Circana: Channel Outlook For 2024, 2025

Jennifer Follett talks with Circana’s Mike Crosby about the impact the economy, AI and other factors will have on channel sales this year and beyond.

[Video Transcript]

Jennifer Follett, Executive Editor, CRN: This is Jennifer Follett with CRN, and I'm here with Mike Crosby of Circana. Mike, thanks so much for joining me.

Mike Crosby, Executive Director, Circana: You're welcome. Great seeing you, Jen. Thanks for having me.

Follett: You too. We've had a few conversations across the year. Now we're about ready to wind up. We’re just about to the end of 2023 here, heading into 2024. What's the outlook right now for how we're going to wind up this year?

Crosby: I think if there's good news here, we're seeing that we're closer to the end of a lot of the economic challenges that we faced in the beginning of the year, and I think there's a lot more predictability that's coming out of it. So this year we should finish $63 billion roughly, that total number. And we're still soft. Right now, we're showing we're still down between 5 percent and 6 percent, but it's really aided quite a bit by software and cloud that has really propped up the performance. So we saw double-digit increases that were going on in cloud. We still saw a solid 9 percent, 10 percent in software that help mitigate some of the impact of really the down pressure that we saw, mostly around devices, in 2023.

So net-net, I guess my point is, yeah, we're still negative. We're not comping year over year, but we are in better shape than we were. I think the outlook looks decent as we turn the corner and are heading into 2024.

Follett: Were there any surprises in the way 2023 has turned out or did we pretty much hit what you thought we’d hit?

Crosby: You know, I think the hope was that we were still going to preserve a little bit more of the device volumes than really what we saw. We did see, interestingly, that printers performed reasonably well. Communications continue to do well in some of those areas. So from the standpoint of a couple of different hardware categories, specifically. As I said, the big pressure downward was really on IT hardware, because everything else, as I said, cloud and software, really continued to perform very, very well. It's a nice up-and-to-the-right trajectory, which we also see that carrying forward into 2024, 2025 and even into 2026. So all of that, if we can get this hardware kind of pause a little bit underway. And I think as economic conditions continue to get better, you're going to start to see investment by businesses. Mostly we expect midsize and enterprise really probably to lead. And that's where we’re anticipating a little bit as we as we head into 2024.

We're also coming up on what we talked last time about: So many of the devices that were purchased early-stage pandemic in 2020 and 2021 are now nearing their end of life. So we're reaching right now the end of that lifecycle. And with economic conditions improving, that's really the expectation we think is going to really help be a catalyst for growth in hardware.

Follett: Given that so many businesses took a hit in the midst of the pandemic, do you think that window of refresh, that end of life, so to speak, is going to be extended because people aren't really going to want to make those investments quite so soon?

Crosby: For some. I think the answer, like most things, is somewhere in the middle. I think you're going to see larger companies tend to be a little bit more leading on that expansion. That's why I think small and even some mid-sized may pause a little, may extend the life of that device maybe one more year. That's why we're actually anticipating the algorithm that we drove on the forecast really shows ’24 improving. But really the acceleration comes in 2025. So you're going to see kind of a bell curve, as we believe. But I think ’24 is that initial phase. And as I said, it's so much tied to the economic conditions on where we are today. Again, inflation still not where we need it to be, but we're trending on the right trajectory. The goal for the Fed is to land at around 2 percent. And even though it's not going to be at 2 percent by June of ’24, there's a lot of consensus out there that suggests we should start to see some interest rate cuts, and that's going to really fuel investment by businesses. Again, they're looking for cost of capital improvements, and that's where you saw a lot of pause on spend based on the fact let's just buy what we have to have until ultimately economic conditions improve and then we'll look to do that.

So I think you're right, it's going to be more gradual. And again, the way that we're looking at it in ’24 and the way the forecast supports it is that first half is still going to be modest improvements. You're still going to be seeing very similar conditions as kind of what you're seeing now. But as we get to that second half, and if that reduction in interest rates is that starting of the catalyst, look for the second half to improve and then again look for ’25 and ’26 to climb up even more aggressively because then we're really going to be in that sweet spot.

