In January 2009 IDC predicted that two powerful forces will collide in 2009 – a deep and protracted global recession, and an acceleration of hyperdisruptive transformation within the IT industry. Hyperdisruptive industry transformation will accelerate the move to “the Cloud”. Emerging markets and SMBs (predicted by IDC to outperform other markets by a wider margin than 2008) will increase their strategic importance to vendors, touching off a wild scramble (or, in the case of the Megafauna, a ponderous amble) for new feeding grounds.

Left unstated by IDC was precisely how the IT Megafauna, grown fat, aristocratic, arrogant and bureaucratic from many years of largely uncontested domination of the food-chain, will adapt to straightened circumstances and hard-scrabble feeding grounds, especially since those feeding grounds are already occupied by more nimble, lower-cost, regionally-attuned, price-sensitive, and hence more efficient, resilient and survivable operators.

The consequences of the collision between recession and hyperdisruption will, in the opinion of IDC, cut global IT growth in half, taking 3 years to get back to 2008 growth levels.

In a subsequent IDC blog published in May, Frank Gens re-stated his opinion that the economic crunch will amplify the economic benefits of the cloud services model, and therefore accelerate IT cloud services adoption. Gens’ blog included substantiating data from a user survey undertaken earlier this year by IDC’s Stephen Minton.

Furthermore, the Minton survey strongly suggested to Gens that the cloud computing model – which IDC forecasted last October would account for about 9% of enterprise IT spending in 2012 – is on a pace to drive closer to 10-15%.

Gens believes this makes 2009 and 2010 a very important time for suppliers to be actively educating the marketplace about the cloud model and their cloud offerings – very appropriate in his opinion, given IDC’s assessment that the cloud model is in the “crossing the chasm” stage of adoption.

What IDC didn’t say is that the recession-hyperdisruption collision has the potential to be the modern-day equivalent of the Cretaceous-Tertiary extinction event for the ruling IT megafauna. Those that survive the collision may do so in a form bearing little resemblance to their bloated pre-2008 physiognomies.

Commoditization is eroding the significance and value of brands, traditional channel partnerships will break under the pressure of diminishing margins, CEOs and CIOs will be targeted by analysts, and stock prices will come under downward pressure as cash reserves melt away in synchronization with diminishing hopes for a quick return to the halcyon days of yesteryear.

Despite the soothing and optimistic utterances of Megafauna leaders during conference calls and in press statements, it is becoming increasingly apparent to Old Bill’s blind dog that the current model is broken and not repairable – there is no worm-hole back to the past in this particular universe.

Customer expectations and willingness to pay top dollar for IT have irreversibly hardened against the Megafauna. Yes, there will be a few more years of declining but acceptable harvests; paid for not by increased sales, but by measures such as cost-cutting (packaged in accountant-speak as “rebalancing the workforce and distributing work across the globe”); increased repositioning away from hardware and towards software and services; discarding of unprofitable commodity businesses; and stock buybacks to counter decreased earning per share.  Such measures are appropriate to bridge periodic downturns – but they cannot reverse unstoppable trends such as the one now under way.

The most recently published numbers of the Big Four IT Megafauna clearly show the impact and trends of the global recession to date. We can expect numbers for the next few quarters to show more dramatic downturns, as “easy fixes” and “one-shot salvoes” are exhausted.

SAP: SAP’s second quarter 2009 results published July 29, 2009 posted a staggering 40% drop in software revenues.  According to Rachael Singh, writing in Accountancy Age on 6 August 2009, analysts said SAP will need to change its sales strategy to weather the economic storm, and should focus more on the mid market.

Thomas Otter, an analyst with IT research firm Gartner, said: ‘The big deals in terms of millions of pounds of software projects are history. They are becoming tougher to find for SAP and it has to grow and become better at being more nimble and able to close smaller deals quicker.’

Otter also said that SAP ‘needs to compete more effectively in the mid market’.

The real question is whether multi-million pound/dollar SAP projects will ever return in the future – our view is that era has passed for good, and the trends we are seeing today (although indisputably hastened by the global recession) are irreversible.

The latest blow comes as it emerged that SAP had to re-evaluate its online product Business ByDesign. A spokesman confirmed that the technology wasn’t ‘cost effective’ and that it was proving more expensive for the company to run than it was able to make from the software.

The company hopes to have the technology on general release next year, although they declined to comment on a specific timeframe. It is not clear, however, that SAP has a firm grip on what customers really want, either. The company has fallen well behind rivals in efforts to offer a “cloud computing” product, in which customers essentially rent applications and use them online instead of buying the software and maintaining it on their own machines.

David Bradshaw, an analyst at technology research firm IDC, said: ‘The way SAP built it, (Business ByDesign) it was expensive for them.’

Business ByDesign, which is currently being tested by 90 clients, is aimed at mid-market customers.

SAP said it rectified glitches but would not elaborate on what the problems were, or how they were resolved.

An article published in the New York Times on August 9, 2009 reported that Leo Apotheker, the chief executive of the German software giant SAP, has watched his leading rival, Oracle, go on a buying spree, snapping up more than 50 companies in the last four years. And Oracle’s latest megadeal, the $7.4 billion acquisition of Sun Microsystems, will thrust the software maker into the computer hardware business.

Mr. Apotheker says SAP prefers to develop products in-house. “We focus on engineering our stuff to the best extent humanly possible,” he said.

Anybody recall the German Army Tiger tank – the best tank by far of WWII?  Too expensive, too over-engineered, too slow to produce, and eventually overwhelmed by the sheer volume of much-inferior but cheaper and faster-produced Sherman tanks…….

