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Solid Internet business strategies crucial for continued IT market expansion

Volume of Web transactions predicted to increase 400 percent by end of this year. Which companies will prosper?

By Marc Ferranti, IDG News Service

January  1997
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New York -- Computer companies that already have solid business strategies for the Internet will do well in 1997 and beyond as the information technology industry overall suffers its second straight year of declining growth, according to a report released by the market research firm International Data Corp., based in Framingham, MA.

The IT market is undergoing a wrenching change as companies shift their business strategies to the Internet as a vehicle to reach the wired consumer, according to Frank Gens, IDC's senior vice president and chief technology forecaster, in Framingham, MA.

In 1997, spending on IT products and services will grow to more than $700 billion, a 12.3 percent increase in spending -- but a decline from 1996's 14.1 percent growth and 1995's 14.5 percent growth.

Next year will also be the second straight year of declining PC market growth, as global PC spending rises 15.5 percent to $182 billion, down from 20 percent growth in 1996 and 32 percent growth in 1995, according to IDC.

The bright spot is the Internet, which has companies scrambling to come up with electronic commerce strategies as more and more consumers shop online. The market will rebound after this transition period, which will last several years until the Internet infrastructure and marketing strategies are in place to connect businesses to the mass market, Gens says.

"This industry hasn't seen anything like the growth it's going to see over the next 10 years," says Gens, who predicted that IT spending as a percentage of the overall world economy will grow from 2.2 percent to 2.5 percent now to 3 percent or 4 percent in 10 years.

The IDC figures show that commerce over the Internet totaled around $3 billion in 1996, with more than one-third of those purchases completed on the Web itself. In 1997, Web users will double to more than 68 million, 90 percent of the largest companies will have a Web site, and transaction volume over the Web will increase by 400 percent. By 2000, the value of transactions over the Internet will reach $100 billion, according to IDC.

"New markets have been found and vendors have to figure out how to reach them," Gens says. As the corporate PC market matures in the developed economies, new opportunities lie in Asia, Eastern Europe, South America, and the global mass market.

During the transition phase of the next few years, IT vendors can make money by helping corporations set up World Wide Web sites for electronic commerce, and setting up their own sites. Some companies already are poised to do well in this scenario.

Dell Computer Corp., Cisco Systems Inc., and Gateway 2000, for example, already have Web sites that have added to the bottom line. Dell has done $250 million in business over its Web site since it was established in June 1996, while 9 percent to 10 percent of Cisco's business is now being done over the Web, according to Gens. And Cisco, being in the networking business, should see its market position bolstered as it serves corporations that are building up intranets, Gens adds.


Demand centers on Internet infrastructure builders
Other companies involved in building up the Internet infrastructure and bringing it to consumers, such as Cascade Communications Corp., and WebTV, can also expect strong demand for their products during the transition period, Gens says.

Other industry insiders support this view. "Big companies like the Bells (regional Bell operating companies) may actually lose money as they experiment with new services, but the companies that will really make out well -- even if these experiments flop -- are the companies that provide infrastructure and networking equipment, like Cisco," says James Kobielus, a senior telecommunications analyst with LCC, an Arlington, VA network design and engineering firm.

IDC also predicts significant Internet-driven gains for Microsoft Corp., Dell, Cisco Systems, Oracle Corp, and IBM's service business, adds Gens. In addition, Microsoft -- with the forthcoming Windows NT 5.0 and the Merchant Server -- is poised to do well in the low-end server business, Gens says.

The global PC vendors, such as Compaq Corp. and IBM, also are expected to build up sales over the Web, following Dell and Gateway's lead in this arena -- but they have more complex issues to tackle in terms of avoiding alienating their current resellers. One way to do this, Gens says, is to look to resellers for order fulfillment.

The big U.S. companies also have to brace themselves for more competition from the Japanese, such as Toshiba Corp., Sharp, and Fujitsu Corp., which have a strong background in the mass market, Gens says.

Gens also predicted that Intel Corp., under increasing pressure, will do an "about-face" and defect from the PC-centric camp, embracing the low-cost Internet appliance market.

Research conducted by IDC's Internet program also included the following forecasts:

--Marc Ferranti, IDG News Service, New York Bureau

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