1999 IT Outlook
- by John Boyd -
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Will a new year bring new hope to a beleaguered IT industry scrambling to squash the Year 2000 calendar bug, while weighed down by a
faltering Japanese
economy? After two years of generally
depressing results and
a loss of confidence in some segments, there are signs that a turnaround could begin
in 1999.
Since PC vendors shipped over 8 million computers for the first time in 1996, the industry has seen sales sadly decline. In 1997, vendors reversed into negative growth, and while only by a couple of percentage points, it was the first trip into minus territory after enjoying several years of double-digit increases. With PC shipment results still being tabulated for 1998 at the time of writing, IDC Japan and Dataquest Japan were each forecasting a further drop in shipments of around 4% for the calendar year just ended. On the optimistic side, they both see a return to growth in 1999. "This (1998) has been a miserable year," says Katsushi Shiga, a PC analyst with Dataquest Japan. "And you can blame it on the economy." In 1997, he says at least the industry benefited from the largess of two major government economic stimulus packages, as well as temporary corporate tax cuts; but relatively little of these measures materialized in 1998. At the same time, information systems departments in large and medium-sized companies across the archipelago siphoned off funds to fix the Year 2000, or Y2K, computer calendar problem. "So direct investment in IT shrank (in 1998), especially in PCs," says Shiga. Not that it's been all bad. With 1998 third quarter shipment figures in, Miya Akatsu, a PC analyst with IDC Japan, says "We're seeing a boom in portable PCs. This is important because it's impacting the market." That's not surprising when you consider that sales of portable computers now account for more than 40% of Japan's PC market, and the ratio is rising. Besides the popularity of portables, the successful introduction of the iMac from Apple Japan at the end of August last year also helped boost consumer sales in September, says Takahiko Umeyama, director of systems research at IDC Japan. At the same time, he's seen unexpected additional mid-fiscal-year buying by corporations. "Growth in Q3 has been higher than we predicted, though there could well be a trade-off with Q4 results. We're still expecting a negative figure for 1998," he adds. The demand for mobile computers is being led by Sony's Vaio505, a small, slim notebook made out of a tough magnesium alloy, and which incorporates user-friendly audio/visual software. "Of course this is not the first small and light portable," Akatsu points out. "We've had the Biblo from Fujitsu, and the ThinkPad from IBM. But these were targeting business users. Sony has focused on the consumer." Along with the bondi-blue see-through iMac, which also has consumer appeal, the lavender-colored Vaio appears to be signaling the beginning of a new era for the personal computer: it's now an object of fashion for some purchasers, particularly among the growing number of female users. Expect, then, to see copycat products from rival vendors launch this year. Matsushita and Sharp, more active selling portable computers to consumers than to corporations, and Toshiba, which covers both segments, are the vendors most likely to follow Sony with eye-catching products this year. PC prospects in 1999 If 1998 was "miserable," some analysts argue this will only make it easier to do better in '99. Dataquest Japan is the most upbeat in its expectations, with a forecast of around 11% growth for PC shipments in 1999. IDC Japan is not quite so optimistic; nevertheless, it is still looking for growth of around 6%. Nevertheless, neither market research firm believes 1999 shipments will beat the peak numbers of 1996. Dataquest Japan's Shiga points to a number of factors to back up his high expectations. Most important in his view are signs that a significant number of corporations now appreciate that there is a shift going on from manufacturing to IT-based services, as Japan moves deeper into an information economy. This understanding, he believes, will see major-ranked corporations and other IT early-adopters become aggressive in their use of, and therefore their investment in, IT. As a result, over the next 18 months he's expecting to see these companies switch from a five-year PC replacement cycle, to one as short as two years. In 1999 the replacement market alone could be as high as 5 million, he believes. The speed-up in replacing older equipment is also being encouraged by a significant drop in hardware prices, readily apparent over the past six months. The 1998 updated versions of PCs that cost over ¥200,000 in 1997 have begun selling in Tokyo's Akihabara and other electronics centers, for ¥150,000. A major factor in the price decline is the introduction and acceptance of cheaper microprocessors from Advanced Micro Devices (AMD) and Cyrix that are now replacing the once ubiquitous "Intel inside" label-at least at the entry level. This threat to Intel's low-end market has seen the world's largest semiconductor manufacturer respond with