Giants like Oracle and I.B.M. have been on a relentless mission to persuade companies to buy as much of their computer infrastructure as possible from one place. It is a strategy that has them encroaching on the turf of specialists like SAP. However, some industry players say SAP may eventually be forced to merge with another company as the consolidation trend creates closer ties between software and hardware.

“If Oracle can really make a fast, full package for customers, it will put SAP at a disadvantage,” said Seth Ravin, the chief executive of Rimini Street, a start-up in Las Vegas that services SAP software. “I think it will be harder and harder for SAP to remain independent.”

Microsoft: Microsoft’s soft numbers in the Q409 results published in July, 2009 showed a 29 percent profit drop and sales 17 percent down on last year across all of Microsoft’s main business units, including Windows, Office, Xbox 360, web advertising and the server software group.

Microsoft is slashing costs to ride out the recession – clawing over $750 million of operational savings, albeit partly paid for by the first job cuts in the company’s history in January – over 5,000 jobs were eliminated.

Google has commenced a concerted incursion into traditional Microsoft territory with the release of its Chrome browser (2.59% market share as at July 2009, compared with 67.68% for IE) and its recently announced Chrome OS.  Windows still holds a dominating 93.04% of OS market share, by far the largest portion being the now-outdated and soon to be unsupported Windows XP.  Microsoft’s Bing search engine is still a market midget (3.17%) compared to Google’s commanding 78.45%. Bing and Yahoo (now combined together in a search partnership) only accounted for 10.33% of the global search engine market in July 2009.

According to IDC, Dell and HP are selling PCs in China now for US$150. If you look at the software, you’d normally need to buy Windows and Office for $300 to $600, so there’s a huge motivation by the PC vendors and everybody else to drive the end-point of computing costs right down.

Chrome browser plus Chrome OS will provide very inexpensive computing end-points because obviously you don’t need to store a whole lot of data on the device; you just need a bit of local cache. That will lead to a rash of cheap “netbooks” and other devices that boot straight to Chrome.  Not a happy prospect for Microsoft…..

Again according to IDC, MS missed the internet, it missed web-based software, but it did build absolutely enormous data centers when it realized web-based delivery of applications was going to be a big thing. It has spent hundreds of millions – possibly billions – of dollars building data centre after data centre all around the world.

So, on the positive side, Cloud computing – accessing computer programs over the web rather than on the user’s own computer – is a trend that Microsoft is positioned to aggressively pursue to close the gap with the current leaders in cloud computing, Google and Amazon. Microsoft certainly has the cash to do it, but it also needs to make some smart strategic decisions before its traditional revenue-generating base is eroded. It has started to do that by making a simple version of MS Office Online free.

ORACLE: Oracle’s most recent numbers indicated that new software license revenues were down by 13% for Q4 09, and down by 5% for the full year.

At first sight Oracle’s recent $7.4 billion acquisition of Sun Microsystems Inc adds a hardware-related advantage over arch-rival SAP.  However, given Sun’s performance recently, and recalling the outcome of Lenovo’s acquisition of IBM’s PC business, it remains to be seen whether Oracle can convert its Sun acquisition to a strategic advantage during a protracted recession in which hardware companies are being hit particularly hard.

In the growth area of SaaS, Oracle On Demand and CRM On Demand will be faced with an unprecedented global market level of price-sensitivity and a swarm of low-priced competitors.

Oracle’s core database business is facing increasing competition from low-priced and open source databases – competition that can only become more intense as the global recession seems set to continue into the foreseeable future.

Finally, Oracle does not appear to be well-positioned to take advantage of the high-volume, low-margin opportunities in the only remaining growth areas – emerging markets and SaaS. Price-sensitivity, not brands, will be the determining factor for success in these markets.

IBM: IBM’s 2^nd quarter results for the period ended June 30, 2009 at first sight appear to be bucking the trend of the other three IT Megafauna. Everything, from net income to full-year EPS expectations, is up. Most of the financial analysts were orgasmically excited at these numbers. Not many appeared to notice that IBM’s revenue was down by 13 percent overall.

By region, IBM said Americas revenue for the second quarter was $9.9 billion, down 9 percent. Europe, Middle East and Africa sales were $7.9 billion, down 20 percent. Asia-Pacific sales were down 7 percent to $4.9 billion.

According to ZDNET, in a nutshell, IBM’s positioning in software and services and away from hardware has been a boon in the downturn. IBM’s CFO Mark Loughridge noted that IBM’s decision to exit commodity products such as PCs and printers has allowed it to transform its business. In addition, IBM has acquired 100 companies, including the likes of Cognos.

So how did Big Blue pull the rabbit from the hat in the face of diminished revenues?

1. ”Rebalancing” the workforce and distributing work across the globe helped IBM improve margins
2. IBM’s positioning in software and services and away from hardware has been a boon in the downturn
3. Cost-cutting – job cuts, automating tasks
4. Acquiring small, profitable software and services companies. IBM has acquired 100 companies, including the likes of Cognos
5. Exiting unprofitable commodity businesses such as PCs and printers
6. IBM regularly buys back its stock — which is one way to improve earnings per share, because it reduces the company’s share count

The question is what more can be done in the face of a continuing downward trend in revenue?  More of the same would appear to be the obvious answer.  But how much longer can IBM juggle its businesses and still declare acceptable positive numbers?

SUMMARY: The writing is on the wall for the IT Megafauna. Like the dinosaurs that survived the initial impact of the Cretaceous-Tertiary event, they are apparently, as General Motors was recently proven to be, too big, too fat, too slow, too bureaucratic, too arrogant and too set in their ways to quickly adapt to the cataclysmic and irreversible changes that have inexorably commenced to destroy their traditional business models.

