MARKET DYNAMICS

The IT Infrastructure, Cloud, and Security sectors are experiencing significant shifts as Generative AI and blockchain technologies reshape the landscape. Below are key takeaways regarding the market dynamics from Q4 2024 through Q3 2025:

• Generative AI transforms operations: Traditional practices are replaced by more dynamic, efficient, and innovative processes. The integration of generative AI is transforming operations, but challenges such as integration complexity, data privacy, and skilled personnel remain.

• Cost management through AI: Generative AI is invaluable in identifying cost-saving opportunities and risks through advanced data analytics, enabling more strategic financial decision-making.

• Limited availability of Network Switch substitutes: Buyers face difficulties finding alternatives, leading to fewer opportunities to negotiate discounts in the market.

• Blockchain experimentation continues to rise: Leading platforms increasingly explore blockchain networks, examining the implications and opportunities of cryptocurrencies and digital assets in shaping the global economy.

• Supply Chain Challenges: Component shortages and sourcing difficulties continue to impact the IT infrastructure market. Some key factors include:

  • Geopolitical tensions and trade disputes have disrupted supply chains, causing delays and uncertainty.

  • Transportation disruptions, port congestion, and labor shortages have contributed to delays and increased costs in the supply chain.

DEMAND COMMENTARY

The demand for IT infrastructure products, including security software, servers, and cloud services, continues to grow rapidly. However, various factors, such as supply chain constraints, component shortages, and competitive pressures, influence market dynamics and pricing.

• Even though Security Software demand is expected to increase, more competition will mitigate price increases.

• Zscaler consistently achieves growth in the network security industry and is making substantial investments in AI and machine learning (ML). However, customers must know and understand how to use Zscaler's bundled Stock Keeping Units (SKUs) to avoid overspending, which is rising with Zscaler purchases.

• Leading electronics manufacturers shared that they’ll experience a shortage of chips for AI servers as demand for AI products and services grows significantly.

• Ongoing labor and component shortages are expected to continue constraining chip supply. In the coming years, the number of expert/experienced workers needed to enter the semiconductor industry to meet demand is expected to increase.

• According to IDC's Servers Market Insights, the worldwide server market spending experienced a robust 10.5% growth in 2023 and is expected to continue with a CAGR of 11.4% over the next five years.

• The global server market report indicates that the market was valued at USD 89.24 billion in 2022 and is projected to reach USD 197.04 billion by 2031, growing at a CAGR of 9.2% from 2023 to 2031. The adoption of 5G services and the increasing number of data centers worldwide contribute to this growth.

• The cloud computing market was valued at USD 587.78 billion in 2023. It is projected to reach USD 2,291.59 billion, exhibiting a CAGR of 16.5% during the forecast period by 2032.

• This growth is driven by several factors, such as increasing digital transformation across businesses, widespread adoption of Internet and mobile devices, and the utilization of big data.

SUPPLY ANALYSIS

The supply chain for IT infrastructure products, including network firewall security equipment, servers, and cloud services, faces significant challenges due to various factors. The global chip shortage and the growing demand for these technologies have increased supply chain risks and impacted product availability.

• Supply chain risk is high in the network firewall security equipment market due to the global chip shortage, which hurts the Vendor’s strategy by making the availability of network firewall security equipment less predictable.

• Splunk's data analytics software will be especially useful in the industry, where artificial intelligence is used to outmaneuver defenders and penetrate systems.

• The market's supply chain risk is high due to the volatility of critical inputs such as semiconductors, aluminum, and other telecom equipment.

• AI platforms, such as ChatGPT, are experiencing dramatic growth, which is putting a significant strain on data centers due to the tremendous amount of energy required to power these platforms at scale.

• Supply chain risk for the cloud computing and computer server markets is moderate based on high demand, industry risk, and volatility in computer and telecom networking equipment manufacturing.

• The market is witnessing an amplified need for robust and scalable server solutions. This demand is driven by the rapid growth of data volumes, presenting significant opportunities to server manufacturers.

