The IT sector has been growing moderately in recent years. As companies have invested heavily in technology to automate their operations and reduce their labor costs, many of the service markets in this category have seen their profit levels rise during the past three years. However, some of the product markets in the IT sector have begun to experience declining revenues due to the growing popularity of substitutes, such as internet-enabled smartphones and tablets.
IT Hardware Price Trends
- Prices for IT hardware products are mostly trending downward
- This price decline is largely attributable to the falling cost of semiconductors and electronic components, which are key inputs in IT hardware manufacturing
- Semiconductor and electronic component prices have been falling due to import penetration and increasing manufacturing efficiency
- The increasing availability of substitutes has also contributed to falling prices in some markets, such as desktop computers, laptop computers, network attached storage devices, and phone and video conference equipment
Key Takeaway: Because the price of IT hardware is falling, buyers can set aside time to evaluate a wide range of vendors without risking sudden price spikes. Buyers, therefore, enjoy greater negotiating leverage because they do not need to lock in contracts quickly to secure favorable pricing.
IT Service Price Trends
- The prices of IT services are increasing, including data center services, database management systems, internet services, IT hosting services, IT support services and IT systems integration services
- These price increases are largely due to a rise in the percentage of services conducted online, which is growing in line with the number of broadband connections used by businesses and consumers and the proliferation of internet-enabled mobile devices
- As more services are conducted online, demand for IT services is expected to continue growing, giving vendors the leverage to increase service prices
Key Takeaway: Buyers will benefit from locking in multiyear contracts to secure lower rates because service prices are expected to increase in the coming years.
- Most markets in the IT sector are moderately concentrated with the top four providers generating between 30.0% and 50.0% of total revenue
- Certain IT hardware markets that currently have a low level of concentration are consolidating due to frequent M&A activity and falling revenues forcing suppliers out of the market
- However, market share concentration overall is expected to decrease in most IT markets during the three years to 2022 as low barriers to entry enable new entrants to initiate operations
Key Takeaway: High market concentration prevents buyers from leveraging the availability of alternative suppliers in many IT markets. Therefore, buyers will benefit from leveraging other market characteristics, such as low to moderate switching costs and the availability of substitutes.
ProcurementIQ projects that during the three years to 2022 the price of IT hardware will continue to decline in line with falling manufacturing costs and the increasing availability of substitutes. As semiconductor prices trend downward and new manufacturing technologies become available, providers are expected to reduce product prices to bolster sales volumes. At the same time, however, the prices of IT services are expected to rise with demand, supported largely by growing internet usage. Fortunately for buyers, market share concentration is expected to decrease as new providers take advantage of low barriers to entry, which will potentially increase buyers’ negotiating leverage.