Morgan Stanley
  • Research
  • Feb 25, 2019

The Data Decade Pivots to Software

Why data warehousing, analytics and software are taking center stage as companies harness a new era of artificial intelligence, automation and machine learning.

Last year marked the early innings of “The Data Era,” a decade-long investment cycle centered on data-focused technologies like artificial intelligence, automation, the Internet of things and augmented reality.

Companies in every sector can no longer simply use technology as a tool, they have to think and act like technology companies.

As 2019 begins, the Data Era is gaining momentum, driving the first period of secular growth in enterprise IT spending since the early 2000s—but with a twist. As this new era matures, priority is shifting to software and data after strong hardware growth in 2018.

Although more chief information officers are prioritizing AI and machine learning, data warehousing and analytics now top their lists, a sign of how companies are improving their data collection, filtering and analytics tools to harness the power of metrics for better decision-making.

This trend has far-reaching market ramifications, with the potential to improve productivity growth for companies that invest in technology.

The Data Era Matures

The first phase of this era opened with the realization at the corporate level that those who don’t invest in technology will be disrupted. Companies in every sector knew that they could no longer simply use technology as a tool, they had to think and act like technology companies

Business and IT managers had to answer to C-suite executives and boards who wanted to know what the company was doing with regard to AI, the internet of things, automation, and blockchain. This led to more investment in innovation, pilot programs and proofs of concept—but without a sense of urgency to deliver immediate return on investment.

As phase two begins, companies now realize the difficulty of their task. Many don't know what kinds of data they actually need to power these technologies or—in some cases—how to access it.

Thinking in Data

To answer these questions, companies are stepping back and thinking about their data architecture. They’re trying to figure out where the data flows; how to collect it; how to store it safely in a centralized system. They’re also investigating ways to cleanse the data for accuracy and relevance, and ways to implement governance controls over access to different parts of a centralized database.

In short, they understand the need for foundational work on data. If the ultimate goal is to adopt a technology, such as AI, then they need to infuse the entire company with that technology, not just in isolated use cases or running a pilot with a silo-ed dataset.

A Shift from Hardware to Software

In the beginning of the Data Era, semiconductors and—to a lesser extent—data-center hardware companies benefited from early investment. But that trend has matured, according to the data. Cyclical tailwinds that boosted hardware spending are waning. Companies aren't feeling as optimistic about economic growth, and the benefits from U.S. tax reform and accelerated depreciation are beginning to fade. Bottom line, there just aren't as many incremental drivers of hardware spend in 2019.

Instead, data, software, and services are the key themes. Our recent CIO survey, conducted by our proprietary AlphaWise polling team, reinforced our thinking. Data analytics and warehousing have risen from being the No. 8 priority for CIOs to No. 3—a pretty loud-and-clear signal from the market. CIOs recognize that they need a holistic strategy for data warehousing and basic blocking and tackling of that data if they want to maximize the value of new technologies.

A Year of Transition

For investors, it’s important to see 2019 as an IT-investment year, but less of a "rising tide lifts all boats" scenario. Instead, investors may want to search for technology names with exposure to new workloads and higher exposure to software and services on the long side to mitigate risk of a slowdown.

Finally, we’re seeing a shift in the sectors that are increasing IT spend. Previously, large tech companies led almost all of the growth, which is now permeating more areas of the market. Investors should watch sectors that are growth-leaders in IT spend, such as healthcare, financials, and industrials

For more Morgan Stanley Research on key Tech, Media and Telecommunications themes, ask your Morgan Stanley representative or Financial Advisor. You can also visit the TMT 2019 page. Plus, more Ideas from Morgan Stanley’s thought leaders.