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Companies around the world will spend $200 billion less on information technology — including equipment like servers and PCs as well as software and consulting services — this year, according to a new forecast from research firm Gartner. That accounts for a 5.5 percent drop in spending to about $3.5 trillion worldwide.
But as Oracle and Hewlett-Packard have already said, the decline can be attributed to the ongoing strength of the U.S. dollar relative to other currencies like the euro and the Japanese yen. After accounting for the effect of currency exchange rates, also known as a constant currency basis, the firm found that the overall tech market is expected to grow by 2.5 percent.
U.S.-based companies who do a large proportion of their business in countries with currencies weak compared with the dollar suffer a revenue hit when they convert their currency back to dollars. The forecast echoes comments by Oracle CEO Safra Catz, who said that the company saw a 5 percent decline in sales year-on-year that would have been a 3 percent increase had it not been for the currency effect. HP CEO Meg Whitman made similar comments during that company’s earnings report last month.
Some companies are starting to raise their prices in markets where the currency is weaker in order to offset the difference, says Richard Gordon, a Gartner analyst who worked on the forecast.
“Usually currencies move slowly enough that, over the course of several months, the effects even out, but that isn’t happening this time with such a sharp move over so short a period,” Gordon said. “So we’re seeing some vendors raise their prices by 10 to 15 percent in markets where the currency effect is becoming a longer-term problem.”
Those price hikes are likely to have some residual effect on spending in those markets. Companies may buy fewer computers or lower-priced machines. As for software, the tendency to raise prices is pushing companies to more aggressively embrace cloud software products like Salesforce.com, Workday, Box, NetSuite and other cloud-based applications that are sold as a subscription and not for a one-time purchase price.
“From an accounting perspective, the shift to cloud applications makes the purchase more of an operating expenditure and less of a capital expenditure,” Gordon said. Subscription fees are easier to justify than a large software license purchase.
Meanwhile, cloud software players are leaving their prices unchanged in order to gain as much business as they can, and absorbing the currency hit. That’s potentially bad news for the likes of Oracle and SAP, which still sell a lot of their hardware as one-time license sales but which are both trying to move toward cloud-based subscriptions.
Enterprise software sales will total about $310 billion overall this year, amounting to a year-on-year decline of about 1.2 percent, the smallest decline — before accounting for currencies — in the five product categories tracked by the Gartner study. All five categories are expected to decline. The biggest expected decline will be in communications services, where sales are expected to fall to $1.5 trillion for a decline of more than 7 percent.
This article originally appeared on Recode.net.