You also have a lot of convergence of a couple of different things that are going on. One is, as I mentioned, economic conditions improve and businesses begin to invest. You're at the end of time of that life cycle, but you also have Windows 10 sunsetting October of ’25, and a lot of larger companies, mid-sized and enterprise, typically need a little bit longer runway just to make sure there's no challenges or anything and make sure the installation is smooth and accurate and available and operating the way it needs to. They'll take a little bit more kind of a planful view of that and start a little bit sooner. So you've got all of those things kind of converging the same time. And our model supports and suggests that we're going to see a pretty good momentum shift around devices.

Follett: So if I'm a solution provider and I really want to start 2024 out strong, where should I be putting my focus?

Crosby: I think it's definitely going to be on a combination of things. As we said, the nice thing about solution providers is they're really good at so many different things, and a lot of it's going to be continue to leverage off the momentum that's already being built specifically around cloud and around software. And that needs to continue because the hybrid model, it's now where we're now seeing companies or businesses support three models: the onsite model, you're seeing the hybrid model and you're seeing the remote model. All of those now have to be supported simultaneously. So that's going to continue to fuel the investment needed in security and collaboration and all those tools, right? So partners are very, very good at coming up with collective solutions.

But here's where you're going to start to see the improvement around hardware. And this is where you're again, you're going to start to see device spend and where you see elevation of AI. I'm hearing more and more and more from OEMs and from clients specifically around the increase in AI PC. And first of all, trying to define what is that, what is the definition of an AI PC and is it just something that is AI-capable or is it something that's really going to drive heavy AI workloads? And that's some of the work that we're doing internally right now and trying to understand how should that be categorized and classified.

But with that said, because you see that investment being made and of course businesses want to find that key differentiator and how do I drive and leverage that to grow my business, you're going to see more inclination to look at what are some of the new technologies out there. And likely if they are AI PCs or rated that way, you're likely to also see higher ASPs [average selling prices].

So I think there's going to be some very interesting things coming out over the next six months, and as businesses understand further on what would be the definition of [an AI PC] and how would I utilize it and what would be the use case, and especially as you look at some of the verticals like in finance or in health care, where I am doing a lot of workload and delivery on, maybe it's new drugs in health care, or maybe it's new financial and risk models, etc., you're going to see the need for that hardware horsepower to be where it needs to be. So I think again, that's going to be a nice catalyst for growth.

Now collectively for the channel partners, they do so many things, as we said, so well, but that's that complement of all of that: hardware, software, cloud, services, and you're going to see that really converge, I think, where companies aren't necessarily going to be hiring at this point, we still believe, based on our data, suggests that we're still going to see unemployment uptick running roughly about 4 percent, even a little bit higher in ’25, which means you're going to have to do more with less, which means you're going to lean on technology even more and lean on partners even more. And so, again, I think it's a nice real opportunity to have the channel participate in those types of events, activities, purchases, different ways that they can leverage their expertise to help drive, you know, their clients’ business. So there's a lot going on. But I think the big piece circling back to our first point was really around IT hardware, and because of those influences, I think it's going to make a pretty significant difference. And again, start modestly in ’24 in the first half, we believe improve in the second half, and then ’25 and ’26 should do very, very well.

Follett: For those that do decide to move ahead with PC refresh in 2024, do you expect it to be that drive for the AI PC to be the biggest reason, or is it really maybe going to be for getting ready for Windows [11]?

Crosby: The good news about it is, is it's moving very, very quickly and it's evolving very quickly, but it's still at an early stage, and I think you're going to see big significant changes over the next 6 to 12 months on that. But I think a lot of companies are going to be looking at that end of that lifecycle where they really know their most productive period within those devices is usually that first three or four years. And so I think while there's going to be some interest in certain functions within companies, you're going to want to wait maybe and look at what those heavy workload pieces are.

