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Artificial Intelligence Forecasts vs Market Reality

Artificial Intelligence (AI) and Big Data are the foundation for smart technologies and business analytics. Moreover, AI combined with human ingenuity is now viewed as the differentiator for enterprises to scale and thrive in the era of Digital Transformation.

Worldwide revenues for the AI market -- including software, hardware, and services -- are forecast to grow 19.6 percent year-over-year in 2022 to $432.8 billion, according to the latest market study by International Data Corporation (IDC).

Furthermore, the market is expected to break the $500 billion mark in 2023. However, the upside opportunities are also being hampered by numerous practical solution deployment challenges. 

Artificial Intelligence Market Development

"AI has emerged as the next major wave of innovation. AI solutions are currently focused on business process problems and range from human augmentation to process improvement to planning and forecasting, empowering superior decisioning and outcomes. Advancements in language, voice and vision technologies, and multi-modal AI solutions are revolutionizing human efficiencies," said Ritu Jyoti, group vice president at IDC.

Among the three technology categories, AI Software will see its share of spending decline slightly in 2022 as spending for AI Hardware and Services grows more quickly. This trend will continue into 2023. 

Overall, AI Services is forecast to deliver the fastest spending growth over the next five years with a compound annual growth rate (CAGR) of 22 percent while the CAGR for AI Hardware will be 20.5 percent.

In the AI Software category, AI Applications accounted for 47 percent of spending in the first half of 2021, followed by AI System Infrastructure Software with around 35 percent share.

In terms of growth, AI Platforms are expected to perform the best with a five-year CAGR of 34.6 percent. The slowest growing segment will be AI System Infrastructure Software with a five-year CAGR of 14.1 percent.

Within the AI Applications segment AI ERM is forecast to grow the fastest over the next several years relative to AI CRM and the rest of AI Applications. Among all the named software markets, AI Lifecycle Software is forecast to see the fastest growth with a five-year CAGR of 38.9 percent.

In the AI Services category, AI IT Services enjoyed 20.4 percent year-over-year growth in the first half of 2021 with worldwide spending reaching $18.4 billion. This growth is forecast to improve to 22 percent in 2022 and remain there through the end of the forecast period.

AI Business Services are not far behind in terms of growth with a five-year CAGR of 21.9 percent. By 2025, IDC expects overall AI Services spending to reach $52.6 billion.

Relative to Software and Services, the AI Hardware category grew the most in terms of market share in the first half of 2021 with a jump of 0.5 percent share. It is forecast to reach 5 percent market share in 2022 with year-over-year growth of 24.9 percent.

AI Storage saw stronger growth relative to AI Server during the first half of 2021. However, this trend will be reversed in 2022 with AI Server expected to see 26.1 percent growth compared to 19.7 percent growth for AI Storage. In terms of spending share, AI Server holds the lion's share of the category at over 80 percent.

Outlook for Artificial Intelligence Applications Growth

"Of all the spending in the various AI market segments, AI Hardware is by far the smallest," said Peter Rutten, research vice president at IDC. "What this should tell organizations is that nickel-and-diming purpose-built hardware for AI is absolutely counterproductive, especially given the fast-growing compute demand from increasing AI model sizes and complexities."

IDC analysts believe that client demand for expertise in developing production-grade AI solutions will drive IT services expansion, while the need to establish the right organization, governance, business process, and talent strategies spurs spending on business services.

That said, I'm now sensing that prior AI market hyperbole is being replaced with more realistic market growth projections. Clearly, earlier forecasts of AI growth did not acknowledge the apparent shortage of skilled talent, nor the significant deployment complexity that requires experienced IT professional services. The AI market reality has reset expectations. And, that's progress.

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