The game has changed, the rules have changed and the venue has changed.

A momentous generational step-shift is underway that will reshape IT globally.

Do the Megafauna see it coming?  Or, like the Emperor in Hans Christian Andersen’s tale of “The Emperor’s New Clothes”, are they going to continue to imagine they are appropriately suited for whatever circumstances befall them?

Read more on this momentous unfolding story in future editions of this blog.

And meanwhile please feel free to republish extracts from or all of this blog (with appropriate attribution, of course).

Mountain View’s head of EMEA partners at Google Enterprise, Peter Lorant, was speaking at Channel Expo in Birmingham, said that “There’s going to be a full frontal assault on changing that with the new cloud-based paradigm, because you’ve got to focus on simplicity and the user.”

He added that many users loved the likes of Google Apps “because they totally rebel against this ivory tower that it has to be complex and you can’t do anything unless you call your IT administrator. “Cloud computing is more than a recession-proof offering – it’s a way of life,” he said, brushing aside Microsoft’s hefty enterprise marketshare.

Google Apps consists of Gmail accounts, enhanced for mobile access on BlackBerrys, a shared calendar, Google Talk instant messaging, access to Google Docs & Spreadsheets and a Web page creator.

Here’s more good news for Google apps - Cap Gemini sold what it believes is the largest ever contract for Google’s online suite of software products. The contract is with French industrial group Valeo, which operates in 27 countries from 192 offices and other buildings. About 30,000 Valeo staff will have access to Google Apps.

Google has also been busy on the development side. It added a feature to its popular Gmail service that allows users to easily import email and contacts from their Hotmail, Yahoo! et al accounts. Google’s new tool, which is powered by TrueSwitch, migrates messages and contacts from other webmail providers and is available for all new users who are happy to dump Google’s rivals in favor of Gmail.

Google described switching email accounts as being a “pretty painful” process. “It’s like getting out of a relationship. You have so much baggage – years of emails and contacts, memories of past Christmases and Valentine’s Days – so the easier your new email account can make it, the better,” wrote Gmail engineer Chad Parry in a corporate blog post.

Meanwhile, in its effort to use its Wolverine-line regenerative qualities, Microsoft will ship a technical preview of Office 2010 to invite-only users in July, the company has confirmed. Users can expect changes in the Office 2010 family of apps that include a new lightweight version of the word processing, spreadsheet and presentation intended for use online. Microsoft has the full details about the technical preview here.

But while doing that, Microsoft was Slapped with a $200 million patent ruling. A federal court in Texas slapped Microsoft with a $200 million patent infringement ruling for including a Canadian software firm’s technology in Microsoft Word.

Toronto-based i4i, a developer of XML-based collaborative content solutions, sued Microsoft in 2007 for customizing the XML in Word 2003 and Word 2007 in a way that violated i4i’s patent, charges that Microsoft has denied. The i4i’s case centered on Microsoft’s method for processing Word files using embedded codes that provide instructions on how information appears.

Another purveyor interested in Wolverine-like office immortality is Openoffice, an opensource application. Openoffice now has close to an impressive 60 million downloads. While scooping up the 2009 Favorite Office Software Award in Linux Journal, an interesting fact is that more than 86% are users who on the Windows platform. Read about improvements made on the latest version here. For those interested, OxygenOffice Professional is an enhanced mutant of OpenOffice and contains extras like templates, cliparts, samples, fonts and VBA support. OxygenOffice can be downloaded here.

For instance, last December Gartner made the audacious prediction that nine out of ten companies plan to grow their use of SaaS in the next year, and that more than one third of respondents (37%) plan to replace on-premises software with SaaS to drive down total cost of ownership (TCO).

Then in January, IDC found that:

• The harsh economic climate will actually accelerate the growth prospects for the software as a service (SaaS) model as vendors position offerings as right-sized, zero-CAPEX alternatives to on-premise applications. 
• By the end of 2009, 76% of U.S. organizations will use at least one SaaS-delivered application for business use.

• The percentage of U.S. firms which plan to spend at least 25% of their IT budgets on SaaS applications will increase from 23% in 2008 to nearly 45% in 2010.

• This market’s growth prospects will accelerate the shift to SaaS for the whole value chain as the promise of a recurring revenue stream, and the opportunity to tap OPEX and project-related dollars, will benefit the whole SaaS ecosystem.

Fast forward 4 months, which is about half a dogs’ lifetime in IT years, and you have Gartner still forecasting that:

• The SaaS market will reach $9.6 billion in 2009, a 21.9 percent increase from 2008 revenue of $6.6 billion. 

• The market will show consistent growth through 2013 when worldwide SaaS revenue will total $16 billion for the enterprise application markets.

These forecasts come even as Gartner estimates that overall IT spending will decline 3.7 percent in 2009, and spending on IT hardware, including client computing (PCs), servers, storage and printing systems will drop 14.9 percent this year.

In that same Gartner report, Sharon Mertz, research director at Gartner advised enterprises to identify costs associated with the subscription, training, customization, integration or feature upgrades, and review contractual terms carefully to determine if SaaS is the better choice.

Now this might come as a surprise to you, but there already exist SaaS software that has customization features, DIY integration, free upgrades, zero training time and zero training cost.  It’s called Ubikwiti and you can find out more here.

Even for our brothers in the Middle East, SaaS is on the rise. As regional companies look for ways to manage cash flow, the IT solutions sector has reported a 30 per cent growth in SaaS and is expected to grow by 40% this year.