I think you're not going to see people pause collectively until that, because I think it's still so early stage. I think you're going to see really about productivity and it’s about doing more with probably less people again, until we ultimately expect hiring to probably start picking up again in like 2026. So in between ’24 and ’25, you've got the staff. The staff has to be able to, again, manage the workload efficiently and effectively and scale. And part of that, every time you do that, you lean heavier on tech, and they're going to need it now. So I think it's likely to be an influence, but not materially until I think there's a little bit more clarity on even what is the definition of an AI PC.

Follett: You touched a little bit a few minutes ago on the vertical markets. Can you give us an overview of how you feel those verticals are going to shake out in 2024?

Crosby: Out of the 20 NAICS categories that we track, if you look at it, pretty focused on that, eight sectors represent about 80 percent of the overall business. And right now only two of those sectors are actually comping year over year from a growth standpoint. So one is public admin, manufacturing certainly is one. Education is doing reasonably well.

As we get into this next year though, because so much of that volume was really derived by hardware, I think you're going to likely see some additional expansion that's going to continue in government, because that's on the heels of what happened with the infrastructure package that was signed a couple of years ago. We're now seeing the implementation and the money flowing, and those projects are going to continue to evolve and grow.

In education, we're expecting a reasonable kind of a growth ramp, and you've got a significant pool of devices that were bought in 2020, and so you're looking for that refresh and likely to see that even a little migration to Windows versus Chrome. But there's going to be some of that that's likely going on. Manufacturing, yes. Health care. Yes. If you look at the last jobs report, health care just came in. And I think they continue to show strong growth in new jobs. You also saw that in public admin as well, manufacturing as well. So you're likely to see the core really continue to start to kind of reset and then start to grow and move forward and expand.

One of the areas that was so hardest hit in 2023 was the information vertical, where you have companies like Meta, you have Amazon, etc., large tech companies where we saw initial layoffs, and that's also expected to start to recover because even though technology took a very significant hit in ’23, early on, that's typically, when you get back to more of an expansion kind of an economy, [the] information [sector] usually leads with that. So I think you're looking for that growth as well. But look, for more distributed growth. I think there's real opportunity to gain some balance back again and again. I think with if we can see that that inflation is being held in check and, again, we start to see interest rates come down, you're really going to start to see, I think, you know, cost to capital availability increase and really start to show itself in in expansion to technology.

One thing I will say, though, is my belief is I think you're still going to see in ’24 small businesses are likely to still be a little bit challenged. We already know small businesses are extremely resilient. They can do so many different things. But one of the challenges we continue to face is a lack of availability relative to talent. We're seeing it still very difficult for small businesses not only to recruit but also retain good talent. They're also looking for predictability in their business. And the challenge, we still have some volatility. And so typically you see small businesses pause a little and will wait ultimately until they see more predictability. So as I said, I think when you start to see this momentum shift in this move forward, look for midsize and look for enterprise really to kind of lead that growth effort, and you'll likely see small business trail a little bit, likely in the second half, maybe towards the end of the year, where, again, I think they're feeling more comfortable, more predictable and I think ultimately they've got their arms around the talent needed to not only manage day to day, but also expand with the growth of their own business. So there's going to be probably a little bit of lag there.

Follett: When you look at the vertical markets, then, heading into ’25, do those trends stays the same or do you see some shifts there?

Crosby: A little bit of shifts on the vertical side. Yeah, we’re going to see again, government's going to continue to do well. Banking and finance is going to start to turn around, and you're going to start to see that accelerate a little bit. Manufacturing, definitely yes. We already talked about public admin education is going to do reasonably well. So I think you're going to see a little bit of an expansion and more distribution of those 20 NAICS sectors. I think you're likely to see probably between ten and 11. And then ultimately around the ones that I've named, retail trade, information, again, should also see some expansion. So look for those, I think to also, you know, contribute to this momentum shift.

