Executive Summary

This report considers the UK market for computer hardware, software and services. The computer market in this report is defined as including:

• computer hardware
• computer software
• computer services
• other (personnel costs and telecommunications charges, i.e. network charges).

MARKET SIZE AND TRENDS

Key Note estimates that the UK computer market was worth £43.52bn in 1998, having grown by 12.9% on 1997. Since 1993, the annual rate of market growth has increased steadily. The key drivers of market growth have been:

• steady economic growth since 1993
• government and education initiatives to increase interest in information technology (IT)
• increased workload caused by the Year 2000 problem
• introduction of the Euro
• continued moves towards the use of the Internet/intranet/electronic commerce (e-commerce)
• increased purchases of personal computers (PCs) for home/office use.

The main sectors of growth in 1997/1998 were:

• sales of desktop PCs aimed at the home market
• sales of mid-range and PC servers in businesses
• volume growth in packaged software, especially system and PC applications
• computer services, especially business and IT consulting, IT training, systems development and outsourcing.

Computer services is the largest sector of the UK computer market, holding 34.4% of industry sales in 1998. Hardware is the second largest sector, holding 29.8% of the industry’s revenues. Personnel costs are the third largest industry sector, accounting for 15.4% of industry revenues. Software and network charges are the two smallest sectors of the market, accounting for 11.4% and 9% of sales respectively.

Since 1993, the fastest growing sectors of the market have been network charges and computer services. This reflects the growth in networking in general and the growing tendency for companies to use external service companies to exploit their installed base of computer hardware and software systems.

COMPUTER HARDWARE

The UK computer hardware market was worth £11.38bn in 1997, and Key Note estimates the market will increase to £12.96bn in 1998, a rise of 13.9%.

Computers (i.e. data-processing equipment) are the main category of equipment purchased in the UK. Computers account for 64.6% of spending on computer hardware in the UK, with the split between data processing and peripheral equipment changing little over the past few years. However, peripheral sales have taken a growing share of the market since 1996, due to rapidly declining prices for data processing equipment and rising demand for peripherals like printers, data storage devices, etc.

COMPUTER SOFTWARE

The UK packaged computer software market is now worth £4.95bn. Sales have grown by 52% between 1993 and 1998. Since 1995, annual sales growth has been around 8%.

Major factors driving sales in recent years have been:

• the desire to manage desktop computers more efficiently and cost-effectively
• the need for better management software for computer systems
• the need for enterprise-wide data management and access abilities
• the World Wide Web (WWW) — leading to demand for Web server software.

Consequently, the main growth sector of the market since 1993 has been applications tools, followed by applications software. Systems software is now experiencing declining value sales.

COMPUTER SERVICES

The UK computer services market reached £14.99bn in 1998, having grown by an estimated 20% between 1997 and 1998, and by 111% between 1993 and 1998. Operational services at £5.83bn is the largest sector of the market, followed by professional services (£4.93bn), systems/solutions (£3.26bn) and hardware maintenance (£975m).

Outsourcing in all its forms has been the key driver of the services market since 1993. Another form of outsourcing, the IT staff agencies (i.e. using outside contract staff instead of internal staff) has also shown strong growth recently as companies have sought to become more flexible (i.e. hire staff on short notice) and have sought to cope with internal staff shortages. Skill shortages have also helped push forward the IT training sector of the market. Database/value-added services (VAS) — largely inspired by the growth of the Internet — have also grown strongly in recent years.

KEY ISSUES SHAPING THE MARKET

The Network-Centric Computing Architecture — Thin Client, Fat Server Model

The Internet model of computing — large centralised computers accessed by smaller computers worldwide, using common communication protocols — has introduced a new method of client/server computing: the thin client, fat server model.

Under this model, the PC is replaced by a cut-down computer, the network computer (NC) and its PC equivalent, the NetPC; or by any device which can operate as a Windows Terminal. Processing is centralised back to a larger server, with the desktop (or client) computer carrying out less processing.