And not to leave out our friends from Asia – the SaaS-based ERP market in Asia Pacific is estimated to grow 550%, from US$35 million in 2008 to US$193 million by 2012, said Springboard Research. 

So far, SaaS has been less popular in part because the SaaS mode does not allow much flexibility for customization,” said Michael Barnes, VP – Software at Springboard Research. “As vendors continue improve the customization capabilities of their products, they have the opportunity to improve adoption, especially with organizations implementing SaaS for the first time.”

There we go again with customization capabilities; well, look no further than Ubikwiti’s abilities.

Cost is not the only reason why SaaS is popular.  According to a study by Citrix Online called Worldwide Workplace: The Web Commuting Imperative, employees are willing to sacrifice some of their pay for the ability to work from home or another remote location.

One in five respondents said they are willing to give up 5 percent of their salary for the ability to work remotely one or two days a week.

Also, a number of SaaS providers have developed applications for mobile users to stay connected to company systems and databases making the actual task of being away from the office increasingly difficult to accomplish.  A recent poll by the Creative Group showed that 61 percent of marketing and advertising executives contacted the office at least one time a day while supposedly on vacation.

 And finally, yes, an outage did happen at Google-land and it made us all see that they are human too.  But what made them more than human was the fact that they apologized, and looking at the diminished rants around the world, this apparently worked.  Here is a good analysis by PC World on the Google bungle.

The unusually steep slump in global trade, confirmed by trade statistics announced on Tuesday is confirmed by rising unemployment in the world’s merchant shipping fleet.

More worrisome – the current level of trade does not suggest a recovery soon, many in the shipping business say.

“A lot of the orders for the retail season are being placed now, and compared to recent years, they are weak,” said Chris Woodward, the vice president for container services at Ryder System, the big logistics company.

The cost of shipping a 40-foot steel container full of merchandise from southern China to northern Europe tumbled from $1,400 plus fuel charges a year ago to as little as $150 early this year, before rebounding to around $300, which is still below the cost of providing the service, said Neil Dekker, a container industry forecaster at Drewry Shipping Consultants in London.

Eight small companies in the industry have gone bankrupt in the last year and at least one of the major carriers is likely to fail this year, he said.

According to AIS Live ship tracking service of Lloyd’s Register, one of the largest empty fleets of cargo ships ever gathered together idles at anchor just outside one of the world’s busiest ports, Singapore. 735 cargo ships — some up to 300,000 tons are marooned there by the receding tide of global trade.

Congestion is becoming so bad that that shipping lines are concerned about near misses and collisions in one of the world’s most congested waterways, the straits that separate Malaysia and Singapore from Indonesia.

Vessels have flocked to Singapore because it has few storms, excellent ship repair teams, cheap fuel from its own refinery and, most important, proximity to Asian ports that might eventually have cargo to ship.

The gathering of so many freighters “is extraordinary,” said Christopher Pålsson, a senior consultant at Lloyd’s Register-Fairplay Research, the consulting division of Lloyd’s Register-Fairplay. “We have probably not witnessed anything like this since the early 1980s,” during the last big bust in the global shipping industry.

The world’s fleet has nearly doubled since the early 1980s, so the tonnage of vessels in and around Singapore’s waters this spring may be the highest ever, he said, cautioning that detailed worldwide ship tracking data has been available only for the last five years.

These vessels total more than 41 million tons, according to the AIS Live tracking service. That is nearly equal to the entire world’s merchant fleet at the end of World War I, and represents almost 4 percent of the world’s fleet today.

Western consumers still adjusting to losses in value of their stocks and homes are in little mood to start spending again on nonessential imports, said Joshua Felman, the assistant director of the Asia and Pacific division of the International Monetary Fund. “For trade to pick up, demand has to pick up,” he said. “It’s very difficult to see that happening any time soon.”

So badly battered is the shipping industry that the daily rate to charter a large bulk freighter suitable for carrying, say, iron ore, plummeted from close to $300,000 last summer to a low of $10,000 early this year, according to H. Clarkson & Company, a London ship brokerage.

The rate has rebounded to nearly $25,000 in the last several weeks, and some bulk carriers have left Singapore. But ship owners say this recovery may be short-lived because it mostly reflects a rush by Chinese steel makers to import iron ore before a possible price increase next month.

Container shipping remains deeply depressed. And more empty tankers are showing up off Singapore.

Investment trusts have poured billions of dollars over the last five years into buying ships and leasing them for a year at a time to shipping lines. As the leases expire and many of these vessels are returned, losses will be heavy at these trusts and the mainly European banks that lent to them, said Stephen Fletcher, the commercial director for AXS Marine, a consulting firm based in Paris.

In previous shipping downturns, vessels anchored for months at a time in Norwegian fjords and other cold-weather locations. But stringent environmental regulations in practically every cold-weather country are forcing idle ships to warmer anchorages.

But that raises security concerns. Plants grow much faster on the undersides of vessels in warm water. “You end up with the hanging gardens of Babylon on the bottom and that affects your speed,” said Tim Huxley, the chief executive of Wah Kwong Maritime Transport, a shipping line based in Hong Kong.

One of the company’s freighters became so overgrown that it was barely able to outrun pirates off Somalia recently, Mr. Huxley said. The freighter escaped with 91 bullet holes in it.

Another of the company’s freighters close to Singapore was hit last December by a chemical tanker that could not make a tight enough turn in a crowded anchorage; neither vessel was seriously damaged.

Capt. M. Segar, the group director for the hub port of the Maritime and Port Authority of Singapore, said in a written reply to questions that many vessels were staying just outside the port’s limits. They do not have to pay port fees there.