But if you if you step back and look at this just kind of trajectory where we see it, 2023, again, we kind of made it to the end with marginal declines, mainly narrowed by, again, the strength of the cloud and strength of software. We're going to see a little bit of modest growth in the first half, accelerate the second half. But then, like I said, ’25, ’26 should be a pretty solid trajectory because we should have inflation in line. We've got all these drivers that are really going to be key around hardware refresh. You're going to see continued momentum on software and on cloud. And again, this really kind of unknown right now where the AI PC could be even bigger catalyst, you know, as we head forward. So I really feel like that while it's still been and continues to be challenging in a lot of different parts of the economy overall, we're closer to the end of this challenge than we are to the beginning. And I think with that and as we think see things kind of solidify, we're looking actually, I think, in pretty good shape so we can manage tightly over the first half, probably of 2024, you're going to likely see those improvements start to hit incrementally and then we'll start to see some good increased volume and momentum as we go forward.

Follett: In some cases, hardware might be seen as a nice to have, but security is a need to have. So where do you stand on the security front?

Crosby: Yeah, I mean, as I mentioned earlier with the with the models that are in place today, security is clearly paramount. And I think as you need it, you need to make sure that not only at the device level, the data level, the infrastructure level, because we're also seeing some interesting things around security even now with AI. So think about AI, not only AI PC, but think about AI even within datacenter infrastructure. So there are different ways that you can track exposure and monitoring and different things you can assess, risk. So look for AI to start to increase even in there within power, within storage, well then other areas. So I think everybody is talking about AI PC, but think about really the opportunity where you're going to see really new and innovative ways that AI is going to help address the security issue: scalability, predictability, maintenance, all the different things and aspects that go around managing that. It's going to be a big piece of this.

And, again, security is always going to be paramount because of the multiple models that are having to be supported and the expectations that go with we need to be on 24 x 7 and maximize uptime, no downtime, no risk. And so that puts a lot of pressure obviously, on the collective organization to make sure that we're tight, and that's where I think you're going to see them really invest additionally in AI as part of the security overall infrastructure to drive it forward.

Follett: We've talked a few times in our past discussions about the hybrid work environment and particularly about how more and more people are being asked to return to the office, maybe when they didn't even expect to. What's the expectation for 2024? Will more people be in the office more of the time?

Crosby: We are seeing that, and we've seen it kind of normalize now at this point where you you've seen there's like 10 percent that's dedicated remote, then you see a large chunk now that really is kind of that hybrid role, and then you've got another growing population that's in the office. So I think we've kind of we've kind of now stabilized relative to what that what that momentum is. Typically, again, we've seen larger companies really bring more people back. One of the biggest challenges they felt about, you know, hybrid or remote was that especially for younger employees, they weren't benefiting from the mentoring and other things that were going on in the environments they really wanted them to be. So I think with that, what we are seeing, though, that's interesting is we're seeing repurposing space in much different ways now. The large mass of campuses are really shifting, and you're seeing a lot of commercial real estate, if they don't own the building, you're seeing a lot of those go to higher-end environments, but they're also scaling down the size of them. So you've got hoteling and all the different aspects of what it means to have, employees cycle in and out of the offices they need to be.

One of the interesting things, though, with that we've seen is that where you've seen all of this come full circle where remote employees ended up having to work remotely because of the pandemic, they had their challenges around the current environment they had: they didn't have the right equipment. They didn't have enough displays, didn’t have the right peripherals, a microphone, a better camera, etc. So we saw all of those elevated to a certain level now, and then we have now, as employees are returning back to the office, they're finding in these hoteling or shared environments, they're not as productive as they are at home because now the environments aren't set up as they were at their most productive selves.

