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A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry. Something Ventured: September 22nd, 2006 By Brent Holliday Greenstone Venture Partners Fun Facts, Part Two “Jump in, let’s go, Lay back, enjoy the show, Everybody gets high, Everybody gets low, These are the days when anything goes” – Sheryl Crow, Every Day Is A Winding Road Last time I rolled out a series of facts that I get from the fire hose of RSS feeds daily and tried to add some context.  While the focus last time was on consumer markets, this column will focus on the typical bread and butter of many of the local BC technology companies, the enterprise IT market.  First of all, as Willie Sutton allegedly said many years ago when asked why he robbed the bank (Answer: “cuz that’s where the money is”), here is the reason we tend to build companies in the enterprise IT markets: IT spending in financial and healthcare market to exceed $2.2 trillion in 2006 - Worldwide IT spending in the vertical markets will exceed $2.2 trillion in 2006. Financial services and healthcare industries lead IT five-year spending growth, while government, healthcare and utilities are the fastest-growing global markets through 2006, Gartner says.  A trillion looks bigger when it looks like this: 1,000,000,000,000.  That’s very big. In a related study, focusing on a segment of that $2.2 trillion market - Worldwide end-user spending on IT services will grow at a 5.8% compound annual growth rate through 2010 to reach $828.1 bln, with positive growth in nearly all market segments, Gartner says. IT spending is very broadly categorized as everything the enterprise buys that is remotely technology related including outsourced services.  This ranges from networking equipment to software to computers and peripherals to servers and storage.  Don’t forget security and wireless as two recently fast growing markets.  Lost in these numbers are the huge supply chain sales for companies selling the bits of the end user products and services that enterprises buy like semiconductors, software development tools and embedded devices. The $2.2 trillion in enterprise spending does not include very big sectors that local BC technology companies sell into like communications equipment that is mostly purchased by big telecoms.  The annual spending by telecom companies on equipment is over $200 billion worldwide.  Wireless is growing even faster: Global mobile capital expenditures (CAPEX) to reach $150B by 2012 - In 2006, GSM is the dominant cellular technology, but by 2012, WCDMA will receive the highest CAPEX investment by mobile operators, according to ABI Research. By 2012, worldwide mobile CAPEX will exceed $150 bln. In 2005, China Mobile's CAPEX in China was $8.86 bln, more than Vodafone's global total CAPEX ($8.74 bln), which is remarkable considering the high value of CAPEX spent per-subscriber and per service revenue dollar generated. In North America, Cingular's CAPEX investment in 2005 was $7.475 bln, 116% more than in 2004. This was due to Cingular's investments in building out its WCDMA network. Wow… wireless infrastructure spending is closing in on wireline communications spending as an annual CAPEX market.  If you think about it, Telus makes gobs of money in profit in its mobility division and far less in its government regulated wireline markets.  It is in a dogfight for business phone, data access and long distance with Bell and a myriad of new start-up companies.  Where would you invest CAPEX?  BTW, as a little rant here, how much longer will we dumb consumers of wireless pay the monthly “service fee” of $7.95 to the mobility companies.  Originally put in there for direct investment in improving the network (CAPEX spending!), it is just a pure profit grab now.  That’s $100 a year each of us pays the mobility service providers even though the networks are already built and they are so damn profitable that new CAPEX spending is more than paid for in our monthly fees for connectivity, which are ridiculous when you consider that the receiver of the call pays a per minute charge as well… North America is the ONLY place in the world that charges the receiver of a wireless call a per minute rate.  Stand up and demand the end to the service fee people!  OK, I feel better. 5 million cellular modems to ship in 2006 - The cellular modem market has taken many years to develop, but by the end of 2006 it will reach a notable milestone, with annual shipments to exceed 5 mln units, reports In-Stat. This market got a boost from embedded cellular modems in laptop computers, a class of modem only introduced toward the end of 2005. Embedded cellular modems should account for more than 10% of total modem shipments in 2006. The cellular modem market will grow more than 500% over the next 5 years. For the first time, in 2006, the number of cellular modems sold in Europe exceeds the number sold in North America. In 2005, Asia's share of the cellular modem market almost doubled over the previous year. This is good news for global market leader, Sierra Wireless, maker of cellular modems for the past 14 years.  Let’s hope that they grab a healthy chunk of this growth.  The PC has driven the growth of enterprise IT for 25 years.  