Australia information technology report q2 2011

Executive Summary Market Overview Australia’s IT market should continue to provide opportunities in the consumer, government and business sectors in 2011, following a strong recovery in

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TECHNOLOGY REPORT Q2 2011

INCLUDES 5-YEAR FORECASTS TO 2015

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: April 2011

CONTENTS

Executive Summary 5

SWOT Analysis 8

Australia IT Sector SWOT 8

Australia Political SWOT 8

Australia Economic SWOT 9

Australia Business Environment SWOT 10

IT Business Environment Ratings 11

Asia 11

Table: Asia Pacific IT Business Environment Ratings 14

Asia IT Markets Overview 15

Australia Market Overview 21

Government Authority 21

Background 21

Hardware 21

Software 24

IT Services 26

Industry Developments 28

Table: Computers For Schools Programme, Phase Two – Planned Spending By State 30

Industry Forecast Scenario 31

2011 Outlook 31

Market Drivers 32

Segments 32

Summary 33

Table: Australia’s IT Sector – Historical Data & Forecasts (US$mn Unless Otherwise Stated) 33

Internet 34

Table: Telecoms Sector – Internet – Historical Data & Forecasts 34

Macroeconomic Forecast 36

Table: Australia – Economic Activity, 2008-2015 38

Competitive Landscape 39

Computers 39

Software 41

IT Services 43

Internet Competitive Landscape 44

Table: Australia Dial-up And Broadband Internet Subscriptions (‘000) 44

Internet Service Revenues 46

ADSL2+ 47

Naked DSL 48

WiMAX 48

Company Profiles 50

HP Australia 50

SAP (Australia) 51

Country Snapshot: Australia Demographic Data 52

Section 1: Population 52

Table: Demographic Indicators, 2005-2030 52

Table: Rural/Urban Breakdown, 2005-2012 53

Section 2: Education And Healthcare 53

Table: Education, 2002-2005 53

Table: Vital Statistics, 2005-2030 53

Section 3: Labour Market And Spending Power 54

Table: Employment Indicators, 2001-2006 54

Table: Consumer Expenditure, 2000-2012 (US$) 54

Table: Average Annual Wages, 2000-2012 55

BMI Methodology 56

How We Generate Our Industry Forecasts 56

IT Industry 56

IT Ratings – Methodology 57

Table: IT Business Environment Indicators 58

Weighting 59

Table: Weighting Of Components 59

Sources 59

Executive Summary

Market Overview

Australia’s IT market should continue to provide opportunities in the consumer, government and business sectors in 2011, following a strong recovery in 2010 The total size of the domestic IT market is projected

by BMI to increase from US$21.0bn in 2011 to US$27.0bn in 2015

IT spending in 2011 should be boosted by growing demand across IT spending sectors to take advantage

of opportunities presented by cloud computing In 2010 a wide range of leading Australian private and public sector organisations launched cloud initiatives and the government unveiled a six-year cloud computing strategy

Several factors underpin our forecast of a 6% 2011-2015 CAGR for the Australian IT market

Government tenders will drive considerable spending in years to come Banks will continue to need to spend on regulatory compliance, 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 are driving the key IT spending segment

Industry Developments

In 2010, the Australian federal government announced a six-year plan to transfer government agencies’ computing systems to a public cloud environment According to the plan, public cloud adoption for public-facing websites is scheduled to begin in 2011, with pan-governmental integration taking place from 2012 onwards However the plan requires government agencies to notify the Department of Finance Deregulation of their intention to move to the cloud

In November 2010, the Australian Senate passed a bill to restructure Telstra, to increase competition as

Telstra’s infrastructure is incorporated in the new National Broadband Network (NBN.) The NBN project aims to connect 93% of the population by 2017 and rectify a situation which has led to Australian

broadband charges being ranked the fifth most expensive among Organisation for Economic Cooperation and Development (OECD) countries

In 2010, government projects in sectors such as e-government, healthcare and education drove significant opportunities for IT vendors The Australian government announced plans for a standardised reporting system scheme, while the National E-Health Transition Authority has set the goal of creating a paperless environment in Australia’s health sector, including public hospitals

Company News

In 2010, the release of Apple’s iPad opened a new competitive battleground in the PC market, with

