With the financial world in turmoil and headlines screaming panic, thus far the technology sector has ? on the surface at least ? largely avoided bring dragged down into the mire that is the credit crunch. However, as Rob Power finds, things may be about the change...

Crunch time

Staying in business, never mind a successful and profitable one, can be a tough task at the best of times. And as the wider world goes into an economic tailspin (and one that is already well underway in the UK at that), consumer confidence has been rocked to the core.

The IT industry is by no means immune to the effects of what is now a very tangible threat to the pockets of the nation and the strangling effect of this downturn is, for the foreseeable future at least, only set to tighten.

Yet to this point, the majority opinion across the industry has been one of zen-like calm, even in the face of what is clearly a huge storm a-brewing. Whether it is a case of hiding heads in the sand, or simply one of nobody really feeling the pinch just yet, large scale worrying has not, by and large, been the case.

The question is, why has this been the case for so long when all around is deteriorating at a terrifying pace? And how long can this optimism prevail? Is the perceived worryfree attitude of the industry actually a myth?

As good a place as any to start attempting to answer some of these questions is with the analysts. Keeping a watchful eye on the industry and recording both the positives and the negatives of the past few months, Canalys’s Alastair Edwards maintains that far from the rosy optimism that has been portrayed by many, the market is a long way from healthy.

"I think from a revenue point of view, the UK consumer market is not great," comments Edwards. "If you look at what has come out of the retailers in recent weeks and months, I wouldn’t argue that the UK consumer market is in good shape at all, I think the opposite is the case."

A defining factor of the last few months has been the relentless doom-mongering of the media, which has certainly not helped with the containment of panic, and has caused a massive and worrying dent in consumer confidence. "The difficulty is that up to now the big issue has been not necessarily an actual downturn, but the perception of it," confirms Edwards.

"It’s more a case in the business space that companies become more conservative and spend less. It’s the kind of issue that the more you talk about it, the more you cause a problem, but we’re now far beyond that. Consumers have less money in their pockets due to rises in mortgage and fuel costs, so I don’t think there’s any question that this will have an impact on the UK retail and UK consumer technology markets in the next few months.

"I think overall, and I don’t think I’m saying anything particularly insightful when I say this, we’re heading for a pretty tough period in the last quarter. I think Christmas is going to be very hard, but unless vendors keep the focus on low-cost machines, they’re going to be in a bit of a bloodbath, especially in retail. I think we’re going to see continued focus on these new forms of laptops, netbooks, and we’ll see more and more volumes through non-traditional channels. We’ve seen a big increase in mobile broadband uptake in the UK, which could be explained by promotions that are going on with big vendors."

Gloomy stuff maybe, but there are still some positive movements in the market to help make things feel a little better. "There are some interesting dynamics that are taking place," says Edwards. "The price of laptops is coming down – and I’m just talking about standard laptops, so set aside what’s happening in the netbook space – whilst new channels for PCs and technology in general are emerging, including ways of selling free or discounted laptops with broadband. So it affects the price expectation of the consumer.

But when average selling prices come down, then it’s not actually all about the cheapest product. The affordability of the low end PCs increases to such an extent that consumers are actually willing to pay more for a better quality machine or a higher speed, bigger hard drive, better memory or whatever.

So whereas in the last three years we’ve seen everything pushed down to the entry level notebook, consumers are now looking beyond just price. You may actually see in the mix a slight reemphasis back on higher spec machines, which have better margins and are better for retail and vendors."

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