From it comes the networking spend and, of course, the software billions: The worldwide PC market continued to expand at a healthy pace in Q2 2006, although growth was slower than in recent quarters, according to IDC. Total PC shipments exceeded 52 mln units and growth was 9.8% for Q2 2006. IDC expects the second half of 2006 to be strong enough to maintain double-digit growth for the year. PC sales in USA and worldwide, 2004-2008 Region 2004 2005 2006 2007 2008 US sales, mln. units Consumer 21.8 23.6 25.6 28.0 30.5 Commercial 36.5 40.3 42.2 45.9 51.5 Total 58.3 63.9 67.8 73.9 82.0 Global sales, mln. units Consumer 64.9 78.6 88.5 100.1 111.7 Commercial 114.4 129.3 141.3 157.2 176.1 Total 179.2 207.8 229.7 257.4 287.8 US growth, % Consumer   8.3% 8.5% 9.2% 9.1% Commercial   10.4% 4.9% 8.8% 12.1% Total   9.6% 6.2% 9.0% 10.9% Global growth, % Consumer   21.1% 12.6% 13.2% 11.5% Commercial   13.0% 9.3% 11.3% 12.0% Total   16.0% 10.5% 12.0% 11.8% Source: IDC This is healthy growth that reflects a serious upgrade in technology as prices for PCs and laptops have dropped.  Interestingly, for the first time since the 80’s a significant upgrade cycle in PCs is NOT anticipated for a major Windows release by Microsoft.  The market watchers are saying that Vista will not be snapped up as fast as XP or Windows 95. With healthy growth in PCs comes some interesting supply chain news: Worldwide DRAM market down 18.3% - The global electronics supply chain held 1.92 weeks of DRAM inventory at the start of August 2006, down 18.3% from an average of 2.35 weeks in July 2006. This marks the leanest inventory level for DRAM since January 2005, when stockpiles were at nearly three weeks, iSuppli said. Low supply means higher prices, especially in the face of strong demand for the PCs that most of this DRAM goes into.  More from enterprise IT markets: Total security software market revenue grew nearly 15% to $7.4 bln in 2005. Symantec was the overall market leader, with more than 32% of the market share, Gartner reports. Local company Sophos, buyer of ActiveState, plays here.  This was a slow developing market as everyone used to talk security, but didn’t buy the products and services being offered.  Now, clearly a huge paying market is investing in security and it will not abate. Here’s another huge trend, that like security, has been talked a lot about, but the real question has been “when will the enterprise step up and pay for it?”: 55% of North American companies rely on open source software for mission critical applications - According to Forrester Research, 56% of North American organizations are already using open source software and another 19% said they planned to use it in the coming year. The adoption has taken off so quickly that today, 55% of companies in North America say they use open source software in "mission-critical" applications.                                Now, this is a bit confusing… is it 55% of the 56% that use open source software?  Regardless, I can tell you that the enterprise does pay for support when its mission critical.  This is the dominant revenue model for open source and big enterprise IT seems to be buying into it.  Where they are not paying, at least in comparison to traditional software license models, is for end-user applications.  For instance, Open Office is an alternative to Microsoft Office that is improving all the time.  Some adoption is starting to happen in the larger enterprises as backlash to the huge cost of Microsoft.  But those building open source end user applications will tend to fill a market need for people who don’t want to pay, not even for support. I get a lot of interesting facts on some obscure markets… This one made me think of local BC company Tantalus Networks: 35% of Swedish electric meters to be connected to mobile networks - Investments in intelligent metering solutions in the European energy sector will total 3.5 bln euros until 2010, according to Berg Insight. About 35% of the 3.4 mln smart meters currently under contract in Sweden will be connected to mobile networks. I guess Tantalus better get over to Sweden and Europe pretty fast! Finally, if you and your company are taking advantage of these trends and growing your profits, then these facts are extremely relevant 1) Programmers are getting the biggest salary increases in 2006 among IT staff positions, averaging US$64,100, up 8.7% compared to 2005 results. Systems administrators had the smallest salary increases at 2%, but that was offset by average annual bonuses rising more than 15% from 2005, to $3,000. 2) The highest-paid executives in America had a 58.8% increase in their average annual cash bonus and were paid 38.21% more total cash compensation, according to Economic Research Institute and CareerJournal.com. Heck, if you are getting that kind of a raise, then you probably belong in this group: 3) Private jet owners have an average annual income of $9.2 mln and a net worth of $89.3 mln. They are 57 years old. 70% of them are men. What Do You Think? Talk Back To Brent Holliday   Something Ventured is a bi-weekly column designed to supplement the T-Net British Columbia web site with some timely, relevant and possibly irreverent insight into the industry. I hope to share some of the perspective and trends that I see in my role as a VC. The column is always followed by feedback (if its positive or constructive. I'll keep the flames to myself, thanks). Something Ventured Archive Printable edition