Apple’s rival vendors planning to release their own tablet devices Apple is expected to continue to dominate Australian tablet sales in the Austalian market, with the Apple iPad 2, while the price of the entry-level original iPad is now down to about A$445 However the number of competitor tablet devices

from the likes of Samsung, Lenovo, HP, Acer, Dell and Asus is expected to grow in 2011

In 2010, software vendors were positioning themselves to take advantage of growing demand in

Australia for cloud computing services US enterprise software vendor Oracle set up a dedicated CRM

On Demand package for the Victorian Department of Human Services US Software-as-a-Service (SaaS)

pioneer Salesforce.com has enjoyed growing success in the segment, with estimates that around 10 of

Australia’s largest financial institutions, including ANZ Bank, use at least some Salesforce.com modules

Vendors in the Australian market are investing in infrastructure to provide cloud computing services locally In Q111, Telstra launched a 45-day free trial of its cloud infrastructure for government agencies

US IT giant HP is also moving to compete directly with Telstra, Optus and Macquarie Telecom for a

share of the cloud computing services market, and will open its data centres to local customers

Computer Sales

Australian computer hardware sales are projected at US$9.2bn in 2011, with the popularity of tablets helping to keep demand buoyant after a strong PC market recovery in 2010 Sales are forecast

to grow to around US$10.8bn by 2015, with drivers including new form factors, government

programmes, and growing broadband penetration

More than 90% of Australian households now have a PC and consumers appear willing to spend on upgrading their notebook computers; it is also becoming more popular to purchase a second household

PC Small business comprise more than 99% of all Australian businesses and slightly more than 50% of business PC sales

Software

Software is expected to account for about 17% of the Australian IT market in 2011, with estimated spending of US$3.6bn As the focus moves from hardware to services and solutions, the share of the market accounted for by software is forecast to rise by 2015, with businesses seeking greater leverage from their investments Software sales are forecast to have a CAGR of around 9%, rising to US$5.0bn by

2015

Given many businesses’ focus on controlling costs, cloud computing models have also grown in

popularity and spread beyond initial core application areas 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 2011, with spending of US$8.2bn CAGR for the segment is estimated at 8% over 2011-2015 Demand picked up in 2010 with the revival of several IT projects that had been shelved as a result of the economic slowdown, and

IT services is forecast to be one of the most dynamic sectors in the Australian IT market

In 2011, 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

E-Readiness

Many 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 government’s ICT strategy and overall domestic economic policy is the construction of a National Broadband Network 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

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

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 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 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 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 such as 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 free-market economy supported by a highly educated workforce

ƒ Blessed with rich natural resources, Australia’s economic activity will be augmented

by commodity exports, especially to China

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 high level of private sector debt – especially mortgage loans – poses a threat to

Australia Business Environment SWOT

Strengths ƒ A highly educated workforce and comparatively modern transport infrastructure

underpin economic prospects

ƒ A number of free trade agreements with countries such as New Zealand, Thailand and the US serve as a boon for trading activities

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 over 22mn, the domestic consumer base is small by regional standards

Opportunities ƒ Australia is currently in talks with China, Malaysia, the Gulf Cooperation Council,

Japan and South Korea regarding potential bilateral free trade agreements and is also considering similar agreements with India and Indonesia

ƒ Upgrade and expansion of urban infrastructure will be needed to sustain population growth in Australia’s main cities, providing opportunities for public-private

partnerships (PPP) in the future

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

even as the government has promised to gradually reduce rates over the medium term

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

Asia

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

markets over our forecast period through to 2015 Our Q211 ratings reflect our consideration of the political and economic risks, as well as risks associated specifically with IT intellectual property (IP) rights protection and the implementation of state spending projects

In our updated Asia Q211 ratings, country rankings are unchanged, reflecting stabilisation in most

markets after the impact of the global economic downturn in 2008-2009 Across the Asia Pacific region, global economic recovery and improved consumer confidence resulted in improved trading conditions for

IT vendors, and a stronger than expected rebound in PC sales

Australia retains its top regional rating this quarter The market was boosted following confirmation that the new government will continue to implement the National Broadband Network project, which will drive the development of Australia’s digital economy and feed demand for PCs Sectors such as

government, telecoms, healthcare and banking should continue to supply demand for implementation, consulting and managed services in future

