The Impact Of Tariffs On Channel Growth In 2025

CRN's Jennifer Follett and Circana's Mike Crosby discuss the outlook for 2025, focusing on growth trends in the IT hardware and software sectors, the impact of AI on the market, and the challenges posed by tariffs and supply chain issues.

Jennifer Follett, vice president of U.S. content and executive editor of CRN and Mike Crosby, executive director, Circana, discuss the outlook for 2025, focusing on growth trends in the IT hardware and software sectors, the impact of AI on the market, and the challenges posed by tariffs and supply chain issues. They emphasize the importance of communication and agility for solution providers in navigating these changes and highlight the ongoing evolution of AI PCs and their adoption in various industries.

A full transcript of their conversation is below:

Jennifer Follett, vice president of U.S. content and executive editor, CRN: This is Jennifer Follett with CRN and I'm here with Mike Crosby of Circana. Mike, thanks for joining me.

Mike Crosby executive director, Circana: Hey Jen, how are you? Great to see you.

Follett: I'm doing well, doing well, good to see you. We are going to talk about the outlook for 2025 as far as the channel's concerned. We're also going to spend a fair amount of time touching on tariffs and what they may or may not mean for the channel, for partners and for OEMs. So let's get right to it. What's 2025 shaping up to look like, Mike?

Crosby: So 2025 as we've been talking about, even ending 2024, we talked about this expected PC refresh that was going to be a significant catalyst for growth, not completely, but one of the key contributors to that. We're seeing that already beginning, starting in January. And if you look at collectively what we're looking at, we're looking at about a $67 billion, a little bit north of that, $67.4 billion, for the overall aggregate number. IT hardware is going to be about $32 billion, where we're going to see some growth and recovery. Still single digit, but most of that's going to be carried by PC specifically, by notebook and desktop. Software and services in cloud both continue to do well. Software we're anticipating between 7 [percent] and 9 percent growth. And then on cloud we also tend to see a pretty high rate of growth. We're going to run about 25 [percent] to 30 percent on an overall [basis]. So if you look at that collectively you're going to see about a 6 percent gain is the outlook for 2025. And again, what's nice is we see growth and expansion in each different industry group that we have within that. So between hardware, between software, and between cloud. Typically we would see growth maybe in software and cloud, but maybe not in hardware. But for this time, we're starting to see, again, some nice momentum building across all three areas.

Follett: And how are you expecting it to shape up as far as distribution throughout the year? Will the front end be less growth, the tail end of the year be more growth? How will it even out?

Crosby: It's fairly balanced, but we believe that there's going to be a little bit more front-loading, mainly around the IT hardware side, mainly again attributed to this expectation on PC refresh. The initiative is to have these devices refreshed before October of 2025, which is going to be the sunset date of [Microsoft] Windows 10. So we're anticipating, especially in midsize and enterprise, likely to move a little bit quicker, which we're already seeing that kind of early momentum, January and February. They're going to need a little bit more runway to, again, refresh the larger fleets of devices, where we're going to see small business likely lag a little bit.

One, small business will likely lag a little bit because they typically don't refresh at the same rate that larger businesses do, but also they have less operating flexibility. And with some of the challenges that are going on in the environment today, they may opt to push out just a little bit longer, ultimately, until we see a little bit more stability in the market. But I think it definitely is going to be front-loaded a little bit first half and more concentrated around midsize enterprise.

Follett: And we've talked about that issue for a few of our other conversations where there was still a very sizable base that hadn't moved yet to upgrade. Where is that looking now? Is there anecdotal evidence that that rate has accelerated now or is it still to come?

Crosby: You know, it has improved, but we're still seeing based on a couple of different sources that we see it anywhere between 60 [percent] and 65 percent still needs to be refreshed. They're still operating Windows 10 or older. So it's a little bit later. And so, again, we're anticipating a pretty good momentum and wave. And as I'd said earlier, if the first month and a half are any indicators of 2025, January was very strong and we're already seeing continuing momentum as we look at February through the first couple of weeks or so, so we're already seeing, again, good momentum on notebooks. We’re also seeing as good momentum on desktops as well, so it's fairly balanced when you look at the actual core PC devices.