• Robust security measures, including encryption, authentication protocols, and intrusion detection systems, are needed to address data integrity and privacy concerns.

• Investments from major cloud players are rising to meet growing customer demand for cloud services. For example, on May 18, 2023, Amazon Web Services (AWS) announced it plans to invest INR 1,05,600 crores (USD 12.7 billion) into cloud infrastructure in India by 2030.

• Server manufacturers must continually innovate in this competitive server market. They must invest in research and development to develop new technologies, increase performance, and improve energy efficiency.

PRICING TRENDS & INSIGHTS

Network firewall security prices are expected to continue rising due to several factors:

• Increased Demand: The growing need for robust security solutions has increased demand and prices.

• Supply Chain Constraints: The global chip shortage and geopolitical tensions have impacted the availability of network firewall equipment, contributing to higher prices.

• Rising Energy Costs: The increased demand for data centers and cloud services, essential for network security, has put upward pressure on electricity prices.

To mitigate the impact of rising prices:

• Long-Term Supply Agreements: Consider locking prices with suppliers through long-term contracts.

• Alternative Sources: Explore alternative suppliers or sourcing options to reduce reliance on a single source.

• Cost Optimization: Implement strategies to optimize the use of network firewall resources and reduce costs.

Additional Considerations:

• Data Storage Costs: The amount of data stored significantly impacts pricing, with different storage types and usage volumes affecting costs.

• Processing Power: Your applications’ computational requirements will influence pricing, as different instance types have varying costs.

• Cloud Services: Moving data in and out of the cloud and utilizing additional features like auto-scaling and monitoring can incur further costs.

By carefully considering these factors and implementing effective strategies, organizations can manage their network firewall security costs and ensure they have the necessary solutions to protect their IT infrastructure.

KEY TAKEAWAYS

The IT infrastructure landscape is undergoing rapid transformation, driven by the integration of AI, the growing demand for network security solutions, and the increasing reliance on cloud computing. As businesses navigate these evolving trends, addressing challenges such as cost management, data privacy, and supply chain risks.

• AI is revolutionizing traditional practices, but its integration comes with challenges such as managing costs, ensuring privacy, and finding skilled personnel to operate and maintain AI systems.

• The growing demand for security software from businesses and consumers is causing price fluctuations, emphasizing the need for strategic procurement.

• Product specialization in the Network Firewall Security Equipment market remains strong, with limited vendors that meet businesses’ specific needs.

• The increasing demand for backup power systems, including generators, highlights the need for uninterrupted uptime in data centers, particularly those hosting AI platforms, as power outages can lead to significant financial losses.

• Data center operators are rapidly expanding infrastructure to support the growing volume of data businesses generate, making robust server solutions critical to managing these larger workloads.

• Cloud computing continues to allow developers to scale applications on demand, enhancing collaboration and seamless code sharing across platforms.

• The server market remains highly competitive, with vendors vying for market share by offering innovative products and distinct value propositions.

• As server technology evolves, managing increasingly complex architectures and security features presents challenges for vendors and users, demanding ongoing updates and system compatibility checks.

• Securing servers against cyber threats, data breaches, and unauthorized access remains a top priority, requiring regular updates and stringent security measures.

• Organizations must carefully select providers to avoid being locked into proprietary technologies, ensuring flexibility for future growth and innovation.

MARKET DYNAMICS

• The Global PC Market rebounded in Q2 2024 after two years of declining shipments, posting a year-over-year (YoY) growth of 3%, totaling 64.9 million units, according to International Data Corporation (IDC) data.

• Key regions, including the Americas, EMEA, and parts of APAC, contributed over 5% to the market's growth. However, gains were tempered by weak results from China, the world’s largest PC consumer.

• Advances in AI development, the rise of AI-integrated PCs, and increasing demand for gaming systems are accelerating commercial and consumer upgrade cycles. Major industry players such as Qualcomm, AMD, and Intel drive this trend by promoting new AI-capable models.

