Australia information technology report q2 2010

Executive Summary Market Overview Australia’s IT market should continue to provide opportunities in consumer, government and business sectors in 2010, following a better-than-expected p

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TECHNOLOGY REPORT Q2 2010

INCLUDES 5-YEAR FORECASTS TO 2014

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Publication date: April 2010

CONTENTS

Executive Summary 5

SWOT Analysis 8

Australia IT Sector SWOT 8

Australia Telecoms Sector SWOT 9

Australia Political SWOT 10

Australia Economic SWOT 10

Australia Business Environment SWOT 11

IT Business Environment Ratings 12

Table: Regional IT Business Environment Ratings 14

Market Overview 15

Asia Regional IT Market Overview 15

Government Authority 20

Industry Developments 25

Table: Computers For Schools Programme, Phase Two – Planned Spending By State 26

Industry Forecast Scenario 27

Table: Australia’s IT Sector (US$mn Unless Otherwise Stated) 29

Internet 30

Table: Telecoms Sector – Internet – Historical Data & Forecasts 30

Macroeconomic Forecast 32

Table: Australia – Economic Activity 34

Competitive Landscape 35

Computers 35

Software 36

IT Services 37

Internet Competitive Landscape 39

Table: Australia Dial-up And Broadband Internet Subscriptions (’000) 39

Internet Service Revenues 41

ADSL2+ 42

Naked DSL 43

WiMAX 44

Company Profiles 45

HP Australia 45

SAP (Australia) 46

Country Snapshot: Australia Demographic Data 47

Section 1: Population 47

Table: Demographic Indicators, 2005-2030 47

Table: Rural/Urban Breakdown, 2005-2012 48

Section 2: Education And Healthcare 48

Table: Education, 2002-2005 48

Table: Vital Statistics, 2005-2030 48

Section 3: Labour Market And Spending Power 49

Table: Employment Indicators, 2001-2006 49

Table: Consumer Expenditure, 2000-2012 (US$) 49

Table: Average Annual Wages, 2000-2012 50

BMI Methodology 51

How We Generate Our Industry Forecasts 51

IT Industry 51

IT Ratings – Methodology 52

Table: IT Business Environment Indicators 53

Weighting 54

Table: Weighting Of Components 54

Sources 54

Executive Summary

Market Overview

Australia’s IT market should continue to provide opportunities in consumer, government and business sectors in 2010, following a better-than-expected performance in 2009 The total size of the domestic IT

market is projected by BMI to increase from US$18.7bn in 2010 to around US$22.7bn in 2014

In 2010, there could be a boost, particularly in the second half of the year, from computer hardware

tenders delayed from 2009 The launch of Microsoft’s Windows 7 operating system also has the potential

to help trigger a new cycle of hardware upgrades Consumer spending held up relatively well in 2009, thanks to demand for notebooks, while corporate IT spending had started to recover by the end of 2009

A number of factors underpin our forecast of a 5% 2010-2014 compound annual growth rate (CAGR) for the Australian IT market Government tenders will drive considerable spending in years to come

Regulatory compliance will continue to need spending by banks and intense competition in the retail sector is spurring spending on customer relationship management (CRM) and back office systems Competition and new service platforms in the telecoms sector is a driver for that key IT spending

segment

Industry Developments

In 2010, government projects in sectors such as e-government, healthcare and education will drive

significant opportunities for IT vendors In mid-2010, the Australian government is expected to launch a standardised reporting system scheme Australia’s National E-Health Transition Authority has the goal to create a paperless environment in Australia’s health sector, including public hospitals

While most government IT programmes were relatively immune to the global slowdown, the financial downturn encouraged the government to seek greater efficiency in IT procurement There were reports in

2009 that the Australian government was considering centralising the procurement of desktop computers, with the appointment of a single supplier The Australian Information Industry Association expressed concerns about the implications for smaller companies

Federal programmes have also found an echo in state government projects in areas such as education and smart cards Queensland Transport recently unveiled plans to introduce a new driving licence using smart card technology Adult proof of age cards are also to be introduced, as are cards for licences for passenger transport and by a number of other licensing authorities

Company News

In 2009, the PC battleground continued to focus on competition for government tenders, particularly the

computers in education programme In April 2009, Lenovo succeeded in a tender to provide computers to

New South Wales schools This followed a previous big win for Lenovo in February, when it teamed up with a local partner to roll out 10,000 netbooks to Victoria public schools over a three-year period The

project supplied netbooks from both Lenovo and Acer to students in years five through to eight

In February 2010, Microsoft Australia received a boost when Qantas, one fo the largest corproate users

of Lotus Notes in Australia, announced that it had dumped the IBM email system in favour of Microsoft Outlook A long-time user of Notes, Qantas announced that it would migrate 20,000 workers to Outlook

by the end of 2010, with the project being managed by Fujitsu

IBM’s Australia subsidiary remained positive about its revenues prospects in 2009 and in December, the

company opened a new regional IT service centre in Ballarat Meanwhile SAP Australia reported a strong final quarter following deals with Newcrest Mining, National Australia Bank, and the Defence Department SAP software was also selected for a contact worth tens of millions of dollars from Origin