So it's interesting. We're still seeing a little bit of lag in some of the other categories. Networking is still lagging a little bit, but we're starting to see some improvement again. And I think as you see improvement around these core devices, mainly PCs, you also tend to see some benefit around some of the other adjacent categories. So input devices, we're seeing as up right now on a year-over-year basis, mice and keyboards, webcams, etc. We're also seeing some gains on monitors and displays in some cases as some companies are refreshing devices.

It's a little bit different life cycle window of time, but we're also seeing that refresh occurring with monitors as well. So when you get that core device momentum that's going on, it also tends to, again, float all boats relative to these other adjacent categories.

Follett: When you look across the categories, where do you see the impact of AI on growth expectations.

Crosby: I mean, certainly on PCs and certainly where we're seeing momentum still building. If you look at the forecast for 2025, in our definition, and we have a much more detailed level of segmentation around AI PCs, we still see it about 40 percent or so of what that overall contribution is in the overall mix. So we're still seeing relatively early stage of adoption, but definitely seeing acceleration. And we're seeing the use cases, which as we've talked about previously, that a lot of challenges where there are very defined use cases within certain verticals, we're starting to see that broaden a little bit now. So besides financial modeling, or if it's new drug development that we would see it in health care, you're starting to see more horizontally based use cases that tend to drive general productivity and other things. So as those mature and broaden, I think you're going see that broadening of that momentum as well.

So back to my original point, we're still seeing AI still obviously is going be a critical piece of technology that's going to continue to grow and evolve. We saw it get past that innovator early adopter stage, and now we're moving into that next stage that shows that higher level of adoption, faster adoption. You're also going to see a little bit broader distribution of capability. So you're seeing some that have high, high-end TOPS scores, and you're going to see highest performance, but you're also seeing others that fall within that line that are good for a general productivity device that you'll see across the rest of the organization.

Follett: How should solution providers be feeling right now when it comes to sales of AI PCs? We haven't seen the big shiny burst yet. That's still maybe to come. I do hear anecdotally maybe some folks are feeling a little disappointed that it hasn't happened quickly, or as quickly, as they had hoped. What should the outlook be from the solution provider perspective? They just need a little more patience?

Crosby: And I think part of that is indicative of where we saw so much hype and then when AI PCs entered the market, there was not a lot of clear definition around what an AI PC was, nor were there a lot of clear defining things around what we thought that momentum and that growth and that velocity. And I come back to what we shared about before with you guys around this tech adoption curve. And it's a fairly defined bell curve of really those different phases of technology as it's adopted by the marketplace. And we looked at it that way.

And when you look at that first stage, that innovator early adopter, while these are more tech-savvy individuals, and they certainly know and embrace the technology, first to market is critical, but it's also a fairly small part of the overall [market]. So if you really look back, even with our forecast that we gave, we came within a couple of points of really where we thought the AI PC contribution would be. So we felt pretty accurate that it was still a fairly modest adoption in ’24, second half of ’24.

But 2025 is where you're going to start to see some acceleration. And again, I keep bringing this back to: “It's the use case.” It continues to be use-case driven. I think what we saw is we saw the technology skate out in front a little bit where there weren't use cases to support it. It was very much driven on the spec, and it's 40 TOPS and all the other requirements to say you've got a great overall AI experience on device. But as you started to look at that a little bit, what were those specific use cases, and the other variables within adoption in B2B was really two other things. One is making sure, because a lot of this technology was still fairly new, there wasn't going to be any kind of hidden incompatibility that would be risky to businesses. So I think as we're getting more installs, there's more and more level of comfort that there's stability in these technologies that are being adopted. But also there's a skill set gap that needed to be closed as well where you had folks that were deploying some of these basic AI tools, but they didn't really understand, “How am I supposed to use it and how do I apply it to my day to day and be able to leverage and get the benefit out of it?” And I think there was still a learning curve there.

So now we get into 2025, I think a lot of that newness has kind of worn off. We've delved into this a little bit deeper. We've defined more use cases, more clarity around what are the best practices on how to use these devices. That's where I think you're going to really gain the traction and then start to see that ramp curve.

