SEE IT markets 2016: Third platform technologies driving growth, legacy markets on decline

by Neli Vacheva, IDC Bulgaria Country Manager

International Data Corporation (IDC) is a global provider of market intelligence, advisory services, and events for the information technology, telecommunications and consumer technology markets. More than 1,100 IDC analysts provide global, regional, and local expertise on technology and industry opportunities and trends in over 110 countries worldwide. IDC is a wholly-owned subsidiary of International Data Group (IDG), a technology media, research, and events company.

In 2016 the ICT market in Southeast Europe (SEE) grew 2.35% on an annual basis, driven by a gradual rise in spending on IT services and software and strong performance of the smartphone segment. The market’s subdued performance came after slow recovery of the economies in the region combined with political instability affected IT investments by both the public and private sectors in 2015. The IT markets in Macedonia, Montenegro and Slovenia even saw declines year on year, while the markets in Bulgaria, Romania, Croatia, Bosnia and Herzegovina and Serbia expanded only moderately. The highest growth rate, by 4.57%, was seen in Serbia, followed by Croatia with 3.23%, Romania with 1.34% and Bulgaria with 1.21%.

The IT markets in SEE are highly dependent on the performance of hardware sales. The negative trends on the hardware market continued into 2016, with a significant stagnation on the PC market, which shrank 13.63% in terms of U.S. dollars, and the tablets market, which was down 23.10% in U.S. dollars. The imaging and hardcopy device markets grew slightly after two years of declines.

In a situation of uncertainty, the business became cautious about IT investments and companies prolonged the replacement cycles. While the business in the region is faced with the need to improve its competitiveness, IT spending is primarily focused on cost savings and optimisations. At the same time the transition to the Third platform (cloud, social, mobility and BigData) shifted investments toward replacement of outdated IT infrastructure and adoption of mobility and cloud technologies. Device sales are now dominated by mobile devices, as cloud service providers represent a growing proportion of all infrastructure hardware and software sales even though the cloud market in Central and Eastern Europe (CEE) is lagging behind peer regions. The technology services market in CEE is worth over 14 billion dollars, as the cloud services market represents about one-tenth of it. Nevertheless, the uptake of cloud is about five times more dynamic and consequently the share of cloud delivery is rapidly increasing. Mediumsized business account for the largest portion of overall spending on public cloud service.

In the consumer segment, tablet and notebook sales were outpaced by smartphones. In 2016 sales of 4G smartphones in the SEE region exceeded those of 3G ones – a milestone which Western Europe reached two years ago. According to the IDC Quarterly Mobile Phone Tracker, 63.2% of smartphones shipped in CEE in 2016 were 4G/LTE, and the company forecasts that this share will reach 85.2% in 2021. All SEE countries except Bosnia and Herzegovina have 4G networks in different stages of development. The share of 4G smartphones was highest in Serbia – 74.3% versus 69.1% in Bulgaria and 63.8% in Romania. The market in CEE, and in particular in SEE, continued to be very price sensitive. The 2016 average smartphone price at 200 U.S. dollars retail before tax was less than half that in Western Europe. In the first half of 2017 stable economic performance and a recovery of foreign currency exchange rates boosted consumer confidence and demand for notebooks started to pick up in SEE.

Regardless of the overall picture of cautious IT investments by the local organisations, the IT sector in SEE is one of the most dynamic economy branches. It is heavily export-oriented and home to numerous R&D and outsourcing centres of large IT vendors and innovative start-ups developing cutting-edge technologies which are competitive on global markets.

New technologies, which IDC calls “Innovation Accelerators” will provide worldwide almost 7.4 trillion U.S. dollars in aggregate industry revenue in 2015-2020, adding 1.8 trillion U.S. dollars to the overall size of the industry in terms of annual sales by the end of the forecast period. A large proportion of this spending will come from the fast-growing Internet of Things (IoT) market, which is forecast to reach almost 1.3 trillion U.S. dollars in annual revenue by 2020, of which more than 1 trillion U.S. dollars represents new opportunity outside of traditional technology market categories (devices, infrastructure, software, services, and telecom). Robotics, AR/VR, security, cognitive/artificial intelligence, and 3D printing will contribute the rest of this fast-growing portion of the ICT market.

Between 2015 and 2020, overall ICT spending, excluding the Innovation Accelerators, will see a compound annual growth rate (CAGR) of just 1% in constant currency terms. Including the Innovation Accelerators, ICT spending will increase by 5% over the same period. In total, the Innovation Accelerators will post a CAGR of 18%. Asia/Pacific excluding Japan represents the largest market for Innovation Accelerators, forecast to reach more than 600 billion dollars by 2020, as CEE will be one of the regions that will see fastest growth over the review period.

In CEE, according to IDC forecasts, spending on IoT will grow 20.6% year on year in 2017, reaching just over 12 billion U.S. dollars. By 2021, CEE IoT spending is expected to total nearly 27 billion U.S. dollars as organisations continue to invest in the hardware, software, services, and connectivity that enable the IoT. The IoT use cases that are expected to attract the largest investments in 2017 include freight monitoring, smart grid technologies for electricity, gas, and water, and manufacturing operations. Production asset management and smart home technologies are also forecast to attract significant investments this year. While these use cases will remain the largest areas of IoT spending in 2021, smart building technologies are predicted to experience strong growth of 34.4% CAGR over the five-year forecast. The use cases that will see the fastest spending growth are smart grid technologies for water, insurance telematics, and electric vehicle charging, though all will start from a relatively small initial base.

According to a survey among attendees of the IDC CIO events in SEE and the framework for assessment of the digital maturity of organizations IDC’s DX Maturity Scape, most of the organisations in SEE are in the “Repeatable” stage of their digital maturity. The DX Maturity Scape framework enables organisations to assess and benchmark their digital maturity across five key dimension: Leadership, Omni-experience, Information, Operating Model, and Work source. A typical stage of the Repeatable stage of maturity is that business and IT strategies are aligned at the enterprise level to achieve near-term goals. Digital customer product and experience initiatives are under way, but the business is not yet focused on the disruptive potential of digital initiatives. Information is managed as an asset and its intrinsic DX value is established. Enterprise-wide DX operations are emerging and architecture and standards are organized to implement the best DX practices.

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