Singapore has reported to the countries of registry for administrative action about 10 to 15 ships that have anchored in sea lanes in violation of international rules in the last two weeks, Captain Segar said.

Ships are anchoring at other ports around the world, too. There were 150 vessels in and around the Straits of Gibraltar on Monday, and 300 around Rotterdam, the Netherlands, according to the AIS Live tracking service.

But Singapore, close to Asian markets, has attracted far more.

The Japanese giant also warned that it would remain deep in the red in the current financial year that started April 1 and ends March 31, 2010.

Toyota’s reversal of fortunes has been quick and a sign of just how bitter the recession has been, coming after the worst credit crunch since the Depression.

The size of Toyota’s projected net loss this year, at around $US8.5 billion ($US5.5 billion net), surprised the markets, as did the forecast of a 20% slide in revenues as car sales will be an estimated 1 million units lower over the year..

Its 437 billion yen loss ($US4.5 billion) for the full year to March – the first for the company has had since after the second world war – was also larger than expected. Toyota had warned of a 350 billion yen deficit.

The company burned through $US6.9 billion in the fourth quarter of the year to leave a $US4.5 billion full-year loss.

Car sales in the US fell 34% and in Japan, by 23% in the same month. Toyota’s own sales halved in the March quarter and it has slashed hours, shifts and working weeks across its vast empire to try and get rid of unsold stocks.

The Japanese maker’s global sales fell 15% to 7.57 million vehicles last year and will fall again to 6.5 million in the year to next March.

Company president Katsuaki Watanabe blamed the weak performance on a slump in vehicle sales, particularly in the US and Europe, as well as a stronger yen and higher raw material costs.

It is the first time that Toyota has finished a year in the red since it started publishing results in 1941.

On Friday, the unemployment rate reached 8.9 percent as the economy shed 611,000 private sector jobs in April. The unemployment rate and the rate of credit card charge-offs, or uncollectible balances, are traditionally aligned because consumers who lose their jobs are more likely to miss payments.

Unlike in prior recessions, cardholders who recently lost their jobs are unlikely to be able to extract equity from their homes or draw down retirement accounts to help pay off their debts. That means borrowers who fall behind on their bills are more likely to default, leading to higher losses.

After writing off about $45 billion in bad debts during 2008, credit card lenders are bracing for the worst year in the industry’s history. Not only are losses spiraling, but also lawmakers are on the verge of passing a set of tough new consumer protections that could have a devastating effect on profits. This week, the Senate is expected to take up the Credit Cardholders Bill of Rights after the measure passed in the House with a strong bipartisan vote of 357 to 70.

Over the weekend, President Obama pressed lawmakers to approve the new rules, which would curb the ability of card issuers to raise interest rates retroactively on consumers and would require them to reduce hidden fees and penalties. He hopes to sign the legislation by Memorial Day.

The bank stress test results, released Thursday, suggested that the nation’s 19 biggest banks could expect nearly $82.4 billion in credit card losses by the end of 2010 under what federal regulators called a “worst case” economic situation.

But if unemployment breaches 10 percent, as many economists predict, the rate of uncollectible balances at some banks could far exceed that level. At American Express and Capital One Financial, around 20 percent of the credit card balances are expected to go bad over this year and next, according to stress test results. At Bank of America, Citigroup and JPMorgan Chase, about 23 percent of card loans are expected to sour.

Experts predict that the rate of credit-card losses could eventually surpass the jobless rate because of the compounding effects of the housing crisis and lackluster consumer confidence. Shortly after the technology bubble burst in 2001, credit card loss rates peaked at 7.9 percent.

Even the government’s grim projections may vastly understate the size of the banks’ credit card troubles. According to estimates by Oliver Wyman, a management consulting firm, card losses at the nation’s biggest banks could reach $141.5 billion by 2010 if the regulators’ loss rate was applied to their entire credit card business. It could top $186 billion for the entire credit card industry.

American Express, Bank of America and Capital One Financial showed first-quarter loss rates that hovered around 8.5 percent, roughly tracking the unemployment rate. All three said they expected higher losses in the coming months. Even Chase Card Services, which charged off just 7.7 percent of its card loans in the first quarter, expects its loss levels to surpass unemployment by the end of the year.

For the banks, the economics of the credit card business are increasingly troubling. As the recession has dragged on, cardholders have sharply reduced spending. New customers with strong credit histories are increasingly hard to find.

A prominent banking analyst expects credit card lenders to cut the lines of credit they extend to borrowers by a total of $2.7 trillion through 2010. That is equivalent to a 57 percent reduction in the credit they made available two years ago at the height of the boom.

Key points from Mr. Hall’s statement:

• Widespread job losses continued throughout the private sector in April.
• Private sector employment fell by a total of 611,000
• The total number of unemployed persons in April increased by 563,000 to 13.7 million
• The U.S. national unemployment rate has increased to 8.9 percent in April, an increase of four-tenths of a percent over the rate at the end of March
• Over the month, the number of long-term unemployed continued to grow, rising by 498,000 to 3.7 million. The long-term jobless represented 27.2 percent of all unemployed persons in April, the highest proportion on record
• Since the start of the recession in December 2007, the number of unemployed has risen by 6.2 million, pushing the jobless rate up by 4 percentage points.
• Federal government employment rose by 66,000, mainly due to hiring of temporary workers in preparation for Census 2010.
• Manufacturing employment fell by 149,000 over the month. The manufacturing sector has shed 1.6 million jobs since the recession began, representing more than a quarter of the decline in total nonfarm jobs
• Construction employment decreased by 110,000 in April. Job losses have averaged 120,000 per month in the last 6 months, compared with 46,000 per month from December 2007 to October 2008
• Mining employment fell by 10,000 in April. From the start of the recession through September 2008, this industry had continued to add jobs, mainly those related to oil and gas production. Since September, mining employment has declined by 44,000.
• Professional and business services employment dropped by 122,000 jobs in April
• The health care industry added 17,000 jobs over the month, in line with its average monthly gain since January. In 2008, the average gain was 30,000 jobs per month.
• From March 2008 to March 2009, the Consumer Price Index for Urban Wage Earners and Clerical Workers declined by 1.0 percent

.