One area of opportunity should be growing demand for cloud computing services In 2010 a wide range

of leading Australian private and public sector organisations launched cloud initiatives, including many of the country’s leading banks Meanwhile, the government unveiled a six-year cloud computing strategy

The smaller, but mature IT markets of Singapore and Hong Kong take second and third positions

respectively in our ratings table, due primarily to their high Country Structure scores Key sectors of the Hong Kong economy such as financial services are investing in modernisation as Hong Kong strives to maintain its regional hub status in the face of competition from rivals such as Shanghai Hong Kong also continues to offer IT investors 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 Spending on IT services will be boosted by the continuing boom in IT-enabled services such as call centres and back-office financial services Other promising sectors for IT services include healthcare, as the government launches a series

of initiatives to develop health technology Hong Kong and Singapore are expected to emerge as cloud computing hubs due to growing interest in cloud computing across the region

On the downside, the continued restructuring of both economies, towards a more service-oriented model, may limit long-term growth prospects However, this also brings opportunities in sectors such as financial services and banking Businesses will probably remain cautious and value-focused over the short term

BMI forecasts per capita IT spending in South Korea, in fourth place in the table, will rise by one-third to

US$1,000 by 2015 South Koreans will increasingly choose to spend money on IT products due to a substantial increase in disposable incomes Consumers appear willing to upgrade their PCs and there is also a trend for households to own more than one computer New cloud computing offerings and

increased competition in this segment are expected to fuel growing demand from end-users, to utilise this technology There will be many key growth areas and IT outsourcing is expected to show a strong

demand trajectory

Malaysia remains in fifth position in our Q211 regional ratings IT spending growth will be driven by the government’s drive for greater broadband penetration It has set an optimistic target of 75% by 2015 The roll-out of a high-speed broadband network will boost IT spending outside the Klang Valley Other projected growth IT market drivers include a rise in the PC penetration level from about 35%, tax

exemptions for notebooks, and growth in disposable incomes There are increasingly attractive

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

In China, factors such as the vast potential rural market and a commitment to modernisation in sectors such as education, healthcare and manufacturing will help sustain market growth Over the forecast period, government spending, an expansion of consumer credit and expectations about China’s long-term economic growth will also drive IT investments In the services segment, growing interest in cloud computing will be stimulated by the establishment of government pilot programmes in five cities

However, there are still market risks associated with IP rights protection in China, as well as piracy and a lack of business transparency Pressure on hardware prices is also a risk in the current environment

Vietnamese IT demand, although with a rather smaller market than its leading neighbor to the north, is expected to have several long-term drivers Vietnam’s improving ICT infrastructure will facilitate the development of the nation’s IT market in a country with just 15% PC penetration Government digital divide programmes to boost internet and digital utility in rural areas will help addressable market growth and open PC ownership to a growing number of rural inhabitants Vietnam’s gradual integration into global trade networks such as ASEAN and the WTO has helped reduce tariff barriers and prices, and has increased opportunities

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 corresponding high growth potential over the forecast period However, there are challenges such as labour shortages and rising wages

India also recorded impressive double-digit y-o-y computer sales growth in 2010 The potential is clear, with less than 2% of the population owning a computer, which is about 20% of the level in China It was estimated that 5% of India’s 7.5mn SMEs could implement a technology solution in 2010 and there is increasing interest in cloud solutions Realisation of this growth potential depends on fundamental drivers such as increasing India’s low computer penetration, rising incomes, falling computer prices and the government’s ambitions to connect the country’s vast rural areas to the rest of the world

The last three markets in our regional ratings have low scores due primarily to business environment factors, despite considerable growth potential In Thailand, 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 the government’s PC for Education programme and 3G mobile and WiMAX broadband service roll-outs

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

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

of the fastest growing in the region over the five-year forecast period The SME sector will drive demand for basic hardware and applications as enterprises focus on enhanced productivity

Sri Lanka’s IT market has benefited from the restoration of peace and improvements in the security situation, which helped release pent-up demand for IT solutions The country has felt the effects of instability over the years, from disruption of distribution channels and a flourishing grey market to the underdeveloped telecoms infrastructure However, the market will feature on IT vendors’ radars as one of the best potential growth prospects in South Asia Computerisation has only started in government services Major public and private sector organisations remain largely underpenetrated in terms of basic enterprise software

