IBM, Sun face 'reckoning' in '09 as budgets shrink

International Business Machines Corp., Sun Microsystems Inc. and SAP AG may be among the hardest hit technology companies in 2009 as spending on computers, software and services drops for the first time in six years.

Spending will decline 4 percent, led by an 8 percent slump in developed markets, Goldman Sachs Group Inc. estimates. The first quarter may be one of the worst ever for software makers, which may cut 5 percent of workers or more in 2009, said Brent Thill, an analyst at Citigroup Inc. in San Francisco.

A worsening economy and the bankruptcies of Wall Street icons such as Lehman Brothers Holdings Inc. have prompted companies in all industries to curb purchases and preserve cash. While demand has slowed, budget cuts haven't yet had their full impact on technology orders, Gartner Inc. analyst Ken McGee said.

"There's going to be a period of reckoning that's not going to be pretty," he said. "There is an unhealthy incongruence between the state of economy and the number of companies that are saying their information technology staffs are extremely busy."

The U.S. economy, in a recession for a year, may suffer its longest slump in the World War II era as job losses mount. The economic decline will cause companies to cut technology budgets in the U.S., Western Europe, Canada and Japan, Goldman Sachs said in a Dec. 1 report. In emerging markets, such as China and India, growth in technology spending is slowing.

Projects Canceled

"I'm not sure if I am going to have any money to do any new projects, and we will be reassessing our existing projects," said Chris Vein, chief information officer for the city of San Francisco, which is contending with a $576 million budget shortfall.

Half of CIOs are looking to cut consulting-services costs, 35 percent want to reduce computer and server expenses, and 23 percent want savings on software, according to a Goldman Sachs survey.

Financial companies, accounting for the biggest single chunk of technology spending, will cut budgets as much as 20 percent in the U.S. next year, the survey showed.

Equifax Inc., looking to trim its more than $200 million in annual technology operating expenses, is cutting some consulting projects with IBM to use in-house staff, CIO Robert Webb said. The Atlanta-based company, which calculates consumer credit scores, is also demanding price cuts of about 20 percent, Webb said.

"I expect our suppliers to participate in helping me achieve a lower operating expense," he said. "Those who do will remain in our portfolio. Those who don't will be worked out of our portfolio."

Smaller Share

Goldman Sachs's survey indicates that IBM, the biggest computer-services provider, will get a smaller share of companies' software spending, the first time in 43 such surveys since 2002.

Ian Colley, a spokesman for Armonk, New York-based IBM, declined to comment. The company said in October that its subscription sales provide a steady source of profit and cash.

Sun Microsystems' server computers are losing out because companies are switching to cheaper Hewlett-Packard Co. and Dell Inc. machines that use Intel Corp. chips, said Sarah Friar, a Goldman Sachs analyst in San Francisco.

"Sun makes big expensive boxes with very poor features that compare very poorly to the comparable Intel-based boxes," Friar said. "CIOs we speak to have already been switching off of Sun, but now they're going to accelerate getting off of them."

‘Pay a Premium'

RealNetworks Inc. Chief Technology Officer Edmond Mesrobian said he prefers Hewlett-Packard machines to Sun's because they are cheaper and work well with the Linux operating system.

"I don't need to pay a premium for Sun," he said.

Sun provides an "important alternative" in the software and storage markets, spokesman Shawn Dainas said. "Sun has a growing global customer base."

IBM, down 21 percent this year before today, fell 7 cents to $85.77 at 9:34 a.m. in New York Stock Exchange composite trading. Sun, in Santa Clara, California, declined 8 cents to $4.11 on the Nasdaq Stock Market and has dropped 77 percent this year. The Standard and Poor's 500 Information Technology Index has lost 43 percent in 2008.

Some companies are better positioned to weather the slump. Those may include VMware Inc., whose software lets companies save money on hardware, and Oracle Corp., whose sales are buttressed by multiyear contracts, Friar said.

Upgrade Delays

RealNetworks, which is eliminating 7.5 percent of its workforce, will keep paying Oracle the same amount for maintenance contracts even as it delays upgrading to the company's newest business applications.

The city of Seattle is using VMware to consolidate its existing servers, instead of buying 139 new ones from IBM. Next year, CIO Bill Schrier wants to use more of VMware's so-called virtualization software, which lets computers run multiple operating systems, saving costs. VMware shares have dropped 71 percent this year before today.

Other parts of the software market, including SAP business applications and Microsoft Corp. operating systems and office program packages, may fare worse. Last week, Gartner cut its 2009 enterprise software growth forecast to 6.6 percent, or $244.3 billion, predicting slowdowns in those areas. That's down from a September forecast of 9.5 percent.

SAP, Microsoft

SAP, based in Walldorf, Germany, gets all of its sales from applications that run tasks such as payroll and human resources, one of the first areas to face cuts during a slowdown, Friar said.

"Applications is a terrible place to be," she said. "SAP is in a tough position. They depend on these huge apps purchases with all the bells and whistles."

Customers will still invest in critical technology projects, SAP spokeswoman Lindsey Held said in an e-mail.

"SAP is a tough and robust company, and we are working with our customers to weather this storm together," she said.

While Microsoft will benefit from the popularity of its SharePoint software, which helps workers collaborate, slowing PC sales will crimp demand for its Windows and Office programs, according to Goldman Sachs. Microsoft spokesman Bill Cox declined to comment.

"I'm worried about every single vendor," said Citigroup's Thill. "It's just a question of magnitude. The worst may very well be ahead."