Because, again, we're still anticipating as part of this PC refresh, it's likely to peak in 2026 and then begin to normalize as we get into 2027. But you're going to continue to see the concentration of AI mix continue to get higher and higher and higher. So I think it's just going to take a little bit more time. But I think we're starting to see, again, more of a clearer picture on what that rate of adoption is and where we see it ultimately being successful.

Follett: And is it still the expectation that that conversation around the Windows update is going to be the primary driver for the AI PC conversation still, or are we starting to see those separate out?

Crosby: Well, the Windows 10 sunsetting is still obviously critical within the B2B environment. But I think beyond that, as you look at the capability of AI, I think you're seeing, again, very much early stage of what the possibilities are. So I think that's going to continue to flush its way out, and I think it's going to accelerate. Clearly the thing in front of us now, and that was the real decision, is should I opt for an AI PC or should I not? But I think as you look at the overall mix, the majority of devices that we see are still being deployed are AI-grade, depending if it's more of a base configuration or more of a premium, you're seeing AI is going to be common across all these. I think that's really going to be the table stakes config as we go forward. All will be AI, and it'll just matter then on ultimately what does the position that you do you have in the business require, what's the complexity of the job that you're doing, and that will ultimately drive what grade of device I think you'll ultimately need. But I think AI is going to be common across everything.

Follett: You mentioned earlier about the early conversations around AI PCs not really having a strong definition of what exactly that even meant. I know you guys at Circana have done some work to try to flesh out what is an AI PC and what isn't. Do you want to touch a little bit on that and the work you've done there?

Crosby: Sure, it took a decent amount of time, and we spent a lot of time meeting with OEM partners across the board to really understand all the different perspectives that ultimately align to a way that we could put a structure in place that we could also measure not only the rate of adoption but the type of AI PC and the rate of adoption for each.

So, quickly, what we did is we looked at, first cut, we looked at what would be cloud-based AI, so anything that might be a Chromebook and or a Windows device, it doesn't have an NPU, that there's no on-device capability, and ultimately that would be accessing AI just simply via the web. And there's a part of the base of units that we have that we could call this AI-accessible, but it's cloud only. There's no on-device capability.

If you talk specifically about the AI PCs that we're talking about today, it's a separate bucket, and that's what we classify now as on-device AI-capable. And we have basically three tiers that we constructed with that.

The first one would be called AI Basic, and basically that would have an NPU, but it would be less than the 40 TOPS threshold. So it has the capability and on-board, but it's less than that performance grade that's been promoted. And that would include things like Apple or would include things like Windows. If you go into the Equipped, which is the middle tier, that would be things like Copilot Plus. That would be things that would be a 40 TOPS or it also takes advantage of a high-performance GPU.

One of the things that we mentioned earlier like with Nvidia, GPUs have been around for a very long time and that's been the primary for doing a lot of the heavy AI workloads. We wanted to make sure in our definition we still also had consideration for GPU. So in the Equipped, if you have an NPU that's less than 40 TOPS, the GPU would actually qualify as an AI-Equipped in our definition. And then the last one is greater than 40 TOPS and would have a high-performance GPU, and that would be the highest end. So what this does for us, at the end of the day, we can overlay that with the POS and look at not only AI PCs as a whole collectively, but we can look at what grade of AI PC is adopting and where, because we can also look and see it by vertical. So we can see it by, if it's health care, if it's banking and finance, if it's professional and scientific, we can identify which grade ultimately is where we're seeing traction or where we're not. So there's quite a bit that went into it, and I know that's quite a bit of information, but I think it really has helped us understand the nuances.

Because back to your original question about config, when AI first came out, there was no real clear definition. If it either had an NPU or not, and that was kind of the simplest definition, but we felt like it really required us to go much deeper, and we were effectively able to do that.

Follett: So that sort far right end, the real high-end machines, what can you tell our audience about that segment and what that might look like for 2025?

Crosby: Still very small, and if you look at the overall contribution for AI Advanced it might be one or two percent and that's going to be driven again on the highest-end config, the highest-end processors, the highest-end across the board, and in fact if you look at it within the overall mix there are very few devices that meet that requirement. So part of what we wanted to do is also look and plan for the future to make sure that we had a step above anything that was in that Equipped category that then would fall in line with the Advanced. So it really gives us I think a very clear picture because, again, we also can see ASPs [average selling prices], configs, all the others by each of those different segments.