Energy

Computer Sales

Australian computer hardware sales are projected at US$7.8bn in 2010, and are forecast to grow at a 2010-2014 CAGR of around 5% to reach US$8.7bn by 2014 The main drivers of growth in the PC market will be government programmes, growing broadband penetration and greater affordability The fastest-growing segment is notebooks, which already accounts for more than 50% of the market by value

The main drivers of growth in the PC segment will be government programmes, growing broadband penetration and greater affordability More than 90% of Australian households now have a PC, but consumers appear willing to spend on upgrading their notebook computers and it is also becoming more popular to purchase a second household PC Small business comprises more than 99% of all Australian businesses and slightly more than 50% of business PC sales

Software

Software is expected to account for about 18% of the Australian IT market in 2010, with estimated spending of US$3.3bn As the focus moves from hardware to services and solutions, the share of the market accounted for by software is forecast to rise to 20% by 2014, with businesses seeking greater leverage from their investments Software sales are forecast to have a CAGR of around 8%, rising to US$4.5bn by 2014

Software piracy has fallen in Australia in recent years, but remains an issue in some segments of the enterprise market Over the forecast period, enterprise resource planning (ERP), CRM and other e-

business products will be increasingly popular with the small and medium-sized enterprise (SME) market,

as companies look to enhance productivity through automating essential functions

IT Services

IT services are expected to account for about 40% of the domestic IT market in 2010, with spending of US$7.6bn, up from US$7.2bn in 2009 CAGR for the segment is estimated at 6% over 2010-

2014 IT services are forecast to be one of the most dynamic sectors of the Australian IT market

In 2010, sectors such as government, telecoms, healthcare and banking should continue to supply demand for implementation, consulting and managed services Regulatory compliance will continue to need spending by banks and intense competition in the retail sector is spurring spending on CRM and back office systems

E-Readiness

A number of alternative Australian internet service providers (ISPs) are in the process of expanding the

coverage of their ADSL networks Other broadband service providers, including Unwired, are rolling out

WiMAX networks, which will help to ensure greater choice and flexibility in the type of broadband connection available Australia is above the OECD average in terms of businesses purchasing online (49% versus 33%) and selling online (27% versus 17%)

The central component of the Rudd government’s ICT strategy and overall domestic economic policy is the construction of a National Broadband Network (NBN) The programme is expected to drive economic growth and foster the creation of a digital economy The government has projected GDP gains of 1.4% after five years from the broadband project Tenders for the construction of the network were lodged in November 2008

Despite these investment commitments, our outlook for Australian broadband growth continues to be cautious This is based partly on delays that have characterised government and operator efforts to

address the problem of low broadband coverage in rural parts of Australia Meanwhile, fixed penetration rates in urban areas are already very high Our newly revised broadband forecast envisages broadband penetration rising to just over 37% at the end of 2009

SWOT Analysis

Australia IT Sector SWOT

Strengths ƒ Strong government support for ICT programmes

ƒ IT-literate population

ƒ Strong financial sector

ƒ Relatively unaffected by global economic crisis compared with Europe and the

US

Weaknesses ƒ Australia has a relatively mature domestic market, with relatively slow growth

rates

ƒ Sensitive to volatility in the global economy

Opportunities ƒ The National Broadband Network programme will have many direct and indirect

benefits for the IT market

ƒ Phase two of the computers for schools project is expected to generate an additional US$800mn of spending

ƒ Other major IT projects in areas such as healthcare and smart cards

ƒ Green IT as companies look to make power savings

Threats ƒ The biggest threat is slowdown the global economic slowdown affecting

Australia’s economic activity and leading to a scaling back of IT budgets

ƒ The cheaper Australian dollar will affect consumer and business demand in the import-dependent IT market

Australia Telecoms Sector SWOT

Strengths ƒ Mature and highly competitive mobile market, with a well-established

independent regulator

ƒ Mobile customer growth continues within both the prepaid and postpaid segments

ƒ All of the leading mobile operators offer 3G and HSDPA services

ƒ Strong demand for, and growth of, mobile value-added services (VAS)

Weaknesses ƒ 2G subscriber market is close to saturation

ƒ The high proportion of postpaid customers limits the opportunity to migrate prepaid users to higher-value contract packages

ƒ Greater take-up of 3G services offers significant potential for operators, content providers and aggregators

Opportunities ƒ Growth in the number of mobile data customers is expected to continue for the

foreseeable future

ƒ Deployment of higher speed HSPA technology and the proliferation of new multimedia mobile handsets should have a positive impact on data service usage

ƒ Operators continue to develop ever-more sophisticated multimedia services, providing opportunities for content providers

ƒ Merger between Vodafone and Hutchison’s 3 has created a larger operator which should be able to apply more competitive pressure on Telstra and Optus

Threats ƒ Increasingly saturated market will reduce the opportunity to win new customers

ƒ There are signs that blended ARPU rates have entered a period of sustained decline; danger that operators could struggle to encourage the use of higher-value mobile data services

ƒ A reduction in mobile termination rates initiated by the Australian Competition and Consumer Commission (ACCC) in 2006 is impacting on operator profit levels

ƒ Introduction of MVNOs could offset the improvements made in blended ARPUs due to the stronger acquisition of higher value customers