its own low-cost Celeron chip, putting further pressure on microprocessor prices. Though Intel muffed its first el cheapo attempt with a speed-crippled Celeron that lacked adequate cache memory, Intel has since corrected its mistake and is back in technological competition. Intel's minnow rivals, though, continue to push the price/performance envelope in this segment, and will persist in doing so in 1999 and beyond. Battle for PC market share According to first half 1998 PC shipment figures, NEC and Fujitsu were neck and neck with around 26% and 24%, respectively. IBM filled the number three slot with almost 11%, followed by Toshiba with 8%. As the year progressed, it also became clear there was little difference in shipment sizes between the next five trailing vendors: Hitachi, Apple, Sony, Compaq, and Sharp. "Almost a dead heat," said Akatsu, after reviewing Q3 figures. All analysts expected NEC to remain the number one PC vendor in 1998, though IDC Japan's Umeyama added ominously, "But we're not sure if that will be the case in 1999". NEC has been steadily losing share to Fujitsu ever since the latter decided to get serious about PCs in the mid-nineties. After more than a decade of pushing low-appeal, high-cost proprietary desktop systems, Fujitsu put its considerable weight behind DOS/V, Japan's localized version of the world-conquering IBM PC AT standard, and which has subsequently been superseded by Windows 95 and Windows 98. Now NEC finds itself in transition. The company is fast retreating from its phenomenally successful PC 98 proprietary architecture, and, like Fujitsu, is putting its energy behind the world standard architecture, which it markets under the rather confusing brand name PC98-NX series. Yet NEC must still cater to the legions of customers still using its venerable PC 9800 series, which has sold more than 18 million units over the years, and is the reason why NEC has been the number one PC vendor in Japan for as long as anyone can remember. As NEC struggled to get users to switch over in 1998, it lost more ground to an aggressive Fujitsu, which, as Japan's largest overall computer manufacturer, is tired of playing second PC fiddle to NEC. Fujitsu is attacking NEC in all markets, particularly the low-end consumer area - and a market where NEC is less active, given its traditional focus on more profitable segments. NEC has also been busy sorting out its US PC vendor acquisition, since renamed Packard Bell NEC. Though the original Packard Bell was once the leading consumer brand in the US, it has recently lost ground to competitors like Compaq, Gateway, Hewlett-Packard, and Acer. Last year Packard Bell founder, Benny Alagem, quit, and NEC will have its hands full stopping further erosion of its US subsidiary's market share in 1999. A further concern for NEC this year will be dealing with any aftermath of the government procurement scandal that broke in September last year. The scandal involves an NEC subsidiary allegedly overcharging the Defense Agency (SDF) on equipment contracts. Though this may appear to be a matter unrelated to NEC's PC business, NEC could well be overlooked when it comes to handing out government and education PC contracts during 1999. Currently, these are segments where NEC leads, but is facing a strong challenge by none other than Fujitsu. Despite a year of negative growth, some second-tier vendors managed to make gains (at least in the first half of 1998). This helped lessen the impact of large shipment drops suffered by the top four vendors: NEC, Fujitsu, IBM, and Toshiba, which together make up almost 70% of the market. Sony with its Vaio, Dell Japan and Gateway Japan through their direct marketing approaches, Apple with iMac, and Hitachi by bundling LCDs with its desktop PCs, showed that something different and innovative can still sell, even in a down market. Servers There was a time when servers and their client workstations were powered only by heavy-duty RISC (reduced instruction-set computer) chips, and ran on various flavors of Unix, the powerful multi-tasking, multi-user operating system (OS). Then several years ago, Microsoft and Intel together made it technologically possible for PC vendors to bring their mass-production efficiencies and a single standard to this upscale market, using Windows NT on Pentium II boxes. The almost overnight result was the creation of entirely new PC workstations and PC server market segments that now compete strongly with traditional workstations and servers. Compaq was quickest to exploit the lucrative PC server market, where prices begin at a little under ¥1 million, quickly spiraling upwards for multiprocessor systems. Feeding on the corporate stampede to network PCs and to establish websites on the Internet, Compaq grabbed an early lead around the world, including Japan. Since 1996, however, NEC, Fujitsu, and IBM Japan have used their greater domestic resources in service and support to move ahead. Now Compaq finds itself muscled down to fourth place, with Hitachi following in fifth. Dell Japan has also arrived on the scene, and currently offers the lowest-priced products. Compaq, however, has long held ambitions to grow beyond its PC