Server Costs Rise, Software Sells at High Price: Reports
The latest inflation data from the US government paints a mixed picture for IT managers: Server costs rose in July, after a month-long reprieve in the inflationary trend, while storage spending continued to decline and that professional services have stabilized.
Prices for host computers and servers rose 3.1% month-over-month in July, according to the August release of the Producer Price Index (PPI), which tracks prices paid producers of goods and services. The rise follows a 1.2% drop in the cost of servers in June, a drop that halted eight consecutive months of price increases.
Computer storage, however, fell for the second month in a row. A month-over-month decline of 0.52% in July followed a 0.42% drop in June. Prior to this June drop, storage costs had been rising steadily since August 2021, according to PPI data.
Meanwhile, professional services and consulting fees in July were flat from the previous month. Costs in this sector had increased in 2022 as service providers increased their rates to offset rising labor costs.
Technology buyers can anticipate a continuation of the current price turbulence, with a number of factors at play. “We expect prices to remain variable for the foreseeable future,” said Matthew Ball, chief analyst at Canalys, a market research company. He cited fluctuating exchange rates, COVID-19 restrictions continuing to disrupt supply chains, and suppliers clearing backlogs of products – often sold at prices set 6 months ago.
Hardware Price Increase Factors
Rising hardware prices are tied to continued shortages of chipsets. But the scarcity of components and the associated cost increases are not the only problems.
“Inflationary pressures aside, we’ve seen a multi-year trend in server prices rising due to the need for richer configurations to support more compute-intensive workloads,” Ball said.
Although list prices have increased, discounts in competitive sales scenarios may offset the increase, Ball added. He also noted the difficulty of monthly price comparisons for storage and server appliances, citing the different configurations requested by customers.
“Mission critical” software at high prices
IT managers face a double whammy in pricing as software costs also rise, but for reasons other than general economic trends. A Forrester report published in August noted that the PPI for application software has increased in recent years compared to other technology sectors. The reason? The centrality of software in digital businesses leaves vendors free to raise prices.
“Software solutions are mission critical and vital to the day-to-day operations of a modern enterprise,” Forrester’s Global Software Industry Forecast said. “Major software vendors can consistently raise prices without losing demand, resulting in high and stable margins.” Forrester cited Adobe’s rising costs for its Creative Cloud offering and Microsoft’s price increase for its Office line earlier this year as examples.
Inflation, rising interest rates and geopolitical turmoil will have “little impact” on enterprise software adoption, however, with the industry expected to grow 12% in 2022, according to Forrester.
Flat services — for now
As professional services stabilized in July, buyers shouldn’t expect prices to drop. Canalys surveyed approximately 350 channel partners, primarily in EMEA and APAC, and found that over 50% of them plan to increase prices for managed services over the next 6 months.
Factors such as automation may reduce professional services costs in some cases, but “staff-intensive services will be under pressure from wage inflation,” Ball said.