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Will Mortgage Losses Impact IT Budgets?

Will Wall Street losses from the subprime mortgage mess lead to IT budget cuts for financial firms?

Wall Street financial institutions are among the most important consumers of data center services, spending hundreds of millions annually on corporate data centers, storage and low-latency trading operations. But in recent weeks there has been a steady drumbeat of large losses from the financial sector, where writedowns from subprime mortgage losses topped $40 billion in the third quarter.

Will these losses lead Wall Street firms to tighten their belts? And what might that mean for IT spending in the financial sector. Wall Street & Technology has just released a comprehensive IT budget survey showing that 42 percent of sell-side firms and 35 percent of buy-side institutions anticipate increasing IT budgets from 11 percent to 30 percent in 2008. But that's not the entire story:

In full disclosure, the survey was fielded in late September and early October - before Merrill and Citi announced their record losses and before analysts began warning of a possible recession. Recently, Misys, a provider of core banking solutions; Tibco, a provider of business integration software; and Cisco all stated that orders from financial firms in the current quarter are drastically lower. As a result, UBS downgraded Misys on speculation that banks are reviewing IT budgets for 2008.

If Wall Street cuts back its investment in IT and/or construction projects, it could have a significant impact on the data center market. What do data center executives think about the implications of the recent losses from the subprime mess? We heard from several this week.

On Tuesday, securities analysts pressed executives of Switch and Data about the possible impacts of Wall Street budget shrinkage from the subprime mess. "We have not seen any negative impact on demand from the financial sector at all," said Switch and Data CEO Keith Olsen.

Fewer Greenfield Projects?
Digital Realty's Chris Crosby said tighter budgets could actually benefit the incumbent data center builders. Crosby said demand from financial firms will continue to remain strong, but financial considerations may lead some Wall Street firms to reconsider the economics of data center construction. "Maybe some of the banks that wanted to build their own data center may want an outside data center instead," said Crosby.

The move towards tighter credit could also affect the competitive dynamic in the data center market, where large speculative projects have been announced in several markets, and real estate developers are planning build-to-suit data center campuses.

"There are a lot of folks who want to get into the data center business and then wait for that magic client to arrive," Crosby said. "It's a lot harder to build a new data center when you can't get a construction loan."