Australia information technology report q2 2012

One growth area will by demand across market segments to take advantage of opportunities presented by cloud computing.. ƒ In 2012 more leading Australian private and public sector organi

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All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as

TECHNOLOGY REPORT Q2 2012

INCLUDES 5-YEAR FORECASTS TO 2016

ROMA

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: March 2012

CONTENTS

Executive Summary 5

SWOT Analysis 7

Australia IT Sector SWOT 7

Australia Political SWOT 8

Australia Economic SWOT 8

Australia Business Environment SWOT 9

Risk/Reward Ratings 10

Table: Asia IT Risk/Reward Ratings Q212 15

Asia IT Market Overview 16

Sectors And Verticals 20

Australia Market Overview 23

Government Authority 23

Hardware 23

Software 26

IT Services 28

Industry Developments 30

Healthcare IT 31

Table: Computers For Schools Programme, Phase Two - Planned Spending By State 32

Industry Forecast 33

Table: Australia IT Sector - Historical Data & Forecasts (US$mn Unless Otherwise Stated) 35

Industry Forecast Internet 36

Table: Telecoms Sector - Internet - Historical Data & Forecasts 36

Macroeconomic Forecast 38

Table: Australia – Economic Activity 40

Competitive Landscape 41

Computers 41

Software 43

IT Services 44

Internet Competitive Landscape 46

Table: Australia Dial-Up And Broadband Internet Subscriptions, 2009-2010 47

Table: Australian Broadband Market, June 2009-June 2010 50

Company Profiles 57

Hewlett-Packard 57

SAP 63

Microsoft Corporation 67

Country Snapshot: Australia Demographic Data 72

Section 1: Population 72

Table: Demographic Indicators, 2005-2030 72

Table: Rural/Urban Breakdown, 2005-2012 73

Section 2: Education And Healthcare 73

Table: Education, 2002-2005 73

Table: Vital Statistics, 2005-2030 73

Section 3: Labour Market And Spending Power 74

Table: Employment Indicators, 2001-2006 74

Table: Consumer Expenditure, 2000-2012 (US$) 74

Table: Average Annual Wages, 2000-2012 75

BMI Methodology 76

How We Generate Our Industry Forecasts 76

Transport Industry 76

Sources 77

Executive Summary

BMI View: Australian IT spending is expected to reach US$21.6bn in 2012, up 4%, with BMI expecting

a deceleration The market should continue to offer opportunities, despite business concerns about the domestic carbon tax and the global economic situation The government's ambitious broadband plans will drive development of Australia's digital economy and services such as online banking and shopping Government tenders will drive considerable spending in future in areas such as education, e-government, transport, and healthcare One growth area will by demand across market segments to take advantage of opportunities presented by cloud computing

Headline Expenditure Projections

Computer hardware sales: US$9.2bn in 2011 to US$9.4bn in 2012, +1% in US dollar terms Forecast in

US dollar terms downwardly revised due to analyst modification although government

programmes should help to shore up demand

Software sales: US$3.5bn in 2011 to US$3.7bn in 2012, +7% in US dollar terms Forecast in US dollar

terms downwardly revised due to analyst modification but enterprise resource planning (ERP), CRM and other e-business products will be increasingly popular with the small- and medium-sized enterprise (SME) market

IT Services sales: US$8.1bn in 2011 to US$8.5bn in 2012, +6.0% in US dollar terms Forecast in US

dollar terms downwardly revised due to analyst modification, with local companies trying to use

computing resources more effectively

Risk/Reward Ratings: Australia's score was 70.9 out of 100.0 Australia ranks second in our latest Asia

region BER table, still ahead of larger rivals such as China, India and Indonesia The country benefited from a Country Structure score of 95

Key Trends & Developments

ƒ The PC market is expected to be affected by supply issues in H112 linked to the severe flooding

in Thailand in 2011 Vendors will look to ultrabooks as a new growth area, but sales are likely to

be restricted to 10-15% of the PC market in 2012, due to high prices The PC market reported mid-single digit growth in 2011, owing mainly to retailer promotions, which helped keep sales in positive growth territory