Australia Political SWOT

Strengths ƒ Australia is a mature democracy with a broadly stable party system

ƒ Economic stability over recent years supports the current political system and radical groups are unlikely to gain substantial support

Weaknesses ƒ Despite enjoying general political stability over the years, the ruling party’s lack

of a clear majority in the upper house of parliament (senate) occasionally creates difficulty in the passage of policy

ƒ As one of the region’s largest and most stable states, the country attracts many refugees and economic migrants The issue is a key source of domestic tension and one that is unlikely to disappear over the medium term

Opportunities ƒ Australia has historically enjoyed close military ties with the US However, with

the rise of regional economic powers like China, it will need to balance competing military and economic ties

Threats ƒ Australia’s early support for the US ‘war on terror’, among other things, has

made Australians abroad a target for Islamic extremists

ƒ Australia’s close alliance with the US, particularly under John Howard, has left a lingering feeling among some Asian governments that Canberra is

Washington’s ‘deputy sheriff’ in the region

Australia Economic SWOT

Strengths ƒ A modern economy supported by a sound financial system and a highly

educated workforce

ƒ Continuity in policymaking This lowers risks for investors and reduces the economy’s vulnerability to governmental change

Weaknesses ƒ The persistent current account deficit, which increases vulnerability to capital

flows and, by extension, currency volatility

ƒ The export basket is highly concentrated in commodities with the consequence that the economy and currency remain vulnerable to fluctuations in world prices for metals, coal and agricultural goods

Opportunities ƒ The rapid expansion of Asian economies in recent years – notwithstanding the

current global recession – offers new opportunities for diversifying trading ties from core European markets

ƒ A low level of government debt has provided a certain amount of flexibility in fiscal policy to support domestic demand through the downturn

Threats ƒ The currency’s vulnerability to commodity prices – and risk appetite in general –

complicates exchange rate forecasting over the near term

ƒ Australia is vulnerable to droughts, which have become increasingly severe in past years as a result of global climate change

Australia Business Environment SWOT

Strengths ƒ A highly educated workforce and comparatively modern transport infrastructure

underpin economic prospects

ƒ The economy is very open, with the IMF awarding Australia its highest rating in the index of trade restrictiveness

Weaknesses ƒ Despite its openness, Australia requires the Foreign Investment Review Board

to approve any commercial real estate investment by a foreign company or individual valued at US$5mn or more

ƒ With a population of just under 22mn, the domestic consumer base is small by regional standards

Opportunities ƒ Australia has opened talks with China, the Association of Southeast Asian

Nations (ASEAN), Malaysia, the Gulf Co-operation Council, Japan and South Korea regarding a free trade agreement (FTA), and is also considering FTAs with India and Indonesia

Threats ƒ Corporate taxes for foreign investors in Australia are higher than in other states

ƒ Recent investment proposals by Chinese firms regarding the resource extraction sector have raised fears that strategic assets will be lost to foreign players

IT Business Environment Ratings

BMI’s Asia IT Business Environment Ratings compare the potential of a selection of the region’s

markets over our forecast period, through to 2014 The ratings reflect our consideration of political and economic risks, as well as risks associated specifically with IT intellectual property (IP) rights protection and the implementation of government spending projects

In 2009 the global economic slowdown had a marked impact across Asian IT markets, with spending growth declining sharply in states like Malaysia, but holding up relatively well in others like Australia Australia’s top ranking is in part due to government ICT programmes, such as the government National Broadband Network project The ambitious broadband plans will drive development of Australia’s digital economy and feed demand for PCs Government tenders will also generate opportunities in years to come

in areas such as education, e-government, transport and healthcare

The two smaller, but mature, IT markets of Singapore and Hong Kong take second and third spots in our rankings table respectively, due primarily to their high country structure scores Hong Kong continues to offer investors in the IT field opportunities associated with its growing links to the vast Chinese market Singapore benefits from high broadband penetration and initiatives such as the government’s ambitious

‘Intelligent Nation 2015’ plan and the standard operating environment

On the downside, the continued restructuring of both economies to a more service-oriented economic model may limit long-term growth prospects, although this also brings opportunities in sectors such as financial services and banking Businesses will probably remain cautious and value-focused in the near term, By the end of 2009, surveys showed significantly better business sentiment

South Korea, in fourth place in our table, was hit by the global economic downturn, but BMI forecasts

that Korean per capita IT spend will rise from US$750 in 2010 to US$921 in 2014 Consumers seem willing to upgrade their PCs, and there is also a trend for households to own more than one PC There will

be a number of key growth areas such as industry-specific software applications, and IT outsourcing, which is expected to show a strong demand trajectory

In China, factors such as the vast potential rural market, government spending and demand from key verticals such as telecoms should drive growth Key sectors currently include telecoms, government, energy, social security, education and transport However, there are still risks associated with IP rights protection and piracy and a lack of business environment transparency Pressure on hardware prices is also a risk in the current environment

Malaysian IT spending growth will be driven by a rise in the current PC penetration level of around 35%, rising incomes and a high-tech focused national development plan The subsidised roll-out of a high-speed broadband network will address a relative lack of information and communication technology (ICT) infrastructure outside the Klang Valley There are also increasingly attractive opportunities in the

IT services area as the government implements measures to make Malaysia a growing regional services and outsourcing hub

