2001 was a bad year for the IT industry – about as bad as it gets. For the chip manufacturers it was abysmal with the final count likely to show a drop of 35 percent or so in global sales. This was spread across the board, with falls in chip sales for computers, networking devices and communications equipment. Even the embedded market appears to have suffered a dip. The PC industry, historically the main motor of the IT industry, looks as though it too will show a dip in sales – of 6 percent or so – when the figures are in. In the previous year, it grew by 14 percent.

Much of the software industry was moribund, with only a few companies bucking the downward trend put in train by the US recession. It is too early to say whether Windows XP or .Net will make a difference to anything. Linux continued its inexorable march forward, but only IBM has yet learned how to generate significant revenues from Open Source (you use it to sell mainframes).

The plight of the IT industry has been compounded by the collapse of the communications industry. As the year 2000 dawned, the communications industry was on a high and everyone’s expectation, including my own, was that it would drive the next major upswing. It may well still happen, indeed it is hard to imagine that it wont, but exactly the opposite happened in 2001. The European Telcos had shot themselves in the collective foot by bidding absurd amounts for G3 licenses with no prospect of early revenues and no absolute guarantee of revenues in the long term either. The chickens came home to roost in 2001 as the debt piled up, revenues slumped and share prices sank to the floor. North America told a similar story, without the excuse of G3. AT&T, Nortel Networks and Lucent Technologies posted multi-billion dollar losses as sales volumes fell like a stone, and the share prices followed suit.

The IT industry and the communications industry, which are clearly in the process of converging are now also in the process of rationalising. The surprise of 2001 was the yet-to-be-resolved attempt by Hewlett Packard to acquire/merge with Compaq. In retrospect it looks logical, if not inevitable. The PC market was in retreat and margins were thinner than ever. All the PC giants were hurting and smaller companies were disappearing from the scene. What made it worse was that Dell was pushing prices down hard, winning market share in the process, but even it ended up laying off staff.
So, what of 2002?

The Internet will proceed to do what it has been doing, which is to extend its reach and bind things together. This year should see a growth in the uptake of DSL lines in Europe and this in turn could stimulate the Internet entertainment industry. DSL lines are already heavily used in US metropolitan areas. The immediate benefit of having one is that the Internet can be “always on”, like a television or radio. The longer term possibilities will see the development of specific devices that take advantage; Games Internet machines, Digital TV based machines, sound systems, etc. This spells the end of the mass market for PCs in the home, so that any revival of the PC market in 2002, if it happens at all, will be short lived.

However there is still no natural replacement for the PC in the corporation and until one appears and proliferates, this market should hold up. The problem here is that it is becoming a replacement market. Newer faster PCs provide little of benefit to the business outside niche areas such as CAD. So why replace them? Not just for Windows XP, surely?

There has been growth though in the use of mobile technology. The conundrum here is “who owns the market?” Compaq has made a very sensible pitch for this market with the iPAQ, and has taken the wind out of the Palm Pilot’s sales. The Blackberry too, which has recently made an appearance in the UK, has gathered a slice of the corporate market. The problem is that Nokia, Ericsson and Motorola would like to own this market, and between them they do own the cell phone market. They have the numbers on their side and if they have any sense they’ll simply copy successful ideas from the PDA market and undercut the competition. The mathematics is helpful, but victory is not assured. We should see this market mature in 2002.

The trend that I expect to see drive the industry in 2002 is the trend to consolidation of IT resources. This trend is already in play – as evidenced by the revival of mainframe sales and the growth in the sales of large servers and SANs. The destiny of the Internet, as has been pointed out many times by many people, is to become an “information utility”. In order to do that it needs to build operational economies of scale, in one way or another. Consolidation of computer resource is the name of the game and it happening with ICL (Fujitsu), IBM, EDS and many others managing larger and larger facilities. It is happening in the growth of ISP data centers and ASP operations like oracle On-line. It is also happening in the large corporates.

This is interesting in many ways, but I guess it’ll still be quite a while before we buy “virtual PCs” in the same way that we buy use of the telephone network. Not this year any way.