Commoditization of hardware will continue to drive software as the primary differentiator for technology companies in 2016.

1. Global technology 2016 outlook
Anand Srinivasan, Eshani Gupte, Jitendra Waral,
Anurag Rana, Mandeep Singh, John Butler
Bloomberg Intelligence analysts

2. Global technology hardware 2016 outlook

3. Tech hardware disruption has no relief in sight

4. Mergers and spinoffs won’t alter virtualization, commoditization
and cloud architecture trends in hardware. Dell-EMC and Hewlett
Packard Enterprise may continue to struggle for sales growth
amid more competition from Lenovo. Cheaper servers are
growing at Amazon and Microsoft clouds.
PCs and tablets remain weak due to Asia macroeconomic
challenges. A shift in storage from networked systems into
direct-attach and solid-state drives hurts EMC and NetApp sales.
The transition to “hybrid” clouds may be slow.

5. Clouds, virtualization, Asia commoditize hardware

6. Growth in public clouds from Amazon, Facebook and Google,
along with emerging market growth, will continue to commoditize
technology hardware. Many companies in these segments use
lower-cost, local or non-branded hardware made by Quanta,
Mitac and Sugon, relying less on Hewlett Packard Enterprise,
Cisco and Dell.
These trends, along with Lenovo’s cost-optimized presence in
servers, may boost competition and damp pricing and margins.
Branded vendors are turning to corporate clouds, which may be
slower to develop.

7. Software model, solid-state drives upend storage

8. Software’s pervasion through hardware has altered servers
and is encroaching on storage. Virtualized servers mostly use
direct-attached storage with Seagate or Western Digital drives,
controlled by software from VMware, Microsoft or Citrix.
NAND-based solid-state drives are also gaining ground.
These models, and hyperscale consumers’ use of original design
manufacturers, will accelerate hardware commoditization, polarize
storage and reduce the use of costly networked storage from EMC
and NetApp.

9. Stronger Windows 10, aging PCs may drive upgrades

10. Microsoft’s Windows 10 has the potential to create a strong
PC upgrade cycle lasting several quarters. With an installed base
of 1.67 billion PCs, Intel estimates there are about 600 million units
more than four years old, which is one potential driver
of upgrades.
The quality of Windows 10, and its relatively bug-free status
compared with prior versions, is another factor. Holiday shopping
in the U.S. and western Europe in 2H might provide a boost to
sales of newer PC models, after a seasonally weaker 1H.

11. Global IT faces macro issues amid tech disruptions

12. Median trailing 12-month sales growth for the top technology
companies on a global basis, including hardware, semiconductors,
software and services are projected to expand modestly in 2016
to 9% from 8% in 2015, consensus data show. Across market-caps,
growth changes appear meager.
Software companies are projected to expand by double digits,
while many other groups including hardware and electronics
manufacturing hover at or below 5% growth. Large U.S.-based
hardware companies may remain growth-challenged.

13. Global infrastructure software 2016 outlook

14. Tech companies make software key differentiator

15. Commoditization of hardware will continue to drive software as the
primary differentiator for technology companies in 2016. All sections
of the cloud -- infrastructure, platform and applications -- should see
greater spending as companies move away from a client-server
IT architecture.
Greater demand for connected devices, along with increased
cyberattacks, may fuel more security software spending. A software
vendor’s ability to provide advanced analytics may become a key
distinguishing factor in the market place.

16. Gap among cloud leaders, laggards likely to widen

17. In cloud Infrastructure-as-a-Service, the gap between leaders Amazon,
Microsoft and Google and the rest of the market will likely widen
in 2016. The scale of these vendors, along with constant price cuts
should create greater barriers to entry for basic cloud compute and
storage services.
This will force other companies to focus more on the hybrid cloud,
which combines public and private cloud resources and has higher
margins. However, in cloud applications, competition from legacy
software vendors may intensify.

18. Security software demand likely to remain strong

19. The number and sophistication of cyber-attacks will likely continue to
grow in 2016. Consequently, spending on advanced security products
will increase 28% annually through 2019, according to IDC.
Greater use of connected devices in the workplace opens up
networks to more intrusions and companies will put greater emphasis
on security software at endpoints such as mobile devices. Large
tech vendors will likely continue to pursue acquisitions for advanced
security products.

20. Analytics may be main differentiator in software

21. The ability of cloud application vendors to provide advanced analytics
on their core products may become the single biggest distinguishing
factor in the year-ahead. Machine-learning and other advanced data
analysis methodologies are becoming increasingly important for
clients to better understand their user-base.
Rising use of Internet of Things products will also fuel demand for
analytics. Pure-play visualization vendors will likely expand their
product portfolio as competition increases.

22. Virtualization moves from servers to network

23. The adoption of virtualization software in the network and storage
layers of data centers will likely accelerate in 2016. Server virtualization
growth rates have plateaued, prompting software vendors to target
other areas in data centers.
OpenStack adoption in data centers is also likely to increase and
threaten the margins of legacy vendors including IBM and Cisco.
Greater use of mobile devices for both personal and business use will
continue to drive the need for mobile-device management software.

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