Table: Asia Pacific 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 rank

Asia IT Markets Overview

IT Penetration

Across Asia, government ICT initiatives and growing affordability will drive increases in PC penetration

during BMI’s five-year forecast period While some cities and regions stand out, there is an unbalanced

pattern of regional development, with PC penetration in countries such as Singapore being above 50%, while in other countries such as Indonesia, it is less than 2%

The two Asian leaders, China and India, embody the region’s growth potential, as computer ownership remains the preserve of a minority in both countries In China, PC penetration was only around 18% in

2008 – although it was far higher in cities such as Shanghai and Beijing – and is projected to pass 30% overall by 2014 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

Lower prices will help to drive higher PC penetration in developing markets The average price of a PC in India has nearly halved over the past few years, and rising incomes and greater credit availability will continue to bring computers within reach of lower-income demographics

Around the region, affordable computer programmes continue to find favour with governments In 2009, China launched a subsidised PC initiative aimed at rural residents Australia’s computers for schools programme had provided almost AUD260mn of computers by the end of 2009 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 The highest levels of internet penetration are found in South Korea, Hong Kong and Australia, with estimated 2010 narrowband

penetration rates of 74.3%, 73% and 67.7% respectively Singapore has by far the highest rate of

broadband penetration, which was estimated at 154% in 2010 Meanwhile, the Philippines has the lowest level of internet usage, with just 6.6% narrowband and 4.9% broadband penetration estimated in 2010

The fastest growth is expected in Indonesia, where narrowband penetration is projected to leap from 30%

in 2010 to 61.2% by 2014 India is now above 20% narrowband penetration despite a lack of fixed-line infrastructure, and this should reach 30% by 2014 Fast growth is also projected for Sri Lanka, where penetration is projected to increase from 10.9% to 21.6% by 2014

Some 48.3% of Malaysians had internet access in 2010 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 in many states However, even in developing markets, the number of broadband subscribers continues to gain ground steadily In China, broadband penetration is on course to reach 34.3% by 2015, surpassing narrowband penetration of 33.6% In India, where the government designated 2007 as ‘the year of broadband’, penetration should increase eightfold

to reach 8% by 2013 from around 1% currently This is, however, a long way below government targets Singapore will also see continued strong growth in broadband penetration, which is projected to reach 202% by 2015

Meanwhile, the growth of Wi-Fi coverage will be

one driver of notebook sales in places such as

Hong Kong, where the government has committed

another HKD200mn to the deployment of a Wi-Fi

network covering more than 200 public venues

IT Growth And Drivers

Most Asian IT markets were expected to report

stronger growth in 2010 Across the region, IT

spending should have been boosted by systems

upgrades deferred from the previous year,

although much will have depended on business

confidence In some cases, companies had IT

budgets that were not spent due to economic uncertainty, and in H110 vendors reported a pick-up in project flows

Strong fundamental demand drivers of IT spending mean that there will be continued opportunities Key factors common to most markets include cheaper PCs and reform in sectors such as telecommunications and finance, as well as government initiatives

In the largest market, China, an expansion in consumer credit, as well as a commitment to modernisation

in sectors such as education, healthcare and manufacturing, will help to sustain market growth BMI

expects China’s IT market growth to be maintained by an expansion into the western region, rural areas and lower-tier cities, as well as growing demand from small and medium-sized enterprises (SMEs) IT spending will also receive a boost from government spending and IT projects associated with the

Shanghai World Expo in 2010

2010 IT Market Sizes

US$mn*

* estimate Source: BMI

The long-term potential of India’s IT market is plain: less than 3% of people in India own a computer (about one-fifth of the level in China), meaning there is real potential in the lower-end product range India’s IT market appeared to be positioned for a strong recovery in 2010 thanks to an improving

economy and stronger consumer sentiment as well as government support for modernisation in lagging sectors It is estimated that around 5% of India’s 7.5mn SMEs may have implemented a technology solution in 2010 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

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, the basic

demographics of rising computer penetration

and growing affordability should drive growth

SMEs represent a growth opportunity, as

currently only around 20% of Indonesian SMEs

are estimated to make use of IT Compliance

with government and international regulations will be a driver in financial, manufacturing and other sectors

In more developed markets such as Hong Kong and Singapore, robust retail sales led the way in early