ƒ In 2012 more leading Australian private and public sector organisations are expected to launched cloud initiatives, with surveys indicating that cloud computing is a key priority for Australian CIOs Cloud initiatives have already been implemented by many of the country's leading banks Meanwhile, the government has adopted a six-year cloud computing strategy

Government subsidies of computers in education will provide support for the market In 2011, national and state governments continued to roll out new initiatives, and the Victoria government has invested more than US$150mn in IT in schools New South Wales and Queensland authorities were also rolling out IT for schools projects

SWOT Analysis

Australia IT Sector SWOT

ƒ IT-literate population

ƒ Strong financial sector

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

ƒ Sensitive to volatility in the global economy

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

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

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

refugees and economic migrants The issue is a key source of domestic tension and one that is unlikely to disappear over the medium term

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

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 it is America's 'deputy sheriff'

in the region

Australia Economic SWOT

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

by commodity exports and the high investment inflows into the mining sector

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

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

Australia Business Environment SWOT

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

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

Indonesia, India, Japan and South Korea regarding potential bilateral free trade agreements

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 in the future The government is also targeting infrastructure improvements to rural areas

countries, 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

Risk/Reward Ratings

BMI's Asia Pacific IT Risk/Reward Ratings (RRR) compares the potential of a selection of the region's

markets over our forecast period through to 2016 Our Q212 ratings reflect our consideration of the political and economic risks, as well as the risks associated specifically with IT intellectual property (IP) rights protection and the implementation of state spending projects

There were several changes to the

country rankings as we fine-tuned our

methodology to better reflect the market

conditions In this quarter's update,

highly urbanised Singapore overtook

Australia by outperforming the latter in

three out of the four components

Although Singapore's IT market is

smaller than that of Australia, Singapore

has other redeeming factors For one,

Singapore is strategically placed at the

heart of South East Asia amid emerging

markets such as Indonesia and Thailand

Its strong infrastructure, political

stability and pro-business environment

attract foreign investors and spur

Singaporean 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

Although Australia fell to second position, it still has a respectable IT Rating of 70.9, which was

significantly higher than the regional average of 50.2 Due to the sheer mass of the country, it is inevitable that certain regions suffer from a deficiency in IT services However, the government has been looking to resolve the issue with its ambitious National Broadband Network (NBN), which aims to deliver

nationwide high-speed broadband connectivity with a combination of fibre, fixed-wireless and satellite

Developed Countries Have Their Heads

Above The Rest

Asia Pacific IT Risk/Reward Ratings Q212

Source: BMI

technologies Furthermore, a number of leading Australian private and public sector organisations have launched cloud initiatives, including many of the country's leading banks, while the government has also unveiled a six-year cloud computing strategy

IT verticals such as the government, telecoms, healthcare and banking should continue to supply demand for implementation, consulting and managed services in the future Meanwhile, the NBN should drive the development of Australia's digital economy and feed demand for personal computers and mobile devices

There were no changes to Hong Kong's IT Rating score or position on the table Hong Kong has one of the lowest fibre broadband tariff rates in the world, and this provides the backbone for next generation IT services such as cloud computing and data centres While we expect robust IT market growth in Hong Kong due to the increasing investment opportunities arising from its growing links with the vast Chinese market, we also highlight that the outlook for 2012 is looking more uncertain as we envisage a hard landing in China

Similar to its developed peers in the region, South Korea is also encouraging the utilisation of cloud computing by small businesses New cloud computing offerings and increased competition in this

segment are expected to fuel growing demand to use this technology IT outsourcing is also expected to show a strong demand trajectory The government has also identified the potential and importance of software development, highlighted by the ascendency of mobile operating system (OS) Android, and has announced a plan to develop an open-source OS with domestic ICT firms Regardless of whether the project would succeed, it shows the forward-looking stance of the South Korean government and its commitment to drive IT developments in the sector

While the South Korean consumers have exhibited strong appetite for IT products, we expect private consumption to be subdued in the near term South Korea's household debt quandary leaves the economy

in a precarious position While lower interest rates have reduced the risks of an implosion in the

household debt market, high debt levels still place a substantial constraint on consumption spending A deteriorating economy is likely to place considerable weight on consumers' debt repayment ability as incomes are likely to get slashed while the jobless rate ticks up A combination of seasonal factors, as well as a worsening economy should keep downward pressure on consumer spending going into 2012