We saw Sun stumble to a 20 percent fall in quarterly revenue immediately prior to permanently disappearing into the Oracle event horizon.

We saw SAP zapped by a 33 percent crash in software revenue, coupled with an emphatic “nein” from the German software giant to a request to forecast sales for the rest of 2009.

We saw IBM’s quarterly revenue drop by 11 percent at the same time as its Board raised its dividend by 10 percent and authorized an additional $3 billion worth of share buybacks.

We saw Oracle enter the hardware business at a time when most incumbents wished they could quit it.

Oracle’s acquisition of Sun does appear to have a strategic upside in giving it control over Java, probably much to the chagrin of IBM and SAP, since both have built key business offerings around Java. Oracle also gained the ability to kill off MySQL, Sun’s open source database challenger to Oracle’s own database business.

An eventful month indeed.

Dennis Howlett recently noted a price-cutting trend In the SaaS world in his AccMan post “More about pricing: open source and commodity services”.     

As we commented in a response to Dennis’ post, the underlying dynamics of the free enterprise system haven’t changed – the speed and scope of market changes are visibly accelerating because of the conjunction of a major step-change in technological capabilities with the deepest and most widespread recession since the Great Depression.

That’s a theme we are continually harping upon so it was very satisfying to read a post by Michael Hugos entitled “Cloud Computing and the Fist of Innovation”.  

Michael believes that economics is once again driving a big change in the way companies use and pay for computing and application system resources. We recommend reading the full post, but here’s an extract drawing a historical analogy between 1910 and 2010:

“My hometown of Chicago is the birthplace of the modern steel frame skyscraper and when those first skyscrapers were built around the turn of the last century they had big electric power generators installed in their basements to provide light and power for the people who worked in those buildings. Then during the 1910s owners of those buildings started shifting away from their internal electric generators and relying instead on the public power grid provided by electric utility companies.

Imagine the debate that happened between those who thought they would be better off and more secure by keeping the power generation function in-house and those who thought it would be more cost effective to shift that function to outside vendors. I imagine it was probably the finance guys (those heartless penny pinching sons-a-guns) who kept pointing out that the electric utilities were able to deliver electricity at lower and lower costs per kilowatt hour as compared to the in-house guys. I imagine the in-house power guys countered with the argument that relying on outside utilities was a performance risk and a security risk. How do we know if outside utilities will deliver reliable power, and what if someone cuts the power lines to our building?

But alas, money talks, and by the late 1910s the power utilities were the clear winners of this debate. So here we go again. As we head into the 2010s the arguments and concerns are in many cases so similar to the electric power debate of a hundred years ago that all we have to do is substitute computing power for electrical power and the rest is pretty much the same. And it’s clear which side is going to win (hint – they’re the heartless penny pinching sons-a-guns).”   

We predicted an acceleration of mergers and acquisitions as the major I.T. players scramble to maintain market share and revenue in a shrinking (and probably deflationary) market.

Our post was barely published when Oracle announced its acquisition of Sun Microsystems for $7.4 billion.

Sun’s acquisition was no surprise in itself. Sun has never fully recovered from the dot-com crash and has openly been searching for a buyer for some time.  Sun was already in the process of laying off 6,000 employees – between 15% and 18% of its workforce.  Apart from IBM, which had offered to buy Sun in March, other potential suitors included Cisco and Hewlett-Packard.  

Strangely enough, Oracle, a company that makes most of its money from databases and business software, was not generally perceived to be a contender for Sun, albeit that Sun’s Solaris operating system is the leading platform for the Oracle database, and Sun’s Java language and software is a core element of Oracle’s Fusion Middleware.  

An IBM-Sun deal looked likely to close only two weeks earlier, until IBM reportedly walked away from the negotiating table over unwillingness to pay more than $7.0 billion.

Big Blue has made some big blues in its time but letting Sun fall through its fingers into Larry Ellison’s hands over a measly 5% – 6% pricing differential may well yet prove to be among the biggest.  

Overnight Oracle has become a major player in server and storage hardware. Oracle now has the footing to use the extended recession to get the better of both IBM (servers, storage but no business application software) and SAP (application software but no servers or storage).  

On the same day as the Oracle-Sun announcement, IBM announced its first quarter sales were down 11%  to $21.7 billion, with virtually no profit contributions whatsoever from hardware products. According to IBM’s CFO Mark Loughridge, “Effectively, all our pre-tax profit came from software, services and financing. IBM continues to focus on higher margin software products and services in such areas as business analytics, cloud computing and what IBM is calling its “Smarter Planet” infrastructure initiative.”

And what about Sun’s customers, developers, partners and employees?  Despite Sun’s CEO hailing the merger as “a fantastic day” for all the aforementioned stakeholders, as many as 10,000 people could lose their jobs because of the Oracle acquisition, according to Wall Street analyst Toni Sacconaghi of Sanford C. Bernstein & Co.