In the Philippines, the IT market will be driven by further growth in the local IT and business process outsourcing (BPO) sector The Philippines has a lower PC penetration than many other Asian countries, and the IT market offers correspondingly high growth potential over the forecast period However, there are challenges such as labour shortages and rising wages

In 2009, the Indian authorities announced a series of measures to stimulate the domestic IT market as well

as assist domestic IT companies The potential is plain, with less than 2% of the population owning a computer, about one-fifth the level in China Realisation of this long-term growth potential depends on fundamental drivers such as raising India’s low computer penetration, rising incomes, falling computer prices and the government’s ambitions to connect the vast rural areas to the outside world

Three South East Asian markets occupy the final three positions in our table, with low rankings due primarily to business environment factors, despite considerable growth potential In Thailand, once an upturn starts, IT spending could spurt forward again as customers make good on pent-up demand The fundamentals of growing affordability and low PC penetration should keep the market in positive territory during the forecast period A number of factors should also support momentum, including a Government

PC for Education programme, and 3G mobile and WiMAX broadband service roll-outs

Similarly, with ICT penetration of only around 20% and development restricted to richer areas such as

Java, the Indonesian IT market has much latent growth potential BMI expects the Indonesian market to

bounce back strongly from the deceleration last year and become one of the best regional IT market

growth prospects over BMI’s five-year forecast period The small and medium-sized enterprise (SME)

sector will drive demand for basic hardware and applications as enterprises look to enhance productivity

Sri Lanka’s IT market has felt the effects over the years of the country’s political economic instability, from disruption of distribution channels and a flourishing grey market to underdeveloped telecoms infrastructure However, the market will feature on IT vendors’ radar as among the best potential growth prospects, in South Asia Computerisation has only just got started in the government service, and major public and private sector organisations remain largely underpenetrated in terms of basic enterprise

software

Table: Regional IT Business Environment Ratings

Limits Of Potential Returns Risks To Realisation Of Returns

IT Market

Country Structure Limits

Market Risks

Country Risk Risks

IT BE Rating

Regional Ranking

Source: BMI Scores out of 100, with 100 highest The IT BE Rating is the principal rating It comprises two sub-ratings

‘Limits Of Potential Returns’ and ‘Risks To Realisation Of Returns’, which have a 70% and 30% weighting respectively

In turn, the ‘Limits’ Rating comprises IT Market and Country Structure, which have a 70% and 30% weighting

respectively and are based upon growth/size/maturity/govt policy of the IT industry (Market) and the broader

economic/socio-demographic environment (Country) The ‘Risks’ rating comprises Market Risks and Country Risk which have a 40% and 60% weighting respectively and are based on a subjective evaluation of industry regulatory and

IP regulations (Market) and the industry’s broader Country Risk exposure (Country), which is based on BMI’s

proprietary Country Risk Ratings The ratings structure is aligned across the 14 Industries for which BMI provides

Business Environment Ratings methodology and is designed to enable clients to consider each rating individually or as

a composite, which the choice depending on their exposure to the industry in each particular state For a list of the data/indicators used, please consult the appendix at the back of the report.

Market Overview

Asia Regional IT Market Overview

IT Penetration

Across Asia, government information

and communication technology (ICT)

initiatives and growing affordability will

drive increases in PC penetration during

BMI’s forecast period to 2013 While

some cities and regions stand out, there is

an unbalanced pattern of regional

development, with PC penetration in

countries like Singapore being above

50%, while in other countries, such as

Indonesia, it is less than 2%

The two Asian giants, China and India,

embody the region’s growth potential, as in both countries computer ownership remains the preserve of a minority In China, PC penetration was only around 16% in 2007 – although it was far higher in cities like Shanghai and Beijing – and projected to pass 25% overall by 2013 In India, less than 2% of people own a computer However, some 45% of the population is under 25, which provides a promising

demographic context for increased PC ownership The government’s ultimate target of 1bn connected computers in India is equivalent to the total estimated number of PCs in the world today

internet-Around the region, affordable computer

programmes are finding favour with

governments In early 2009, China

announced a new subsidised PC

programme aimed at rural residents In

the Philippines, where penetration is

currently around 5%, the government

launched its PC4All programme in 2007

In Indonesia, penetration of around 2%

could double by 2013 if government

initiatives are followed through The

Indonesian government is also rolling out

new e-learning initiatives, with a target of

raising the current 1:3,200 ratio of PCs to students in public schools to 1:20

A similarly broad range is found with respect to internet penetration India and Indonesia are now above 17% penetration, despite a lack of fixed-line infrastructure in those countries Both have deployed fixed-wireless technologies as one alternative solution, and overall penetration should pass 30% in both by

2012 The fastest growth is projected for India, in which penetration is projected to increase from 17.7%

to 44% by 2013, while Indonesia suffers from high tariffs

Some 46% of Malaysians had internet access in 2008 Across the region, government programmes are an important driver of ICT penetration The Chinese government has a five-year plan to make the internet available in every administrative village in central and eastern China and every township in the west

Dial-up technology is still the dominant access method However, even in developing markets, the number of broadband subscribers continues to gain ground steadily In China, broadband penetration is on course to reach 31% by 2014 In India, where the government designated 2007 as ‘the Year of