This model replaces the standard client/server model of a thin client (i.e. a cut-down server) which serves a fat client (a PC with full-scale processing power, back-up storage, etc.).

This new model has major implications for the future shape of the PC and server industries, and for the software market. Already, major PC manufacturers like Compaq have acquired server manufacturers, and Microsoft is now refocusing its long-term strategy onto server and network software, rather than desktop software.

The Internet

The Internet inspired the thin client, fat client computer model. It is also affecting the computer market in other ways, such as:

• It is leading to an increased demand for Internet servers and growing interest in servers that provide ease-of-use and leading edge e-commerce capabilities.
• An increased consumer interest and demand in Internet appliances, e.g. NetTVs.
• A growth in demand for desktop and network operating systems, client/server applications, software development tools and messaging/GroupWare.

Enterprise Computing The network-centric model of computing is leading to consolidation of corporate computer systems. Many large companies are now consolidating their computer networks from smaller systems to bigger central computers. The hope is that enterprise computing will combine the advantages of the old centralised mainframe approach to computing with the advantages of the modern Internet-enabled distributed systems.

European Monetary Union

The introduction of the Euro and the moves towards European Monetary Union (EMU) will have a major influence on UK IT infrastructures. It is estimated that Euro-related expenditures will account for around 8% of the UK IT market at their peak in 1999, after which they will decline in importance. The main burden of the spending is falling on the banking services sector.

The Year 2000

UK companies spent £2.7bn on Year 2000 compliance in 1997, and this is expected to rise to £4bn in 1998.

The main burden of Year 2000 adjustments is falling on less than 1,000 UK companies, with the main burden being borne by British Telecom (BT), the big four High Street banks, the top ten building societies and the utilities.

A growing number of UK major companies are now moving into an advanced stage in terms of their work to fix the Millennium bug. Smaller companies and the public sector, however, are much less well prepared.

One of the most serious problems of the Year 2000 problem is not so much changing visible computer technology (i.e. servers and desktop systems), but changing embedded technology, that is computer chips embedded in many business systems, such as fire detection systems, security alarms, process-control equipment. Here business preparation is at a much lower level compared with work on servers and desktop systems.

The effect of Year 2000 problem could be severe in the UK. There are two problems likely to be faced:

• Despite the most comprehensive planning in the world, there may still be incidences of Year 2000 failure in systems that users have not checked, either by accident or poor systems inventories and planning.
• Failure in systems known about, but that users have not had time to fix, or could not fix in time, or that they thought they had fixed but had not.

IT Staff Shortages

One of the most serious challenges facing the UK computer industry is the lack of skilled personnel. The IT jobs market is now very tight and the industry reports a rapid turnover rate of staff in key areas. The skill shortages coincide with the Millennium problem and the Euro. The result is rapidly rising contractors’ rates and an increase in poaching of key staff.

The Importance of Business Intelligence

Business intelligence — the gathering, management, analysis and distribution of data — is seen by many businesses as of crucial strategic importance for their operations. Industry leadership in most markets now requires analytically-orientated systems, which generate information on which major strategic decisions can be made. Consequently, an increasing amount of effort is being placed into the development of business intelligence tools and the development of computer systems to handle business intelligence.

IT Security and Reliability

The issue of security and systems reliability is of vital importance to businesses. With computers running mission critical applications, a breach of security or computer downtime has serious implications for companies. The issue of security has been given added impetus in the past year or so, due to the rise in usage of the Internet. Greater use of the Internet is adding to security breaches for UK companies.

Industry Consolidation

The IT market is consolidating. Major companies are now being formed in strategically important markets, each of which is attempting to dominate (on a global scale) its particular IT sector. Three companies typify this new trend:

• Microsoft — software
• Compaq — hardware
• Cisco — datacommunications (datacoms) hardware.