• Anticipation around Apple’s annual event in September could further fuel the demand for AI hardware, potentially propelling the market to new heights.

  • Apple's September 9, 2024, event introduced several vital updates that may impact the tech landscape, including new iPhone 16 models optimized for AI-driven applications.

  • Apple’s new AI-powered system integrates generative AI models with on-device personal data processing, ensuring enhanced privacy and security.

• Additionally, remarks by Federal Reserve Chair Jerome Powell at the Jackson Hole Economic Symposium indicated the possibility of an interest rate cut, which would serve as a positive signal for continued market expansion. ​

DEMAND TRENDS & FORECASTS

• IT hardware demand is expected to grow next quarter, driven by increased investment and technological advancements such as AI-capable PCs and new PCs powered by ARM CPUs. 

• Today, Most AI software runs in the cloud (ChatGPT, etc.), where any PC, laptop, or smartphone can access the website and interact with AI. To process AI tasks faster and strengthen data privacy, an “AI PC,” usually with a neural processing unit (NPU), is the industry solution. 

• We can already see technology giants making moves on the AI PC roadmap to drive the demand for this new hardware:

  • Microsoft has included a dedicated “CoPilot” key on the new PC keyboard to facilitate the launch of its CoPilot AI.

  • Both CPU giants, Intel and AMD, have offered their solutions with Core Ultra and Ryzen 8000 series processors. At the recent Intel Vision 2024 conference, Intel claimed it has shipped 5 million AI PCs to date and targets shipping about 40 million by the end of the year.

  • Qualcomm, a traditional ARM processor provider for smartphones, will have its AI processor, the Snapdragon X Elite chip, built inside the Microsoft Surface Pro 10 and Surface Laptop 5.

• Major tech companies like Microsoft, Intel, AMD, and Qualcomm are already moving in this direction with new AI-focused hardware and processors, aiming to capitalize on a potential surge in demand for these machines.

• As reducing carbon footprint becomes a business KPI, improving the energy efficiency of the device used will be essential. Expect to see the number of lower-power consumption ARM processor-driven devices grow significantly.

SUPPLY ANALYSIS

• The top three manufacturers, Lenovo, HP, and Dell, collectively accounted for over 50% of total shipments in Q2 2024. This data highlights the significant market presence and influence of these key players in the industry. 

• High market share concentration indicates these manufacturers have strong pricing power over the market. However, they also face significant competition, which means lower supply chain risk. Because the products are plentiful and interchangeable enough, if a disruption occurs in one source, another manufacturer can quickly fulfill the buyers’ needs.

• Current hardware lead times have returned to pre-pandemic levels, with the average lead time for laptops and desktops now ranging from one to two months.

• Though the semiconductor shortage has been eased, there is an increasing need for skilled labor to keep up with the global semiconductor manufacturing demand.

• The addition of the unsettled existing regional crisis has potentially increased the delivery within some regions and may affect wider regions should things escalate.

• To mitigate lead time volatility, it is advisable to plan demand based on forecasts and establish safety stock through leasing or participation in a “Device as a Service.” 

• Refurbished PCs offer an alternative solution to address fluctuations in demand or support expansion efforts.

• Additionally, opting for refurbished hardware helps reduce lead time and cost and contributes to supply chain sustainability, as offsetting carbon footprints has become an important KPI for global businesses. . 

PRICING TRENDS & INSIGHTS

• Price fluctuations in the market are driven by several factors, likely contributing to yearly volatility. These include:

  • Volatility in critical drivers such as wages.

  • Dependency on the availability of semiconductors.

  • Macroeconomic factors like high interest rates and inflation.

  • Ongoing geopolitical tensions.

  • Government policy and legislation, such as sanctions and tariff rates.

  • ESG (Environmental, Social, and Governance) trends.

• The hardware market is highly concentrated, with the top three manufacturers (Lenovo, HP, and Dell) controlling over 50% share. This concentration indicates that a single supplier or a group of suppliers wields considerable pricing power in the market. 