So now you're seeing some investment kind of expand there. So there's a little bit of equalization that's got to go on right now between where it went, “I used to be really productive at the office and I really wasn't set up correctly at home.” That pendulum swung the other way and now I had this unbelievable environment that I was super productive [at home], and now they're finding there's some challenges at the office. And so you're seeing that balance come back. So long answer, short question, yes, we're definitely seeing it stabilize, but we're seeing some of those balanced needs coming into place because, again, employers really want employees to maintain that level of productivity. And especially as we know with unemployment where it is, the expectation is there's not going to be a lot of other new hires that are going to be coming in. So employees that are here are going to really need to carry the lion's share of the load. And with that, as I mentioned earlier, that's a real lean on technology.

Follett: I've heard that anecdotally, too, you know, “Why do I want to go into the office where I don't even have a dedicated space anymore? It's not my space. I'm just kind of hanging out. I'm better set up at home.” Given that trend, though, what does that mean for spending as far as the solution provider channel might be concerned? What kinds of solutions should they be expecting to be called on for as more and more people are back in the office?

Crosby: I think you're going to see it come back a little bit more traditionally in what they had spent. So it's going to be a high priority around collaboration. You're going to see a high priority really around productivity, not only at the device level, but, again, in the ways that they can work and function in all of those environments: onsite, remote, hybrid, etc. A lot of lean on communication. I think you're actually seeing some uptick too, in things like even printers where we saw until people were coming back to the office, there just wasn't a lot of spend on those. So we're seeing that now elevate. But again, ultimately,

I think what you're going to see is this fall back in line a little bit more of a traditional spend that a provider would see. But you're still going to see heavily leaning, though, on, again, on any cloud support, certainly on software. But you're also seeing managed services come up more and more and more.

Companies are saying, “look, if I don't have the ability to hire the additional people that I'd like to hire for this, I have to augment my existing staff, my existing team, with professionals that that is what they do.” And so you're going to see, I think, partners where they have areas of specialization continue to be leaned on, because you're not really going to see employers make any significant moves on hiring, even when economic conditions get better because again, typically what happens is on an expansion, and we can't call it a recession, but we can call it a slowdown, on a slowdown typically as you see the businesses start to climb out both in revenue growth and profitability, hiring tends to lag. And so that's the expectation that we're going to have. So again, that's more leaning on partners, leaning on their expertise, leaning on technology to really be able to maximize their productivity. Ultimately, I think where you're going to start to see hiring that in ’26. So I think for ’24 and ’25, I think you're going to see a lot of a lot of opportunity for partners in the channel that really provide that collective suite of services. And I think look for that, that augmenting, again, of ways that they can help fill that gap from a skill set and from a scalability standpoint until companies ultimately are ready to hire.

I think that right now is going to lead with, again, midsize and enterprise. But I think you're also going to see that similar challenge with small business. As small business starts to invest, they're likely not to hire and they have struggle and challenge with a lot of finding dedicated talent. But they are agile, and I think they're understanding now the ability to leverage, you know, contracted expertise that can fill those gaps very nicely and, for the most part, fairly cost-effectively, that they see that as a way to maintain their agility without having to invest a bunch in new dedicated headcount where maybe I just need some flex and let's see how that goes in the interim step. And if it looks like that supports it, then maybe we can look to hire additionally. So I do, I think the opportunity while, it's been challenging certainly in 2023 for partners, I do think the channel is set up perfectly to be able to do what the channel does, because this is where, again, knowledge, expertise, capability, scalability, all those great things, this is where companies rely on that. And I think this is going to be no different.

Follett: Well, that sounds like a good note to end on.

Crosby: Yeah, listen, I'm excited because I'm excited to talk about at least what we believe is going to be good news. We knew in ’23 people kept saying, “When is this going to get better? When’s it going to get better?” The good news is it's getting better. Not quite there yet, but I think pretty quickly on the horizon, we're going to start to see some improvement that’s going to make everybody smile again.

Follett: Here’s to a happy, healthy and successful 2024!

Crosby: Yeah, sounds good.

Follett: Thanks, Mike, appreciate your time.

Crosby: You bet. Thanks, Jen. Good seeing you.