component cycles. In 2023 and 2024, some of that growth is simply due to IT vendors charging more for their goods and services in the wake of the pandemic-induced inflation that has disrupted so many economies but not yet forced the United States into a recession as the Federal Reserve tries cool the economy with higher interest rates. We also think that fears of a recession, concern over what generative AI means to business, and overcapacity in 2020 and 2021 are what are predominantly driving the decline in datacenter systems spending and a focus on enterprise software.

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