Consolidation is being encouraged by the fact that most large corporations now wish to move back to the type of market relationship they enjoyed with IBM in the 1970s. Instead of having to deal with numerous vendors, often supplying incompatible products, they wish to deal with a few major vendors which can offer them compatible products across the whole range of the market and an integrated package of services. The relationship today, however, is not based on proprietary computer products but on ‘open’ systems. Hence, global pan-sector companies are being formed to meet this need.

Sector Current Issues

Follows is a list of the key issues facing the major sectors of the computer industry today. Excluded from the list are the major issues discussed previously, except where these have specific influence on a sector:

Hardware

• the development of new desktop computers designed for the thin-client computer model, e.g. NC, NetPC, Windows Terminals
• PC97/PC98 specifications, designed to make PCs easier and cheaper to use, especially on thin-client corporate networks
• increased focus on multiprocessing and clustering (e.g. MPP, SMP and NUMA)
• cross-systems servers
• new innovative financing deals for mainframes
• growing importance of 3-D graphics on computers, as business applications become more sophisticated
• new development in computer storage (e.g. PRML, RAID, HSM, DVDs and faster CD-ROMs)
• new colour printer technologies
• new video monitor products and technologies (e.g. larger liquid crystal display (LCD) displays, digital interfaces).

Software

• IT skills shortages which could make new software development harder
• the growth of networked software and distributed software
• increased attention to scalability and clustering
• the growth of object technologies and object wars (i.e. Microsoft versus Corba)
• new applications development languages (i.e. Java and the battle over Java interoperability)
• legal battles (e.g. Sun versus Microsoft, US Department of Justice versus Microsoft)
• potential of electronic software distribution and distribution via supermarkets
• the growth of global software deals
• the growth of computer viruses
• continued rise in outsourcing deals
• changing nature of outsourcing (e.g. desktop deals)
• continued sector consolidation, especially in IT staff agencies).

THE FUTURE

Key factors shaping the computer industry over the period from 1998 to 2002, will be:

• spending on Year 2000 compliance
• spending on EMU
• the rapid growth in computer networks
• the rapid growth of intranets
• the uptake of the thin-client computer model, and the resulting resurgence of interest in mainframe computers, which will act as giant servers
• much greater emphasis on mobile computing and teleworking
• the convergence of computing, telecommunications and broadcasting will gather pace
• the growth of outsourcing and process-based outsourcing
• changing technology will result in changes in the skills demanded by the computer industry.

These issues will be important, given the key business issues that will have to be addressed through IT in the coming few years. Key business issues in the coming years will be:

• e-commerce
• maximising the use of business information
• improving internal corporate communications and information interchange
• developing IT in a global business world.

FORECASTS

Between 1998 and 2002, the computer market will grow by 38.9%, with sales reaching £60.45bn in 2002. After 2000, growth in the UK computer industry will slow and return to the more normal rates of growth experienced by the industry pre-Millennium bug and Euro. Consequently, the market’s growth will slow sharply in 2000 and 2001, but will begin to pick up again by 2002.

By 2002, computer services are forecast to have sales of £26.31bn, which represents 43.6% of the total computer industry.

Hardware sales will reach £15.7bn in 2002. The hardware market will experience a very sharp slowdown in sales in the year 2000 and 2001, as Millennium work comes to an end.

Personnel costs will be the sectors most severely affected by the Millennium bug. In 2001 and 2002, once all computer systems have been tested and debugged, personnel costs will decline as many companies reduce the number of staff they have working in their computer departments. Millennium bug busters will no longer be in demand.

Software sales will reach £6.86bn in 2002. Software sales growth will slow in 2000, but overall revenues will continue to grow as companies seek to use sophisticated software to reshape their business processes.

Network charges will continue to grow post-Millennium, as the use of networks between and within companies continues to expand.

Seventh Edition 1998
Edited by Simon Howitt
ISBN 1-85765-859-7

More Information

  Denotes a required field.