And what about Java? According to Larry Ellison, Java “is the single most important software asset we have ever acquired.”  How long before Sun’s commitment to Java as an open standard is Oraculized into Draculava?  

Now, to provide a global frame of reference for the upheavals taking place in the technology sector, let’s take a brief look at the recent prognostications of the International Monetary Fund, published in April 2009 under the title “World Economic Outlook – Crisis and Recovery.”  You can download a coffee-table edition (174 pages) here. 

Some key points from the IMF report for those without a coffee table and/or a desire to reduce deforestation:

• The current recession is by far the deepest post-World War II recession

• The downturn is truly global – output per capita is projected to decline in countries representing three-quarters of the global economy

• Growth has decelerated sharply

• Recovery will be sluggish relative to past recoveries, consistent with evidence that recoveries after financial crises are significantly slower than other recoveries

• The current outlook is exceptionally uncertain, with risks weighed to the downside

• In a highly uncertain context, fiscal and monetary policies may fail to gain traction

• Financial leverage will need to be reduced, implying lower credit growth and scarcer financing than in recent years, especially in emerging and developing economies

• Industrial production and merchandise trade plummeted in Q4 08 and continued to fall rapidly in Q1 09

• Employment continues to drop fast, particularly in the U.S.

• Global GDP contracted by an alarming 6¼ percent in Q4 08, a swing from 4% growth a year earlier

• Gross global capital flows contracted sharply in Q4 08. In net terms, flows have favored countries with the most liquid and safe government securities markets. Net private flows to emerging and developing economies have collapsed

• The financial hole has become even deeper, with total expected write-downs on global exposures estimated at $4 trillion, of which two-thirds will fall on banks, with the remainder distributed among insurance companies, pension funds, hedge funds, and other intermediaries

• So far, banks have recognized less than one-third of estimated losses, and substantial amounts of new capital are needed

• Insurance company and pension fund balance sheets have been badly damaged as assets have declined in value

• The synchronized nature of the global downturn tends to weigh against prospects for a speedy turnaround.  Historically, recoveries from synchronized recessions are weak

• The Euro area will experience a deeper decline in activity than the U.S. as the sharp contraction in export sectors increasingly curtails domestic demand

• In Japan, the downturn is exceptionally severe

• As activity contracts across the globe, the threat of rising corporate and household defaults will imply still-higher risk spreads, further falls in asset prices, and greater losses across financial balance sheets

• Additional stress in the financial sector will drive greater deleveraging and asset sales, tightening of access to credit, greater uncertainty, higher savings rates, and even more severe and prolonged recessions

• Bank credit expansion in the major advanced economies will remain sluggish through the middle of the next decade

• With investment constrained, a key issue is whether countries will be able to compensate with improved investment efficiency (or faster growth of total factor productivity) in order to sustain potential growth rates

• The current crisis in advanced economies is unique in its depth, breadth, and impact on all segments of advanced economy financial systems.

So what does all that mean?   Well, for a start, it means a quick turnaround is NOT  in sight. The takeaway is that, at the most positive, and provided policy responses are rapid, wide-ranging and, where necessary, unorthodox, recovery will be sluggish.

It will also be expensive to taxpayers, meaning those still fortunate enough to have taxable income and assets.

The aggressive use of discretionary fiscal policy raises concern about the sustainability of public finances. There is evidence (Perotti – 1999) that a fiscal stimulus reduces private consumption in periods during which the level of government debt is particularly high. The degree of public indebtedness reduces the effectiveness of fiscal policy.

According to the IMF’s report, the impact of fiscal policy on the strength of recovery is related to the debt-to-GDP ratio. The impact becomes negative (and hence slows recovery) for countries with debt levels that exceed about 60% of GDP.

The current global crisis is clearly now the most severe since the Great Depression.  In both the Great Depression and the current crisis, rapid credit expansion and financial innovation led to high leverage and vulnerability to adverse shocks.

However, while the credit boom in the 1920s was largely confined to the U.S., the credit boom from 2004-2007 was global, with increased leverage and risk-taking in both advanced and emerging economies.

Moreover, levels of economic and financial integration and inter-dependency are much higher than during the interwar period.

A fine line must be trod by governments to balance national economic interests against the risk of worsening the problem by protectionist trading, exchange rate and capital flow policies. What chance is there of that happening?

Policy is made (or at least, adopted and implemented) by politicians answerable to their constituencies, not to some greater global authority. So pragmatism tells us that recovery from the current global recession will be a long and tedious process, with many missteps along the way.

The boom times, fuelled by seemingly limitless credit, are over for good.  They will not return in our lifetime.

Smart governments, smart companies and smart people must use the present recession to re-focus on innovation, education and preparation for a new post-crisis era in which such attributes will stimulate natural, organic, bottom-up economic growth to create real employment (not public service jobs) and generate wealth.

Enlightened fiscal and monetary measures by governments are undoubtedly necessary, but they must provide a level playing field environment within which entrepreneurs and small and medium business (by a wide margin the generators of most employment opportunities) can rapidly and flexibly exploit opportunities in a new post-crisis world economic order. 

Otherwise, we may all end up employed by the government, and we all know (except perhaps North Korea) that communism doesn’t work.          

We pointed out in that post that while we fervently believe a revolutionary technological step-change is inevitable, the worsening condition of the larger economic environment would drag out the process beyond the capacity of many SaaS companies to balance their burn rate with revenues and profits.

The latest crop of economic statistics have caused us to increase our estimate of the number of SaaS companies that go out of business as a direct result of the recession. This time we are not going to limit the forecast period to twelve months, since nobody appears to believe that economic recovery will happen that fast. 