• Buyers are encouraged to buy now for short-term shortage as the global hardware price trend is on the rise, driven by multiple factors:

  • Increased demand—PC shipment volumes have increased and are back to pre-pandemic levels. The trend is expected to continue throughout 2024 until 2025.

  • Introducing new technology – AI PC is becoming the next big thing in the market and will contribute to significant growth.

  • Components cost – Memory, storage, and GPU prices have increased.

  • Tariffs hikes on China imported goods (batteries, etc.) effective 1 August 2024.

• Implementing long-term pricing negotiations is considered a best practice, allowing for the establishment of favorable discount structures. Moreover, exploring options like leasing and rental (DaaS) can leverage negotiations. These options help free up business cash flow. They are suitable for short-term needs and for users who require up-to-date hardware. 

• Maintaining a collaborative relationship with OEMs is advisable to assess and qualify new low-end technology offerings with specifications that closely match or equal current standards; for example, AMD and Intel offer the best price-to-performance ratio depending on the application used. This approach helps control costs and enhances the availability of supply.

KEY TAKEAWAYS

• Growth Opportunities Amid Rising Prices: The PC market is recovering, with global shipment volumes increasing by 3% in Q2 2024. Buyers should consider replenishing inventories now, as prices are trending upward despite manageable lead times.

• Proactive Purchasing: Buyers are advised to act swiftly to avoid higher costs in the coming months due to expected demand surges from hardware refresh cycles and potential supply chain disruptions (especially from regional conflicts). The anticipated Federal Reserve interest rate cuts could further fuel demand, making timely purchasing even more critical.

• AI-Driven Demand Growth: The rise of AI-integrated PCs is set to drive market growth, particularly with innovations like Qualcomm’s AI processors and Microsoft’s AI-focused CoPilot key. Procurement teams should explore AI-capable hardware to future-proof their IT infrastructure.

• Leverage Refurbished Hardware for Sustainability: Opting for refurbished PCs effectively addresses cost concerns, reduces lead times, and contributes to sustainability goals. With ESG becoming a critical KPI, refurbished equipment supports cost efficiency and environmental objectives.

• Cost-Saving Strategies with DaaS: Device as a Service (DaaS) offers a flexible alternative to hardware ownership, helping companies improve cash flow while maintaining up-to-date technology. This model can also mitigate the risk of future price increases while freeing up resources for other strategic investments.

• Long-Term Vendor Relationships: Establishing collaborative, long-term contracts with OEMs like AMD, Intel, and Qualcomm ensures access to emerging technologies with the best price-to-performance ratios. This approach can help control costs amid rising component prices and tariff hikes on China-imported goods.

MARKET DYNAMICS

The IT software market continues to experience upward pricing pressure driven by inflation, AI development, and rising IT staffing costs. Software vendors increasingly adopt subscription-based models and leverage cloud technologies to enhance revenue streams and customer experience.

• We have seen several software vendors experience price increases in the past 12 months—more than usual. Many vendors apply year-over-year (YoY) increases, even on multiyear agreements.   

• SaaS price hikes of 15- 23% on average are predicted in 2023 due to some more prominent titles making up for inflation, continued AI development/enhancements, and rising IT staff costs.

• We continue to see upward pricing pressure across software publishers. (Inflationary)

• More publishers continue to be available in the public cloud and are moving from on-premises to Software as a Service (SaaS), focusing on customers to move toward new subscriptions.

DEMAND TRENDS & FORECASTS

Demand for IT software is expected to remain strong, but organizations face increasing costs and challenges in managing software portfolios.

• Reducing or delaying SaaS commitments through 2024 will result in a 25% increase in SaaS costs through 2026.

• By 2025, 50% of organizations will be forced to make their subscription or support a single-year contract with 8% or more annual adjustment rates.

• By 2026, 50% of enterprise applications will separate support from existing subscription and maintenance costs to create additional revenue streams and negate existing and maintenance costs to develop additional revenue streams.

