The Information Technology sector

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INFORMATION TECHNOLOGY SECTOR

OVERVIEW

As of 31 January 2004, the Information Technology sector comprised 18.54 percent of the S&P 500. The sector in our portfolio is comparatively underweighted, then, accounting for only 17.1 percent.

This particular sector is divided into 3 sectors: Software and Services, Technology and Hardware Equipment, and Semiconductors and Semiconductor Equipment. The three largest companies in the Software and Services Industry are Microsoft ($298.3 billion market cap), Oracle ($72.5 billion), and SAP AG ($51.7 billion). These are by far the largest companies within this industry, since the next largest by market cap is only $15.2 billion. The Technology and Hardware Equipment sector is similarly top heavy with International Business Machines ($167.4 billion) being the largest. In addition, Cisco Systems, Inc. ($159.4 billion), Nokia Corporation ($104.5 billion), and Dell Corp. ($87.1 billion) are major companies in this industry. The Semiconductors and Semiconductor Equipment industry is led by Intel ($196 billion) and followed by several companies bunched together in a range from approximately $20 billion to $50 billion in market cap. Among these leaders are Texas Instruments ($53 billion) and Taiwan Semiconductor Manufacturing (42.1 billion).  Because of the great potential in each of these industries, we will further examine each of them in our proceeding analyses.

BUSINESS ANALYSES

The sector as a whole moves in a cyclical pattern, with some inelastic industries being the exception. Generally, when the economy is doing well households and businesses are more likely to invest in new technology. However, some components of this sector represent industries that are essential to society, such as communication.

SOFTWARE BUSINESS ANALYSIS

The Software and Services industry is currently somewhere between middle growth and nearing maturity stages of the life cycle.  It would not be fair to place the industry into either one of these classifications, since the sub-industries (Software & Internet Services) are for the most part not in the same phase of the life cycle.

        The industry would currently be classified in the High Growth phase of the business cycle.  The industry has already seen rapid expansion through the late 1990’s and now there are becoming fewer players within the industry.  This is happening mostly through consolidation.  The Information Technology sector as a whole does moderately well in bad economic periods, simply because companies still increase efficiency with upgrades, and attempt to make up for the lack of manpower.

  Software has been around for years, and over the last 5 years we have not seen any vast improvements in general software.  The one area that could explode in the near future is the development of web based application software.  This would possibly move the computing power from the desktop to the server.  Another area of growth will be software designed to support the wireless communication between a variety of wireless devices.

With the current industry consolidation we are seeing several anti-trust cases against software companies. Currently the European Union (EU) has filed against the Oracle (ORCL)– PeopleSoft (PSFT) merger, as well as RealNetworks (RNWK) case against Microsoft Corp. (MSFT) claiming that Microsoft has made competition too difficult for their media player software to compete. (Microsoft Responds to Real Networks Suit)

Today’s society regularly uses the Internet and email for simple communications across town and throughout the world.  The computer is a household appliance that is growing in popularity everyday.  Another social factor is that both business and retail software upgrade sales have been lagging, since many of the recent upgrades are not extremely superior to their predecessors.

 As the average age of the world increases, there is a greater demand for healthcare services.  Within the IT sector there is increasing demand to create information systems (IS) that can handle patient data at either your practitioners office and the hospital.  These firms are in need of firm specific software (e.g. patient databases) to facilitate their needs.  There is a new technology that will allow patients to carry a credit card sized card that contains all of their medical vitals.  From this a doctor will be able to swipe the card and view a patient’s accurate medical history in seconds.

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Currently there is large open source software growth in Asia.  IDC Enterprise Server Tracker is predicting that Linux based servers will grow 31 - 40% every year through 2007.  E*Trade Japan is the first financial services company to use Linux Operating System (OS) to support their online securities trading system. (Open Source Gaining Traction in Asia) Also, the French government has announced a plan to move a significant number of the desktop PC’s to a Linux OS by 2007 (French Officials Eye Open-Source Apps).  In May of 2003 the local government of Munich, Germany announced that they are going to ...

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