Broadband’, penetration should increase tenfold to reach 5.5% by 2013 from around 0.5% currently This

is far below government targets, however Malaysia and Singapore will also see strong growth in the number of broadband subscribers

Governments around the region are interested in WiMAX as a potential alternative broadband access method, with India and Malaysia among the countries where network deployments are planned

Meanwhile, the growth of Wi-Fi coverage will be one driver of notebook sales in places like Hong Kong, where the government has committed another HKD200mn to the deployment of a Wi-Fi network

covering more than 200 public venues

Market Growth And Drivers

Most Asian IT markets are expected to

remain in positive growth territory in

2009, despite an expected impact on IT

spending from the global economic

slowdown Across the region, demand

from both business and consumer

segments weakened in H208, after robust

sales in the first half of the year The

difficult economic headwinds will persist

in 2009, but strong fundamental demand

drivers meant that there will be continued

opportunities Key factors include

IT Market Size (US$mn)

2008e

e = estimate Source: BMI

cheaper PCs and reform in sectors such as telecommunications and finance, as well as government initiatives

In China, the falling stock market and

high inflation affected consumer

sentiment in 2008, while declining

external demand influenced business

investment plans However, BMI expects

IT market growth to be maintained by an

expansion into western China, rural areas

and lower tier cities, as well as growing

demand from SMEs IT spending will

also receive a boost from government

spending and IT projects associated with

the Shanghai World Expo in 2010

In India, IT spending growth slowed

significantly in 2008 and is expected to ease further in H109, before starting to recover in H209

Fundamental market drivers include the government’s ambitions to connect the vast rural areas to the outside world, coupled with falling computer prices In early 2009, India’s government announced a series of measures to stimulate the market Meanwhile, India’s business process outsourcing industry is growing at around 40% per annum and will continue to generate opportunities for vendors of IT products and services

As mentioned above, the Philippines is

one of the countries currently benefiting

from low-priced PC programmes

(PC4ALL), which provide opportunities

for vendors to penetrate the low-income

segments Other regional computer sale

drivers over the forecast period include

education, lower prices, IP telephony,

cheaper processors as well as notebook

entertainment and wireless networking

features Meanwhile, in Indonesia,

relatively low levels of government IT

spending may mean that the IT market

lacks a stabiliser that could help

IT Market Size (As % Of National GDPs)

2008e-2013f

e/f = estimate/forecast Source: BMI

IT Markets Compound Growth

2008e-2013f, %

e/f = estimate/forecast Source: BMI

immunise it from the slowdown Once again, however, the basic demographics of low computer

penetration and growing affordability should keep the market in positive territory

In more developed markets, such as Hong Kong and Singapore, there were indications of declining consumer and business sentiment in H208, but IT spending remained in positive territory for the year as a whole The Singaporean government continued to be a major factor in 2008, with the US$1.3bn Standard Operating Environment tender award In Hong Kong, rising unemployment and exposure to the financial crisis will contribute to slower growth in 2009, but this will be partly counteracted by higher government

IT spending as well as cross-border trade and co-operation

The largest IT market in the region is, unsurprisingly, China, estimated at US$73.1bn in 2008, trailed distantly by India (US$13.5bn) and Singapore (US$4.8bn) Singapore’s IT market (including

communications) is the largest as a proportion of national GDP (2.7%), followed by China, Hong Kong and Malaysia, all at 1.9%

The fastest growing IT market over the forecast period looks set to be India, with 2008-2013 compound growth of 79%, taking first place due largely to low PC penetration China is second, with the IT market growing by an estimated 74% over the forecast period

Sectors And Verticals

Regional IT markets will remain

hardware-centric, with hardware

accounting for 45-68% of total spending

in all markets However, spending on

software and services will grow faster

Notebook sales are growing much faster

than the PC market as a whole with

growth driven by falling prices and more

features

This year is likely to be a challenging

year for hardware sales In many markets,

demand proved quite robust in H108 and

exceeded forecasts, but there were signs of a slowdown towards the end of the year Demand from penetrated rural areas, affordable computer programmes and growing broadband penetration should generally prevent stagnation

under-Market Structure (% Of Total IT under-Market)

2008e

e = estimate Source: BMI

In both emerging and more mature

markets, the growing popularity of

broadband will help to support computer

sales China Telecom is among regional

telecoms companies to have rolled out

PC bundling offers as part of its

broadband packages Meanwhile, a wave

of 3G launches across the region should

also provide a stimulus to sales of

notebooks, with Vodafone Hong Kong

among service providers offering

3G/HSPA USB modems bundled with

their 3G services

In much of emerging Asia, demand from

smaller towns and rural areas will provide the main source of growth, along with replacement of desktops with notebooks SMEs will be one of the strong growth segments over the forecast period, with SME demand for servers and networking equipment a significant growth opportunity

Due in part to high levels of piracy, software’s share of IT spending is relatively low, ranging from 25% among countries covered by BMI Efforts are being made to tackle the issue of piracy, but despite government crackdowns in China and the Philippines, software piracy remains above 70% in most of emerging Asia

11-Despite the economic downturn, there are still expected to be opportunities for software vendors in most markets The economic situation is likely to lead to further consideration of open source solutions in some sectors and to encourage vendors to promote software-on-demand solutions There is a growing trend for smaller companies to seek greater efficiency by using IT to improve productivity and reduce costs