• By 2025, 30% of enterprises will demand that SaaS vendors provide license and consumption specialists to manage waste and retain their business. 

SUPPLY ANALYSIS

The IT software supply landscape evolves with mergers, acquisitions, and increased competition. Major players are acquiring smaller companies to strengthen their positions in the market and expand their offerings. The entry of new players and increased competition in the cloud market provide organizations with more options and potentially lower costs.

• AMD to acquire infrastructure player ZT Systems for USD 4.9B to amp up its AI ecosystem play

• Hadrian announced they bought Datum Source, a software company founded by SpaceX alums that uses AI to help hardware companies find manufacturing partners.

• EU approval, UK clears HPE’s USD 14B Juniper Networks acquisition.

• Fintech Payoneer is buying 5-year-old global payroll startup Skuad for USD 61M in cash.

• Cisco finalizes massive Splunk acquisition.

PRICING TRENDS & INSIGHTS

Software pricing will continue rising, with vendors adopting aggressive tactics to increase revenue. Organizations should be prepared for price increases and consider strategies to manage costs effectively.

• Software suppliers are actively raising or attempting to increase prices across all categories.    

• A new fact about software pricing is that many companies are moving towards subscription-based models, where customers pay a recurring fee for access to the software rather than a one-time purchase. This allows companies to generate a steady revenue stream and provide ongoing customer support and updates. Additionally, it will enable customers to spread out the cost of the software over time rather than paying a hefty upfront fee.

• Microsoft recently announced significant pricing and product changes: Dynamics 365 Prices Increased, and Teams Unbundled from Office 365.

• To obtain optimized pricing using third-party assessments on market pricing growth.

• We continue to see plenty of supply within software technology and expect this to remain for the next 12 Months.    

• Economic headwinds force vendors to resort to aggressive revenue tactics, from informal and formal software license audits to unjustified price increases. 

• Expect this behavior to get more aggressive from vendors with upcoming fiscal year-ends. If you have a purchase or renewal with any of these vendors on the horizon, prepare now. 

• We are continuing to see more publications available in cloud applications and expect this trend to continue.    

• New cloud optimization and security entrants have created more supply options with good ROI.

KEY TAKEAWAYS

The current software market is characterized by increasing prices, evolving business models, and heightened competition. Organizations must carefully monitor market trends, manage their software portfolios effectively, and negotiate favorable terms to mitigate the impact of rising costs and ensure their long-term success.

• Rising Costs Across the Market: The market is seeing continued price increases driven by inflation, AI development, and rising IT staffing costs. Organizations need to plan for significant YoY price hikes, particularly in subscription-based models like SaaS, where average price increases range from 15% to 23%.

• Microsoft Licensing Changes: Businesses must adapt to significant shifts in Microsoft’s pricing structure, including the unbundling of Teams from Office 365 and price increases for Dynamics 365. These changes demand strategic license management and timely contract negotiations.

• Vendor Aggression: Vendors employ increasingly aggressive tactics, such as price hikes and formal software audits, especially at fiscal year-end. Anticipate and prepare for these practices by negotiating favorable contract terms.

• Cloud Adoption and ROI: The shift from on-premises to cloud services is accelerating, with cloud optimization and security software showing a solid return on investment (ROI). New market entrants are providing more supply options, enhancing procurement flexibility.

• Stable Supply, Rising Pricing Pressures: While software supply remains stable, inflationary pressures and aggressive vendor strategies drive costs upward. Procurement teams must proactively manage contracts and leverage third-party market assessments to optimize pricing.

• Short-Term vs. Long-Term Costs: Delaying or reducing SaaS commitments in the short term may result in significantly higher costs through 2026, with many vendors expected to enforce annual contract adjustments of 8% or more.

• Evolving Market Dynamics: The IT software market continues to be shaped by mergers, acquisitions, and increased competition, with major players like AMD, Cisco, and HPE expanding their ecosystems through acquisitions. These trends will likely further consolidate the industry while creating opportunities for procurement to explore alternative vendors.