origins. Last year it moved boldly to acquire Tandem, noted for its high-end fail-safe Unix systems, and Digital Equipment Corporation, a vendor of various high-end systems; Digital has also developed its own leading edge 64-bit Alpha RISC microprocessor. Compaq Japan will be working hard in 1999 to exploit Digital's and Tandem's technologies at the high-end of the server business; it is also looking to leverage off these systems to increase its own PC and PC server sales, particularly in corporations with heterogeneous environments. Compaq Japan should also benefit greatly in 1999 from the IT service and support resources both acquisitions bring to the Compaq name. In 1997, more than 170,000 PC servers, valued at over ¥160 billion, were shipped in Japan; that's a healthy increase over the 113,000 units shipped in 1996. Yet even in this hot market, growth in 1998 slowed somewhat, hurt by the poor economic situation. "Small and medium-sized companies just don't have the budgets to invest," says Mayumi Matsuki, an analyst of multi-user systems for IDC Japan. "We estimated a 20% growth rate in Q4 (1998) year-on-year, but it's closer to 15%." She added that the Y2K issue also had a negative impact last year, drawing away funds for hardware investment. But she believes the situation will likely improve in 1999 because companies will be forced to make up for their lack of investment, in order to remain competitive. Yet at the same time, the success of PC servers has not doomed the Unix server business, as some predicted. Referring to 1998 data, Junichi Saeki, a senior systems analyst with IDC, says, "Unix servers are actually growing faster (than PC servers) on a revenue base. Large enterprises are turning to them as a replacement for office computers (turnkey mid-range systems) to run applications like data warehouses, ERP (enterprise resource planning) and supply chain management." Dataquest Japan throws further light on this. "In '97 and '98, companies were looking to take advantage of the scalability and dependability of new high-end PC servers," says analyst Tadaki Mataga. "But Microsoft didn't deliver (its much delayed NT 5.0 OS, now renamed Windows 2000), so Q2 results were poor". In the Unix server market, Hewlett-Packard Japan (HPJ) has held top share since 1996, with roughly 25% of a market that saw the value of shipments reach almost ¥185 billion in 1997. But Nihon Sun Microsystems has been making up for lost time in the past 18 months, by introducing more competitive models. According to IDC Japan systems analyst Tomonori Ooami, Sun moved ahead in the CPU count during the first half of 1998, though it still lagged behind HPJ when it came to revenues. In actual shipments (rather than the number of nodes) Dataquest Japan, however, still had HPJ ahead by two percentage points. As in the Unix workstation market, Sun relies on a number of OEM partners, the biggest being Fujitsu, to sell its Unix servers. So it came as quite a blow for Sun when Fujitsu unexpectedly announced towards the end of '98 it would launch its own Unix server systems in late 1999. While this is not expected to impact Sun's share any time soon, over the long term, it's clearly going to hurt Sun's position in Japan. Workstations It's a different matter in the Unix workstation market, where Sun has long been top vendor, and is increasing its share in a market that shipped over 150,000 units in 1997. With the help of Fujitsu, Toshiba and others, who have long been its OEM customers, Sun has regularly won a 30% market share in workstations used in CAD/CAM, simulation work and heavy duty graphics creation. IDC preliminary data for the first half of '98 had Sun doing even better than usual, taking about a 37% slice of the market. Next was HPJ with around 18%, followed by NEC with 17%. "The top three vendors saw flat growth, or a small drop in the first half of 1998, due to the poor economy," says Yasuke Honda, a workstation analyst with IDC Japan. "But the rest saw a big drop in growthÑanywhere from 20% to 40%." In explanation, Honda added that Fujitsu has shifted focus away from its own original Unix workstations, in favor of pushing high-end PCs, especially where they are to be used as terminals for mainframes. At the same time, IBM Japan and Silicon Graphics Japan have seen their market shares hurt by the growing popularity of PC workstations, given both have neglected the low-end in favor of high-end systems that are more profitable. To counter its disastrous slide, Silicon Graphics is betting on a revival in 1999, with the launch of a PC workstation that breaks with its traditional Unix/RISC roots. "Our new NT personal workstation will enable visual professionals to perform the same tasks (as done on Unix workstations) with the same quality of performance running on Windows NT and Intel microprocessors," said Tom Furlong, senior vice president of Silicon Graphics, in a visit to Tokyo near the end of last year. The message emerging from all this activity and competition is that "the Unix workstation market is declining because of the impact of PC workstations" says Dataquest's Mataga. "And we'll see a further drop in 1999." Computer telephony Computer Telephony, or