(including labour costs) In general, enterprise resource planning (ERP) and other e-business products still dominate the enterprise software market, but vendors are also looking to other areas such as customer relationship management (CRM) and business intelligence, where faster growth is possible

The IT services segment accounts for 17-40% of spending in the Asian markets covered by BMI The economic situation and credit tightening are likely to have an impact on projects in some verticals, but continued demand in sectors like telecoms and banking will help to prevent stagnation Government spending will account for a larger share of spending in many markets In China, government stimulus packages should drive IT-related investments, while Singapore government ICT tenders were worth an estimated US$1bn in 2008 and the Hong Kong government’s Digital 21 initiative will continue to

generate a number of projects

Market Structure (% Of Total IT Market)

2013f

f = forecast Source: BMI

Regionally, hardware deployment services remain the largest IT services category, with other

fundamental services including system integration, support systems, training, professional services, outsourcing and internet services Main spenders across the region include banks and financial institutions

as well as governments Even in emerging markets like India, IT vendors are having to pay more attention

to value-added services such as technical support and product troubleshooting, or basic IT and hardware consulting

In many countries, the number and size of local outsourcing deals are increasing Outsourcing could account for as much as 30% of China’s IT services spending by 2013, while in India there have been some large contracts such as that awarded by Idea Cellular to IBM Singapore – where the government was to tender a major outsourcing contract in 2008 – and Hong Kong have both seen a trend towards larger outsourcing projects in the public and private sectors

Government Authority

Government Authority Department for Broadband, Communications and the Digital Economy

The Department for Broadband, Communications and the Digital Economy was established in 2007 following the election of the Rudd government and was a successor to the former Department of

Communications, Information Technology and the Arts The main policy responsibilities of the ministry include:

ƒ Broadband policy and programmes;

ƒ Postal and telecommunications policies and programmes;

ƒ Spectrum policy management;

ƒ Broadcasting policy;

ƒ National policy issues relating to the digital economy;

ƒ Content policy relating to the information economy

Background

Australia’s IT market is based substantially around imports, with a relatively small local IT sector

Multinational brands such as HP, IBM, SAP, Dell and Acer dominate the market where most have a

substantial presence

The local IT sector is mainly made up of small companies involved in software development and ICT manufacturing with military applications The sector employs around 270,000 people, with more than 95% of firms employing less than 20 workers

Hardware

Australian computer hardware sales are projected at US$7.8bn in 2010 and, following a deceleration in

2009, are forecast to grow at a 2010-2014 CAGR of around 5% to reach US$8.7bn by 2014 The main drivers of growth in the PC segment will be government programmes, growing broadband penetration and greater affordability The fastest-growing segment is notebooks, which already accounts for more than 50% of the market by value

Overall, hardware spending accounted for around 43% of the domestic IT market in 2009 The PC

market contracted in H109, following a slowdown towards the end of 2008 However, the decline slowed

to low single digits in the second quarter, with double-digit sequential growth from Q109 The main growth area was consumer notebooks, which grew by at least 25%, while consumer desktops recorded a double-digit decline

The economic slowdown therefore had an impact on computer sales in 2009, despite a boost from the stimulus package and lower interest rates in H109 Amid economic uncertainty, some IT budgets were cut

in the commercial sector in 2009, with the replacement cycle for computer systems stretching for some companies However, government ICT programmes and continuing demand for notebooks and netbooks helped to prevent stagnation

Netbooks were the fastest-growing PC market segment, with triple-digit growth in H109 over the same period of 2008 Netbook shipments reached close to 15% of notebook sales in Q209, with more than 90,000 units sold However, the popularity of netbooks added to the downward pressure on average sales prices as consumers demonstrated a preference for lower-priced models

Corporate IT spending had started to recover by the end of 2009, as companies looked to achieve greater efficiencies in the wake of the economic slowdown There could be a boost, particularly in the second

half of 2010, from computer hardware tenders delayed from 2009 The launch of Microsoft’s Windows 7

operating system also has the potential to help trigger a new cycle of hardware upgrades in

2010, although much will depend on business confidence

More than 90% of Australian households now have a PC, but consumers have appeared willing to spend

on upgrading their notebook computers, and it is also becoming more popular to purchase a second household PC Indeed, around 30% of households have more than one PC Penetration is also high among businesses, with around 95% of small businesses and 100% of medium-sized and large businesses having computers Small business comprises more than 99% of all Australian businesses and slightly more than 50% of business PC sales

Unsurprisingly, given the high penetration levels in both business and consumer segments, the Australian

PC market is dominated by replacement sales Upgrades are estimated to account for at least 80% of business purchases and more than 50% in the case of households

A number of factors should help to keep computer hardware demand in positive growth territory First, government programmes related to computers in education will provide a bottom for the market In 2009, the second phase of the government’s computers for schools programme was expected to provide 141,600 new computers to schools around the country, with the value of the programme forecast to have reached around AUD260mn by the end of 2009 In July 2008, the government passed a measure that

allowed households to reclaim a 50% rebate of up to US$625 a year for primary and US$1,500 for secondary students for laptops and other IT-related equipment Ambitious government information society programmes could see annual computer sales approaching 5mn by 2013