Here’s our revised take then: 90% of SaaS companies will not exist in their present form by the end of the recession – and that change will extend to the majority of major players in the I.T. sector.  

Consolidation by way of mergers and acquisitions will accelerate as the major players scramble to maintain market share and revenue in a shrinking and probably deflationary market. The first round (and in some cases, the second round) of redundancies and cost-cutting has already taken place in the majors, but sales of new business have continued to shrink in lock-step with the deteriorating economy.  

Forrester Research has cut its projections for 2009 following bleak fourth and first quarters (see full report).  According to Forrester, companies large and small have been shut out of credit markets, and even those that still have access to bank loans, markets for commercial paper, or corporate bonds often have had to pay much higher interest rates. Businesses have responded by going into a cash-hoarding mode, with big and dramatic cutbacks in all forms of capital investment. Since many IT goods are in the capital budget, IT markets have taken a disproportionate share of the capital investment collapse.

How long is the recession going to last?  One year, three years, seven years, or ten years?  The estimate depends on which economist you read. Very few of them think that recovery will occur in one to two years.  Three to seven years seem to be the majority view (it took seven years to recover from the 1981-82 recession). A few pundits take the view that, short of a war (they mean in addition to the two we already have), it could take as long as ten years before U.S. production returns to 2007 levels.

Sixteen months into this recession, the economy is operating at 7 percent below its potential capacity, the Congressional Budget Office reported last month. If that were to continue, today’s $14 trillion economy would be a $13 trillion economy by this time next year.

Labor is contributing hugely to the shortfall. More than 24 million men and women, or 15.6 percent of the labor force, are either hunting for work or working fewer hours than they would like to work, or are too discouraged to seek work, although they would take jobs if offered them, the Bureau of Labor Statistics reports.

The ranks of this “underutilized” group — the bureau’s label — are up by 10 million since early last year. Generating work for so many people would take several years, even if the nation’s employers stopped shedding more than 600,000 jobs a month, as they have done since December, and began hiring robustly.

“We have rarely been in this deep a hole,” said Nigel Gault, chief domestic economist for IHS Global Insight.

His concern is that nearly every nation — not just the United States — is suffering from idle capacity as the recession that started in America grips Europe and Asia. Struggling for sales in a marketplace swamped with goods and services, companies are cutting prices and shutting down operations, trying to keep supply in line with dwindling demand.

One thing that they all agree upon is that when recovery starts, it will be sluggish. It takes time to bring idled capacity – workers, factories, retail outlets, transportation capacity, bank lending, and not least of all, damaged confidence, back on-stream enough to allow the economy to operate at full throttle. 

“Excess capacity, once entrenched, perpetuates itself, and that is what is happening now,” said James Crotty, an economist at the University of Massachusetts, Amherst. “Companies cannot hire workers to make more goods and provide more services until their sales go up. But people can’t buy goods and services until they are hired — so the excess capacity just sits there.”

Signs of a protracted recession are everywhere. Professional service providers are booking fewer hours. Retail space goes begging. Tourism is down. So is cellphone use, airline bookings, freight traffic and household borrowing, which is less than half what it was on the eve of the recession, the Federal Reserve reports.

With orders dwindling, U.S. manufacturers are using less than 68 percent of the nation’s factory capacity, the lowest level since records were first kept in 1948.

Recovery from the current recession could be very sluggish. New occupants have to be found for empty stores. Factory owners who are hesitant to ramp up production will wait until they are sure of demand. Hiring the right people for an operation will take time. And imports, entering the country in ever greater quantities, will slow any expansion by siphoning sales from domestic producers.

On the subject of U.S. imports, China’s 2009 exports may shrink by as much as 10 per cent, a researcher said.

Exports fell for a fifth month in March, adding urgency to government efforts to stimulate domestic demand to revive growth in the world’s third-biggest economy. Overseas sales declined 17.1 per cent to $90.29 billion from a year earlier, the customs bureau said yesterday. 

“We should be thankful if only 2009 exports can show zero growth, or maintain at the same rate as 2008,” said China’s central policy deputy research director Zheng Xinli, at a financial forum in Beijing.

“My concern, and my own forecast, is that exports may decline by 5 per cent or up to 10 per cent this year.” 

Collapsing world trade and China’s slowest economic expansion in seven years have cost the jobs of millions of factory workers and prompted Premier Wen Jiabao to roll out a 4 trillion yuan stimulus package. To spur consumption, China is subsidising rural purchases of televisions and refrigerators and plans a 29 per cent increase in welfare spending this year.

The Chinese government needs to keep the economy expanding at least 8 per cent every year to generate enough jobs to feed the estimated 20 million people who enter the labour force annually.

“China’s main economic goal this year should be to ensure growth and create jobs,” said Jiang Zhenghua, a former deputy head of the Chinese legislature, at the same forum.

Returning to the global and U.S. scenes, if there is an upside for the recession, it is the absence of inflationary pressure. With so much excess capacity rattling around, shortages do not develop that would push up prices. Indeed, interest rates are kept low to encourage more borrowing and spending. Neither is happening. Instead, demand continues to shrink and idle capacity to build up.

The countries and companies and that will emerge from the recession ready and willing to maximize their share of the recovering global pie are those that recognize NOW that the recession will be long and arduous. They also understand that technological innovation (such as Cloud Computing, SaaS, PaaS and virtualization) is both the key to survival during the recession AND the turbocharger for a drag-racing recovery start. Finally, they understand that technological innovation inevitably means major changes to, or even discarding, traditional models.

The countries and companies that DON’T get that are going to be left behind in a cloud of other people’s dust when the recovery finally fires up.