2010 as spending recorded positive growth following a contraction in 2009 In Hong Kong, consumer

spending was expected to remain strong in 2010, as evidenced by the positive early reception of Apple’s

iPad IT market growth will be driven by government IT spending as well as cross-border trade and operation

co-The largest IT market in the region is, unsurprisingly, China, estimated at US$92.5bn in 2010, trailed distantly by Australia (US$19.4bn), India (US$16.1bn) and South Korea (US$16.1bn) Singapore’s IT market (including communications) is the largest as a proportion of national GDP (2.66%), followed by Hong Kong (2.07%)

The fastest-growing IT markets over the forecast period look set to be Sri Lanka and India, with

2010-2014 compound growth of 109% and 104% respectively, driven by increasing PC penetration China is

third, with the IT market growing by an estimated 64% over BMI’s five-year forecast period

IT Market Sizes As % Of National GDPs

2010-2014

Source: BMI

Sectors And Verticals

Regional IT markets remain hardware-centric, with hardware accounting for 42-71% of total spending in all markets in 2010 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

BMI expects a trend of rising hardware

investment to establish itself over the next few

quarters The PC market contracted in many

markets in H109, following a slowdown towards

the end of 2008 However, growth had returned in

most markets by the end of 2009 Sales of

Microsoft’s Windows 7 operating system and new

Intel core technology also had the potential to help

trigger a new cycle of hardware upgrades in 2010

and beyond, although much will depend on

business confidence

In mature markets such as Australia and

Singapore, PC sales are dominated by replacement sales In the former, upgrades are estimated to account for at least 80% of business purchases and more than 50% in the case of households 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

In less developed markets, demand from under-penetrated rural areas, affordable computer programmes and growing broadband penetration should generally drive growth 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 providing significant growth opportunities

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 The Australian government’s National Broadband Network plan should drive the development of Australia’s digital economy and the growth of services such as online banking and shopping

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

IT Markets Compound Growth

2010-2014f, %

f = forecast Source: BMI

their 3G services However, netbooks and notebooks face competition from other form factors such as

smartphones – from Palm, Research in Motion, Apple and other vendors – and tablet notebooks,

spearheaded by Apple’s iPad

Due in part to high levels of piracy, software’s share of IT spending is relatively low, ranging from

11-25% 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

Across the region, 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, ERP and other e-business products still dominate the enterprise software market, but vendors are also looking to other areas such as CRM and business intelligence, where faster growth is possible

The economic slowdown may have encouraged companies to consider cloud computing solutions such as software-as-a-service (SaaS) The hosted application model may already account for between one-fifth and one-quarter of China’s software revenues SaaS has also enjoyed steady growth in the Hong Kong market over the past three years with, according to vendor estimates, around 8% of local enterprises now use a SaaS security solution Improved broadband infrastructure will assist the popularisation of the rented software model in markets such as Indonesia

Market Structure (% Of Total IT Market)

f = forecast Scores out of 100 Source: BMI

New platforms and services in the telecoms field are drivers for that key IT spending segment, where an industry restructuring with the advent of 3G mobile services has led to more competition Meanwhile, expanding technology adoption in the logistics industry and public transport will be a source of IT

services projects Sectors such as hospitals and real estate will also provide opportunities

The IT services segment accounts for 17-40% of spending in the Asian markets covered by BMI The

global economic slowdown and credit tightening had an impact on projects in some verticals, but in 2010,

a brightening business climate should have led to more opportunities in key IT-spending verticals such as financial services, telecoms, government, healthcare and logistics

Government spending will account for a larger share of spending in many markets In China, government stimulus packages should have helped to drive IT-related investments, while in Singapore, government ICT projects such as SOE2 provide significant opportunities, with the government planning to invest around SGD1.73bn in ICT projects in its last fiscal year through March 2010 Australia’s National E-Health Transition Authority has targeted the creation of a ‘paperless environment’ for the health sector and was also expected to launch a standardised reporting system scheme in 2010 Meanwhile, the Hong Kong government’s Digital 21 initiative will continue to generate spending

Regionally, hardware deployment services remains 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 such as 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

Australia Market Overview

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 after 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 around imports, with a relatively small local IT sector Multinational

brands such as HP, IBM, SAP, Dell and Acer dominate the market, and 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 fewer than 20 workers