Follett: So maybe now is a good time to turn to the elephant in the room, which is the tariffs. There's been a lot of talk before the election and now since the election about what they might be, what they might look like, when are they going to take place. There's still a lot of questions. And it's making things a little difficult, I think, for obviously for your position where you're trying to forecast, for customers and solution providers trying to figure out budgets. Where are we on this thing?

Crosby: Yeah, very, very difficult, very difficult, and a lot of uncertainty to your point. And I think that's the biggest challenge because if you rewind to kind of where we were at the end of 2024, I think there was consistently looking at things like inflation was lower and was still the trajectories heading further to lower, GDP was still reasonably strong, unemployment was stable and not a lot of movement. Fast forward with the volatility of some of the different things. And again, it's a change. It's a change in trade policy. It's a change in some other aspects like tariffs, but that can create uncertainty. And I think the challenge with uncertainty is sometimes people want to, businesses want to pause. They don't want to go forward. But we also know there's significant pent-up demand right now. That's what we're still planning on for 2025.

Even with the uncertainty around tariffs, are they implemented or are they not? Are they being reduced or are not? All of those things, the core baseline opportunity is still there. We still believe it's a nice robust opportunity for growth in 2025.

Now, again, as these become more visible and as they're being launched or deployed, that can create some conflict. But one thing that we did see is across the board, all OEMs were very proactive in looking at what are some risk mitigation activities they could take on now to try and minimize and mitigate that risk as best they could. And a lot of it started with, No. 1, looking at rerouting a supply chain. So looking at things like rerouting not only from China, but also looking at things like countries like Vietnam, countries like India and spinning up additional capacity in lines in some of these tariff-free areas.

So it allowed them to then look at what are some opportunities and possibilities to maybe, again, minimize some of that impact ultimately on the tariff. There are also a lot of things that OEMs went back and did from the standpoint of trying to renegotiate with key supplier partners. Can I get a reduction in my pricing on some of these key components because I'm going to have to see that on the other side on the increase. So now how do I manage that down

a little bit, and the better that I can address that upstream the less impactful it would be maybe on the on the commercial customer where I'm not going to see this significant impact to pricing. The third thing we saw is we saw a lot of inventory staging. We saw inventory in the channel, which the channel does always extremely well, positioned itself to really provide additional help capacity additional buffer of inventory. So as incremental units were brought in especially in the top velocity SKUs, it really made the supply chain part of this much more stable, and it allowed partners then to continue to reach out with confidence to their key customers and let them know we have it, we have it available to us, and we have the ability to do that, which is also good.

And again, with that added buffer, even with the tariffs, you still give you a little bit of time where there's a lag ultimately between some of that pricing would hit the street. So there were all these kinds of risk mitigation things that I think everybody across the board did. And again, a lot of participation by the channel and ability to support that.

So I think that's how OEMs were trying to address it from a best practice, and I think the goal would be to again minimize as much as possible and making sure that we've got a good, stable supply chain.

I will add two more things on supply chain though. One of the things that we have to watch very, very closely though is availability and inventory. That as we do have the buffer inventory that's here but as these supply chains are being rerouted and changed, that can cause a lag in access to supply. And because we're going to be up against this ramp up that we're thinking still a little front-half loaded again on these PC refreshes that are going on with midsize and enterprise, that's going to put even more pressure on supply chains.

So again, it's an area that we're going to watch very, very closely. Today, supply seems to be reasonably stable, and again, we have that buffer. But beyond that first wave, it'll be interesting to see, and how do we manage that is going to be critical.

Follett: So what should a solution provider do today to help mitigate any of this, if there's anything they can do at this point

Crosby: I think it starts just with, again, communication. I think it has to be where people are aware and knowing the circumstances and giving as much information as they can as early as they can. So if you've got a key end user customer that has a deployment that's scheduled, we want to make sure that we can balance that timing and then in turn work with our channel partners above and beyond if it's distribution, if it's a large reseller of our partner, etc., managing their own supply and being able to, in some cases, pre-sell the inventory, or you can reserve the inventory and you're looking at creative ways again that you're trying to stabilize as best you can. But again that all starts with ultimately knowing as much as you can from the customer and as early as you can to be able to plan and again try and mitigate some of the disruption because I think that's going to be a lot of it, and you're going to find also this is where we had talked earlier between small businesses and larger businesses have the ability to move and adjust their supply chains where small businesses really did not.