Secondly, the government’s ambitious broadband plans will also drive expansion The government’s NBN plan should drive development of Australia’s digital economy and services such as online banking and shopping Converged multimedia services such as Internet Protocol television (IPTV) will also feed demand for PCs and notebooks with entertainment features Bundling deals by 3G mobile telecoms service providers like Vodafone will help to drive sales of portable computers as connectivity devices

Software

Software is expected to account for about 18% of the Australian IT market in 2010, with estimated spending of US$3.3bn As the focus moves from hardware to services and solutions, the share of the market accounted for by software is forecast to rise to 20% by 2014, with businesses seeking greater leverage from their investments Software sales are forecast to have a CAGR of around 8%, rising to US$4.5bn by 2014

Over the forecast period, ERP, CRM and other e-business products will be increasingly popular with the SME market, as companies look to enhance productivity through automating essential functions As

evidence of the importance of this segment to vendors, Microsoft recently teamed up with Telstra to offer

a suite of enterprise software products to SMEs In 2010, the public and financial sectors, healthcare, telecoms, utilities and SMEs are among verticals seen by vendors as having the most growth potential

Towards the end of 2009, there was software spending by organisations such as Newcrest Mining,

National Australia Bank, and the Defence Department

In 2010, Microsoft’s new Windows 7 operating system, launched in October 2009, has the potential to have an impact, although much will depend on consumer and business confidence There should also be a boost from systems upgrades delayed from 2009 Growing PC shipments, new technologies and business models including 3G mobile, WiMAX as well as industry trends such as software-as-a-service (SaaS), green IT and virtualisation will provide areas of software segment growth going forward

Software piracy has fallen in Australia in recent years but remains an issue in some segments of the market According to the Business Software Association, the overall software piracy rate had dropped to 28% from 31% in 2003 However, most of the fall occurred in the consumer segment, where the drop in

‘white box’ PCs was credited with reducing the use of pirated software Meanwhile, some recent studies have found a rise in the use of illegal software among Western Australian companies, particularly in the booming mining sector The overall trend, however, has been one of improved general awareness, backed

by appropriate legislation

The current economic crisis led some organisations to cut IT budgets or look to defer systems updates In April 2009, Telstra revealed that it had abandoned plans to migrate enterprise and government customers

to a new billing software platform due to cost concerns Other companies, however, will see IT as a way

of bringing greater efficiencies and increasing competitiveness in difficult times Overall, as of early

2009, the impact of the slowdown on corporate software spending seemed to be limited Microsoft reported that sales of software seemed less vulnerable to cutbacks than spending on hardware or services

In late 2008, companies including AWB and Origin Energy announced that they were proceeding with

software upgrade projects worth tens of millions of dollars

Vendors were looking to other areas such as business intelligence, where faster growth was possible Business intelligence demand has grown at a double-digit rate for the past few years and perhaps accounts for around 5% of the total software market Australia will remain a major market for business intelligence software in the Asia Pacific, but growth may slow as users seek to get value from existing investments Security is likely to be another growth area Meanwhile, the cost efficiencies of virtualisation – running multiple systems on a single piece of hardware – makes sense in the current economic climate, but creates new security issues Local research has suggested that for the past few years, Australia has been in the global vanguard of virtualisation of X86 servers, even if the rate is slackening somewhat Given the focus

of many businesses of controlling costs, the pay-on-demand SaaS model has also grown in popularity

IT Services

IT services are expected to account for about 40% of the domestic IT market in 2010, with spending of

US$7.6bn, up from US$7.2bn in 2009 CAGR for the segment is estimated at 6% over 2010-2014 Research in 2009 indicated that the number of Australian companies, including SMEs, cancelling

outsourcing contracts as a result of the economic slowdown was relatively small

Despite this, the economic situation and tighter credit had an impact on projects in some market

segments There were a number of high-profile roll-backs of contacts last year In March 2009, Telstra launched a consolidation exercise to reduce its number of IT services providers from four to two The goal of the exercise was the cut IT system management costs In the short term, maintenance and other services generally regarded as operating expenses were less vulnerable to cutbacks than new projects requiring major capital expenditure

In 2010, sectors such as government, telecoms, healthcare and banking should continue to supply demand for implementation, consulting and managed services Regulatory compliance will continue to require spending by banks and intense competition in the retail sector is spurring spending on CRM and back office systems Competition in the telecoms field is a driver for that key IT spending segment, where deregulation has led to new entrants The current economic crisis may reinforce the logic of outsourcing non-core functions in some cases, as companies will be less willing to spend on in-house IT capabilities

The IT services market is therefore becoming one of the most dynamic drivers of IT sector spending in Australia Local companies are trying to use computing resources more effectively and integrate

investments made in hardware and software Outsourcing is an increasingly important spur to growth for the IT services sector However, traditional services such as desktop support are still the mainstay of the market, while applications services support is less developed

E-government projects will be an important opportunity for IT services vendors over the next few years and a driver of IT projects in various sectors Projects such as the standardised reporting systems scheme for enterprises, scheduled to be launched in mid-2010, will encourage business spending on system updates Businesses are likely to remain cautious however, with a focus on operational efficiency and the bottom-line