Hardware

Australian computer hardware sales are projected at US$9.2bn in 2011, with popularity of tablets helping

to keep demand buoyant after a strong PC market recovery in 2010 Sales are forecast to grow at a

2011-2015 CAGR of around 4% to reach US$10.8bn by 2011-2015, with drivers including new products such as

tablets, as well as government programmes, and growing broadband penetration The fastest-growing segment is notebooks, which already accounts for more than 60% of the market by value

In the first three quarters of 2010, the PC market recorded double-digit shipments growth, compared with the same period of 2009 The main driver was consumer notebooks, with total notebook sales forecast at 3.2mn units, after sales achieved annualised growth of more than one-third in H110 Meanwhile, business

sales received a boost from computer hardware tenders delayed from 2009 Migrations to Microsoft’s Windows 7 operating system and new Intel core technology fuelled hardware upgrades and should

continue to do so in 2011, although much will depend on confidence

Going into 2011, government programmes should be one factor helping to keep computer hardware demand in positive growth territory First, government subsidies of computers in education will provide support for the market In 2010, national and state governments continued to roll out new initiatives, with the Victoria government investing more than US$150mn in IT in schools

The second phase of the national 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

estimated to have reached around AUD260mn by the end of 2009 In July 2008, the government had passed a measure allowing 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

Secondly, the government’s ambitious broadband plans will also drive expansion The government’s National Broadband Network plan should further the 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 such as Vodafone will help drive sales of portable

computers as connectivity devices

Overall, hardware spending accounted for around 45% of the domestic IT market in 2010 as demand bounced back from a sharp deceleration in 2009 Demand slowed sequentially in the traditionally slower third quarter, but enterprise demand for desktops held up Sales in the fourth quarter of 2010 received a boost from strong holiday season demand, with iPads and external hard drives among popular hardware purchases

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 BMI expects a trend of rising

investment to establish itself over the next few quarters

PC penetration is high among businesses, with around 95% of small businesses and 100% of 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 Corporate IT spending had already begun to recover by the end of 2009, and companies will look to achieve greater efficiencies in the wake of the economic slowdown

medium-In the wake of the devastating Queensland floods, the IT repair and replacement bill is expected to run into hundreds of millions of dollars Many mid-tier companies suffered most, as they were unequipped for the disaster, losing desktops, laptops, servers, and even external hard drives Many companies managed to move their servers to higher ground, but losses were still throught to be substantial, with around 6,000 businesses affected in Brisbane and Ipswich alone

The main growth area is consumer notebooks, which grew by at least 25%, while consumer desktops recorded a double-digit decline Total notebook sales are forecast at around 3.5mn units in 2011 More than 90% of Australian households now have a PC, but consumers seem willing to spend on upgrading their notebook computers; it is also becoming more popular to purchase a second household PC Indeed, around 30% of households have more than one PC

Netbooks were the fastest-growing segment during the economic downturn with triple-digit growth for the relatively low-priced connectivity devices in H109, compared to the same period in 2008 Netbook shipments reached nearly 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

preferred lower-priced models

In 2010, netbooks sales growth slowed from the first quarter of the year, due in large part to the

popularity of tablets, as well as a blurring of the netbook and notebook categories Going forward,

consumer purchases are likely to be motivated by speed and processing power and there could be a trend

of demand for higher functionality netbooks Netbooks were never as popular in Australia as in some other markets, peaking at around 16% of the PC market, and the emergence of tablets is expected to see continued decline in the netbook share

We expect to see the continued growing popularity of tablets in 2011, with Apple’s iPad contining to dominate The Apple iPad 2, featuring new cameras and a 8.8mm slim body, was due to be released in Australia in late March Several other vendors followed Apple in releasing net tablet devices — which have a form factor between the size of a smartphone and a netbook — onto the Australian market

According to an estimate by market research firm Telsyte, by the end of September 2010, around 300,000

tablets had been sold in the Australian market, of which the large majority were thought to be iPads At

the end of 2010, telecoms operators such as Telstra were competing to offer affordable tablets bundled

with data services Falling prices should continue to fuel market growth, due to increasing competition The price of the original iPad has now fallen by around A$200, with an entry-level model now costing only about A$445