CT, is all about bringing the power of digital processing and the intelligence of the computer to the telephone. This is helping companies provide better customer support and services, and at the same time is bringing down communication costs as they make use of their corporate intranets and the Internet to carry voice data. "The market is still small in Japan right now," says Kenshi Tazaki, chief telecom analyst at Dataquest Japan. "But we expect it to become one of the growth segments of the IT industry within the next five years." He estimates the value of Japan's CT market in 1997 to be just ¥46.8 billion, roughly one-tenth of the US market, but it is expected to climb to around ¥160 billion in 2002. Call centers are by far the most visible and largest of CT applications; in Japan it's the financial and telecom industries-both facing unprecedented competition because of deregulation-that have taken the lead in implementing the technology. Banks in particular have been busy installing call centers, but they have only been thinking about cost savings, not about the services they need to provide," says Bruce Deaner, a specialist in CT for Ernst & Young Consulting Japan. "In 1999, we're going to see companies pay more attention to how they use them: in capturing information on customers, for instance. With better knowledge of their customers, they can provide better service, and so differentiate themselves from competitors." CT too has seen the recent poor economy throw up hurdles to investment, making life for call center implementers Fujitsu and IBM Japan a little less hectic. Instead of the 30% annual compound growth rate predicted for the industry by Dataquest, Tazaki estimates growth in 1998 slowed to around 17%. "This will not become a full-fledged market until 2000," he adds. Digital broadcasting While satellite digital broadcasting is now well established in Japan, with NHK, Sky Perfect TV, Direct TV, and WowWow offering between them a variety of channel choices, digital terrestrial broadcasting is off to a slow start. Instead of Japan, the UK was the first country in the world to signal the start of a changeover from traditional analog broadcasting, when the BBC began digital terrestrial services last September. The four major networks in the US followed with trials of their own in November. As for Japan, the Ministry of Post and Telecommunications has designated the year 2000 to begin pilot broadcasting, with regular terrestrial digital broadcasting set for 2003. "The reason why governments around the world are pushing this changeover is to save on bandwidth," explains George Makhoul, managing director of media communications at Price Waterhouse Consultants. Analog TV broadcasting is bandwidth hungry, but when digitized, it can be compressed to the point where you can squeeze as many as five digital broadcasts into the same space as a single analog stream-and get a much better picture into the bargain. "Then you can use the freed-up bandwidth for an unlimited number of other applications, such as emerging wireless multimedia, as well as making more room for cellular phone and new PHS services," says Makhoul. Japan's slow start isn't, however, preventing domestic electronics giants, including Sony, Matsushita, Toshiba, Hitachi and Pioneer, from gearing up to supply the nascent UK and US markets with high definition TVs (1008 lines verses the 480 lines of analog TV) as well as set-top boxes that can be connected to existing analog TVs, in order to receive terrestrial digital signals. And 1999 promises a hard battle for the electronics manufacturers as they jostle to win a position in the emerging market. As for the domestic market in set-top boxes, Motoya Ohgami, an analyst with Dataquest Japan, says many consumers have put off subscribing to digital satellite services by the fact that they are required to buy a different set-top box and antenna for each system. As a result, 1998 shipments of satellite set-top boxes, that cost on average ¥50,000, is estimated to be 520,000 units, rising to 740,000 units in 1999. Given the strong activity of Japanese electronics manufacturers on the hardware side, it's clearly not technology that accounts for Japan lagging in terrestrial digital broadcasting. "The dilemma is more about the deadline to switch over and the costs involved," says Makhoul. "More time is needed for conducting trials and testing by all the broadcasters, while the costs in changing over are enormous." Dataquest's Ohgami also points out that until recently, the broadcast industry had been over-regulated, resulting in "the relative lack of TV program variation, and the relative lack of competition among current broadcast services, including cable TV." This, he believes, has resulted in a general weak demand by the public for many more TV channels, which is one of the major selling points broadcasters in the UK and US are going to use to entice viewers to spend large sums on new digital TVs. Stay tuned for more developments throughout 1999. John Boyd is a Japan-based freelance writer who covers the local IT industry for a variety of publications. He writes the monthly Industry Eye column for Computing Japan. |