Malaysia remains in fifth position in our

Q212 regional ratings Recent

developments such as a slowdown in

production activity and falling

commodity prices, which will

exacerbate the slowdown in mining

production, continue to support our

view that Malaysia's economic growth

will witness a significant slowdown in

2012 Consequently, government

spending may become more constrained

because of commitments to tackle the

budget deficit, but there will be growth

areas IT spending growth will be driven

by the government's drive for greater

household broadband penetration of

75% by 2015

The rollout of a Malaysian high-speed fibre broadband network will boost IT spending outside the Klang Valley Other projected growth and PC 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 Guiding the government and industry is the country's Economic Transformation Programme, which has earmarked areas such as cloud computing as one of its top 10 strategic technology priorities

One of BMI's key macro themes for Asia Pacific in 2012 is a growth slowdown across the board with

recession risks highest in countries such as Australia, Hong Kong and Singapore due to factors such as a slowdown in the US and Europe as well as a Chinese hard landing

2012 may be the year in which China's economy goes from - as the title of our China Special Report in October 2011 put it - 'Miracle To Meltdown' We have warned for years about the imbalances inherent in the Chinese economic growth model, which are characterised by a major overemphasis on investment at the expense of consumption, underpinned by unsustainable credit expansion Now, several indicators point to a Chinese hard landing While the definition of hard landing is up for debate, we generally consider it to include the following characteristics: a contraction in manufacturing output as reported by the purchasing manager index (PMI) surveys; a contraction in services sector PMI; a sustained fall in

Country Structure A Letdown

Asia Pacific IT Risk/Reward Ratings Q212

Source: Q212

imports; double-digit house price declines; elevated banking sector stress; and growing expectations of currency weakness

A Chinese economic slowdown would negatively affect the IT market growth, albeit at a lesser extent than other industries such as infrastructure or automotives Factors such as the vast potential rural market and a commitment to modernisation in sectors such as education, healthcare and manufacturing are among the expected drivers We expect growing interest in cloud computing will be stimulated by the establishment of government pilot programmes However, there are still market risks associated with IP rights protection in China as well as piracy and a lack of business transparency

In the Philippines, the IT market will be driven by the local IT and business process outsourcing (BPO) sector The BPO industry, which accounts for around 30% of IT spending, continues to grow The

Philippines has a low PC penetration, like many other developing Asian countries, and the IT market offers corresponding high growth potential over the forecast period The Philippines is also looking at cloud computing as the next growth driver, with the private sector leading the charge Domestic firms have partnered with foreign IT companies in order to provide the necessary infrastructure and technology

to expand their products portfolio, which should attract businesses including small and medium-sized enterprises (SMEs) as they look to cut costs amid an uncertain global economy

India's IT industry possesses significant growth potential as only a small portion of the country's massive population has access to a personal computer Significant opportunities will also be created by demand from Indian businesses and government agencies to help use more advanced IT solutions to improve efficiency and reduce costs Consequently, India had a relatively high IT Market score of 49.0 However, the country was significantly let down by its weak Country Structure score

India is in the midst of a significant cyclical slowdown Industrial production growth stalled to a month low of 3.3% year-on-year in July 2011, led by a downturn in both capital goods and consumer durables activity The latter is of particular concern from a GDP accounting perspective given that

21-households make up the lion's share of GDP (at an estimated 62% in FY2010/11), and in line with our view, the Indian consumer has started to tighten spending on 'big ticket' purchases Although many Indian private and public sector organisations have started to consider upgrading their IT infrastructure, further deterioration in the global economy could once again force them to scale back on investments

The global consumer electronics industry has been severely disrupted by the flooding in Thailand, as output of key components for hard disk drives by Thai plants has been dramatically cut Companies that were directly affected by the disaster have announced that they are looking to relocate some of their operations to alternative countries in order to diversify risk and minimise disruptions, which is a blow to the Thai IT sector