Tablets are being designed to appeal to consumers who find a smartphone inconvenient for consuming video media or surfing the web, but for whom a netbook is still too big or heavy Demand should

continue to grow as consumers shift their social networking habits from smartphones and PCs to tablets Tablets are more expensive than most smartphones, but, despite a mixed record with this form factor, the products are seen as a growth area in 2011

Meanwhile notebooks also face competition from smartphones from Palm, RIM, Apple and others which

often include a Wi-Fi option, and are being offered as alternative connectivity solutions Another area that vendors will watch is the e-reader market, with the release of Kindle’s new lower cost Wi-Fi Kindle, which will retail in Australia for AUD178, likely to help to bring down average prices

Software

Software is expected to account for about 17% of the Australian IT market in 2011, with estimated spending of US$3.6bn As the focus moves from hardware to services and solutions, the share of the market accounted for by software is forecast to rise by 2015, with businesses seeking greater leverage from their investments Software sales are forecast to have a CAGR of around 9%, rising to US$5.0bn by

2015

Over BMI’s five-year forecast period, ERP, CRM and other e-business products will be increasingly

popular within 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 were among the verticals vendors saw as having the most growth potential

Migration to the Windows 7 operating system retains the potential to make a positive impact on sales in

2011 Industry trends such as cloud computing, virtualisation and green IT will drive software segment growth, as will rising PC shipments, new technologies and the growing ubiquity of 3G mobile and

WiMAX However some companies, particularly in the export segment, will continue to experience a difficult trading environment in 2011, leading to caution about IT investments

In 2010 we saw a boost from systems upgrades which had previously been deferred as a result of the economic situation Routine software procurements were also squeezed as enterprises focused on costs and made cuts to protect the bottom line Consequently, some companies had still not spend their IT

budgets for 2009, due to economic uncertainty Retail leader Harvey Norman kicked off a project

costing more than AUD50mn in May 2010, which had been postponed from 2009 due to the financial crisis The project aims to replace all of its core business systems over the next five years

Software piracy has fallen in Australia in recent years but remains an issue in some segments of the market According to the Business Software Alliance, 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’ unbranded 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

Business intelligence demand has grown at a double-digit rate for the past few years and 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 the global vanguard of virtualisation of X86 servers, even if the rate is slackening

Strong growth in demand for cloud computing services is expected in 2011 A broad range of Australian organisations, from Australia Post to the Commonwealth Bank of Australia, now use cloud computing as

a means to deliver individual services Given many businesses’ focus on controlling costs, cloud

computing models have also grown in popularity and spread beyond initial core application areas

SaaS and other services are likely to be promoted by vendors and ICT service providers Around third of Australian organisations already use some cloud computing, according to an estimate by market

one-research firm Frost & Sullivan CSC Australia launched cloud computing services from its Australian

data centres in July 2010 Vendors are looking for channel partners to help them offer cloud computing services to local organisations

New cloud computing offerings and increased competition in this segment are expected to fuel further demand from end-users for this technology In addition to cost savings, businesses will look to

boost efficiency and increase flexibility in response to customer needs Large businesses are most likely

to put IT applications such as mail, phone systems and document management into the cloud

Australia’s ‘big four’ banks have been at the forefront of moves towards cloud computing after

revaluating their IT spend during the economic downturn Many Australian financial organisations such

as the ANZ Bank and CBA have adopted some hosted software from providers such as Salesforce.com

Indeed, more than 80% of Australia’s largest financial institutions are reported to use some

Salesforce.com applications, even as Australia’s financial sector regulator ARPA raised concerns about data sovereignty and location

In late 2010, Westpac was reported to have deployed its own private cloud facility, which it was

managing by drawing on existing resources The Commonealth Bank of Australia also revealed plans to deploy a cloud computing environment, with plans to outsource much of the infrastructure to an external provider Meanwhile, other large Australian institutions such as telecoms company Telstra are also exploring cloud computing models

The federal government has set out a timetable for migrating government agencies’ computing to a public cloud environment In 2010, some government agencies, such as the Australian Bureau of Statistics, moved email and other collaborative applications to the cloud However, enterprise applications that require a high level of customisation, or which are subject to regulatory or data-sensitivity constraints, are more likely to stay on premise

The government’s lengthy six-year timetable for the cloud migration, underlines that it retains security concerns, particularly about migrating private citizen data Australia faces a particular geographic

challenge in that servers large enough to host applications for large organisations are likely to be in an offshore location – most likely the US – which raises regulatory and data security issues Regardless of this, in H111 some state government agencies were proceeding independently, with the Victorian