And in some cases where there are small businesses that are buying through reseller and VAR partners, they don't have the ability. You're it, right? So I think the better that you can communicate proactively and let them know we're a good partner and we have this available for us on the other hand, they in turn then work upstream if they're sourcing through distribution or anything else to ensure, again, we've got supply, communication, pricing's locked in, and it's just more predictable.

And I think that's the point that I guess I was trying to make earlier is with the uncertainty what businesses, supplier partners, resellers and VARs, distribution, OEMs are looking for is predictability. It's something that we can build our business, plan our business on, and with a lack of that, the challenge is you get: everything is a decision made right in front of you. And the goal would be obviously to have a little bit more visibility and be able to plan a little bit more effectively. And that all starts again with just knowledge and communication of what's going on.

Follett: Right, right. What do we want partners to take away, the solution provider audience to take away, as we try to wrap up this convo, what are the key things that we really want them to take to heart?

Crosby: I think with partners and I think what they do, and again the channel is so great at this, is just being agile and being flexible. I think again making sure, as we talked about, the planning and the visibility into where they believe the demand is, working very, very closely with their additional channel partners so if it's access to supply, making sure they're communicating clearly and effectively on what they need. And in some cases, you're going to have to take a hit. You're going to have to look at maybe I bring in a little bit of stocking level inventory on my best customer or do I have additional means to tie up that supply that's not going to be disruptive? Because I think a lot of this, not only we're talking about hardware today, but there's a whole lot of other things that also get tied with the hardware. If it's on deployment, it's on imaging, it's on all the different things that go on with deploying devices remotely or to an office or an organization, there's all those additional services that are linked to that. If I can't get the hardware, so go all the rest of the services that are clearly a big profit center as well.

So I think that's it. I think the takeaway, what I would probably suggest for the channel partners specifically, would be, again, stay communicative like we talked about, look at your business overall, find ways that you can, again, increase the agility, be able to move and respond as quickly as you can.

And I think we're likely to still see some volatility in this. So I think you have to be cautious, but also you have to be willing to take some risks, I think. Because I think that's what's going to be part of this in the near term until we get out a little bit more of the predictability part of it. I think it's going to take some of that. But again, all of this starts and ends with, as I keep saying, with communication upstream and downstream and making sure everybody is very, very clear on what the requirements are and what they're looking to do for them and what partners are looking to do to help them get what they need to be able to support their end user customer.

Two other things that I wanted to mention just real quick as we look at our business again, we look at it across all the different NAICS sectors. There's 20 NAICS sectors, all the different sector verticals that we have. Some of the areas that we believe are still going to be strong and we're seeing it today, banking and finance, health care certainly, we're seeing it in health care as well. Some of the areas that we're seeing some challenge, government with some of the things that are going on now as likely to get much smaller. We're seeing some pausing on that. Even if there is budget, we're not seeing a lot of budget being committed because they don't know how real or how long-term that budget is.

Education, you're likely to see some pressure on education as well. The other areas that we're going to see is probably if tariffs ultimately are implemented, we'll likely see some downward pressure on manufacturing, warehousing and transportation, some of those traditional things that you would see with a manufacturing that's sourcing components.

That's a key part of how they build their business. you know, it's still overall, we're still seeing growth, but we're going to see some pressure, especially if tariffs go beyond the risk of tariff and ultimately be implemented, and that's likely to see some impact. And we're going to continue to monitor that very, very closely like we do and adjust accordingly.

Follett: Well, we know the channel is full of entrepreneurs who know a thing or two about risk, hopefully not totally uncharted waters for them, even though things are a little bit uncertain. But thank you, Mike, so much for joining me. I really appreciate your time, and it's great to see you.

Crosby: Great seeing you as well. Thank you for the time. I appreciate it.