Industry Developments

Stimulus Package

The Australian IT market received a boost in 2009 from federal and local government stimulus spending packages The Rudd government’s five-year AUD15.1bn spending plan aimed to create 133,000 jobs and revive productivity growth Together with a AUD300mn local spending plan, the package was designed

to provide a stimulus across the economy

Healthcare IT

Among sectors expected to be a priority for government IT projects is healthcare Australia has a National E-Health Transition Authority, which has the goal to create a paperless environment in Australia’s health sector, including public hospitals Meanwhile, another public body, the National Health and Hospitals Reform Commission, has a focus on personal electronic health records Recent healthcare IT projects have included Northern Sydney Central Coast Health’s award to HP of a AUD1.15mn networking

contract, while the Prince of Wales Hospital in Sydney selected Siemens for an IP transition of its

communications network

E-Government

In addition to computers in schools, a number of e-government projects continued to be rolled out last year, despite the economic uncertainty In mid-2010, the Australian government is expected to launch a standardised reporting system scheme The programme will involve implementation of a platform

allowing business to submit reports to a range of agencies

Federal programmes have also found an echo in state government projects in areas such as education and smart cards Queensland Transport recently unveiled plans to introduce a new driving licence using smart card technology Adult proof of age cards are also to be introduced, as are other licences for passenger transport and cards from a number of other licensing authorities These programmes should drive IT spending both in government and in tangential sectors

While most government IT programmes were relatively immune to the global slowdown, the

economic slowdown encouraged the government to seek greater efficiency in IT procurement In April

2009, it was reported that government IT departments had been ordered to reduce the number of IT contractors

There were also reports in 2009 that the Australian governmnnt was considering centralising the

procurement of desktop computers, with the appointment of a single supplier The Australian Information Industry Association expressed concerns about the implications of such a move for smaller companies

Education Projects

Around 1,400 high schools were expected to benefit from phase two of the government’s computers for schools project, announced in January 2009 According to computer minister Julia Gillard, phase two will provide 141,600 new computes to 1,394 schools around the country By the end of 2009, the programme would have provided almost AUD260mn of computers

In December 2008, the federal government announced an additional AUD807mn for its signature

programme of installing computers in schools The additional spending was due what the education minister described as ‘the IT situation in schools being even bleaker than originally thought’

As a result, total spending committed to the programme had reached AUD1.2bn In July 2008, the

government introduced an education rebate, allowing households to reclaim a 50% refund on education costs of up to AUD625 a year for primary students and AUD1,500 for secondary students, for broadband and other IT related equipment

The value of the Labor government’s huge investment has been questioned by some opposition

politicians A recent survey found that 1% of parents believed that new computers should be a priority for government Meanwhile, the Australia Computer Society called for further initiatives beyond simply providing students and teachers with hardware

Table: Computers For Schools Programme, Phase Two – Planned Spending By State

State Funding, AUDmn Additional Computers Delivered Under The Plan Total No Of Computers

Queensland 41 40,955 computers delivered to 363 schools 47,759Tasmania 5.2 5,269 computers delivered to 80 secondary schools 6,316ACT 2.8 2,819 computers delivered to 24 secondary schools 5,837Northern Territory 1.3 1,303 computers delivered to 37 secondary schools 2,041

Source: Official figures, BMI

Industry Forecast Scenario

Australia’s IT market should continue to provide opportunities in consumer, government and business sectors in 2010, following a better-than-expected performance in 2009 The total size of the domestic IT

market is projected by BMI to increase from US$18.7bn in 2010 to around US$22.7bn in 2014, with

ambitious government ICT spending programmes and an upward trajectory in consumer and enterprise IT spending However, a growing private sector debt burden could inhibit investment going forward

2010 Outlook

Some enterprise IT projects were cut back last year, but consumer spending held up relatively well, thanks to demand for notebooks Corporate IT spending had started to recover by the end of 2009, as companies looked to achieve greater efficiencies in the wake of the economic slowdown In 2010, there could be a boost – particularly in the second half of 2010 – from computer hardware tenders delayed from

2009 The launch of Microsoft’s Windows 7 operating system also has the potential to help trigger a new

cycle of hardware upgrades in 2010, although much will depend on business confidence

In 2010, government projects in sectors such as e-government, healthcare and education will drive

significant opportunities for IT vendors In mid-2010, the Australian government is expected to launch a standardised reporting system scheme Australia’s National E-Health Transition Authority has the goal to create a paperless environment in Australia’s health sector, including public hospitals

Meanwhile, by the end of 2009, computers in education programmes were to have provided almost AUD260mn of computers Sectors such as government, telecoms, healthcare and banking should also continue to supply demand for implementation, consulting and managed services this year

The Australian IT market was hit by the economic slowdown in 2009 Vendors reacted with promotions and more flexible financing packages, but in early 2009 there were reports of a slight decline in spending

by smaller businesses Consumers also demonstrated a preference for lower-priced IT products such as netbooks However, IT spending received a boost from federal and local government stimulus spending packages

Market Drivers

A number of factors underpin our forecast of a 5% 2010-2014 CAGR for the Australian IT market First, ambitious government ICT programmes, such as the NBN project, are already budgeted and well

established The project places ICT at the heart of the government’s strategy to improve competition and

is expected to stimulate IT spending across all sectors of the economy