Department of Human Services among those with plans to put more sensitive systems into the cloud

The financial services segment, another of the most promising areas for large organisation adoption of cloud computing, is particularly sensitive to issues of data security Financial regulatory body the

Australian Prudential Regulatory Authority considers every offshoring deal on a case-by-case basis

Demand picked up in 2010 with the revival of several IT projects that had been shelved in 2009

Telecoms leader Optus was considering a virtual desktop environment for its call centres and an upgrade

to Windows 7, having put on hold a US$160mn transformation the previous year Meanwhile, demand for services to help with the utilisation of cloud computing, was another driver, with bookseller chain

Dymocks among those looking ‘very seriously’ at cloud computing 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 will drive 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 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; according to a recent survey by market research firm Technology Advisory Partners, Australia was the dominant buyer of outsourcing services in the Asia Pacific region in

2009 However, traditional services such as desktop support are still the mainstay of the market, while applications services support is less developed

A significant opportunity will be services that enable the use of cloud computing models such as SaaS and IaaS Organisations in many industries are keen to drive down costs by using cloud computing models, but one priority for IT services vendors will be to address concerns about cloud security In 2010,

IT services vendors including Fujitsu and CSC rolled out cloud computing service offerings from

Australian data centres Meanwhile, the majority of Australia’s top banks such as ANZ and the

Commonwealth Bank of Australia, and telecoms companies such as Telstra, CSC and Optus, launched

cloud computing strategies in 2010 In 2010 an initiative was launched to develop a shared services platform for more than 60 small government agencies, following initiatives by larger bodies such as the Department of Human Services

Research in 2009 indicated the number of Australian companies, including SMEs, that cancelled

outsourcing contracts as a result of the economic slowdown was relatively small There were also several high-profile roll-backs of contracts as a result of the economic slowdown 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 to cut IT system management costs In the short term, maintenance and other services regarded as operating expenses were less vulnerable to cutbacks than new projects requiring major capital expenditure

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 The retail sector will be one source of opportunity as sector players look to geographic expansion and new formats to boost growth

Industry Developments

Cloud Computing Draft Strategy

In 2010, the Australian federal government announced a six-year plan for migrating government

agencies’ computing to a public cloud environment However the government’s lengthy six-year

timetable for the cloud migration, underlines that it has security concerns, particularly about migrating data about private citizens The Australian government’s draft cloud strategy requires government

agencies to notify the Department of Finance Deregulation of their intention to move to cloud

According to the plan, public cloud adoption for public-facing websites is scheduled to begin in 2011, with pan-government integration taking place from 2012 onwards A ‘whole-of-government’ service provider panel will provide services to government agencies

New Government’s ICT Policy

In November 2010, the Australian Senate passed a bill to restructure Telstra, to increase competition as Telstra’s infrastructure is incorporated in the new National Broadband Network (NBN) The NBN project aims to connect 93% of the population by 2017 and rectify a situation whereby Australian broadband charges have been ranked the fifth most expensive among OECD countries

After the victory of Australia’s Labour party-led coalition in the 2010 elections, the Australian ICT industry urged the government to clarify its broadband policy The former Rudd administration’s

ambitious NBN policy had attracted criticism, particularly from the opposition party This led to

speculation that the government may cut the NBN project However, the need to ensure support from independent MPs representing rural areas was one factor that induced the government to subsequently confirm support for the NBN

Prince of Wales Hospital in Sydney selected Siemens for an IP transition of its communications network

E-Government

In addition to computers in schools, e-government projects continued to be rolled out in 2010, despite 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 echoed 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 other licensing authorities These programmes should drive IT spending in both government and tangential sectors

While most government IT programmes were relatively immune to the global slowdown, international meltdown encouraged the government to seek greater efficiency in IT procurement In April 2009, it was reported government IT departments had been ordered to reduce the number of IT contractors

There were also 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 of such a move for smaller companies

Education Projects

Around 1,400 high schools were expected to benefit from the second phase phase of the government’s computers for schools project, announced in January 2009 According to then-computer minister Julia Gillard, this will provide 141,600 new computers 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 to what the education minister described as ‘the IT situation in schools being even bleaker than originally thought’