However, we retain an overall bullish stance due to the Thai government's flood rehabilitation and IT proliferation plans We expect the launch of more compatible products to leverage on the long-awaited

launch of 3G services Intel predicts that ultrabooks could account for as much as 40% of the notebooks

sold in Thailand in 2012, although BMI has a more conservative forecast as we foresee tablet computers

as a serious threat Meanwhile, the Thai government has earmarked the ICT industry as an important growth driver Besides a plan for 3G operators to provide broadband and Wi-Fi services freely available

in schools nationwide as part of a universal social obligation initiative, the government also has a One Tablet Per Child project, which intends to bridge the digital and education divide

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 Spending in some key IT verticals, such

as financial services and banking should continue to be significant in 2012 Government IT spending is also expected to increase and could have accounted for as much as 25% of the IT market 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, Sri Lanka 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

However, initiatives such as network expansion projects by telecoms providers to increase internet penetration rates in Sri Lanka and free training tools for SMEs from the International Finance Corporation (a member of the World Bank Group) to boost adoption of IT services cloud help the country to close the gap with its regional peers

Table: Asia IT Risk/Reward Ratings Q212

Limits Of Potential Returns

Risks To Realisation Of Potential Returns

Country IT Market

Country Structure Limits

Market Risks

Country Risk Risks IT Rating

Regional Rank Singapore 57.0 100.0 72.1 70.0 85.1 79.0 74.1 1

Hong Kong 48.3 95.0 64.7 70.0 87.4 80.4 69.4 3 South Korea 53.3 75.0 60.9 75.0 71.4 72.8 64.5 4 Malaysia 41.3 55.0 46.1 35.0 76.7 60.0 50.3 5 China 53.1 30.0 45.0 35.0 68.4 55.1 48.0 6 Philippines 39.3 45.0 41.3 42.5 52.2 48.3 43.4 7 India 49.0 15.0 37.1 45.0 55.6 51.3 41.4 8 Thailand 37.5 20.0 31.4 35.0 72.6 57.6 39.2 9 Indonesia 37.5 35.0 36.6 35.0 51.6 45.0 39.1 10 Vietnam 38.1 15.0 30.0 35.0 44.2 40.5 33.2 11 Sri Lanka 30.0 10.0 23.0 35.0 44.2 40.5 28.3 12

Scores are weighted as follows: 'Rewards': 70%, of which Industry Rewards 65% and Country Rewards 35%; 'Risks': 30%, of which Industry Risks 40% and Country Risks 60% The 'Rewards' rating evaluates the size and growth potential

of a telecoms market in any given state, and country's broader economic/socio-demographic characteristics that impact the industry's development; the 'Risks' rating evaluates industry specific dangers and those emanating from the state's political/economic profile, based on BMI's proprietary Country Risk Ratings that could affect the realisation of

anticipated returns Source: BMI

Asia IT Market Overview

IT Penetration

Across Asia, government ICT initiatives and

growing affordability will help to 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 above 50%, while in other

countries, such as Indonesia, it is below 5%

The two Asian leaders, 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 25% in 2010 - although it was far higher in cities such as Shanghai and Beijing and urban PC penetration is projected to pass 60% by 2015 In India, less than 5% of people own a computer However, some 45% of the population is under 25, which provides a promising demographic context for increased

PC ownership PC penetration in Vietnam was estimated by BMI at around 15% in 2010 Notebooks are

owned by an estimated 7% of the Vietnamese population, which points to significant growth potential for the local PC market

Lower prices will help to drive higher PC

penetration in developing markets The average

price of a PC in the Indian market has nearly

halved over the past few years, and rising incomes

and greater credit availability will continue to

bring computers within the reach of lower-income

demographics Even in more mature markets, there

is room for development, however, with official

data suggesting that as many as 25% of Hong

Kong households do not have a computer at home

Around the region, affordable computer

programmes continue to find favour with

governments In China, a subsidised household

electronics products initiative aimed at rural residents has helped to boost PC sales in areas where

penetration was low In Australia 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

In Indonesia, PC 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 Meanwhile, in 2010, the Vietnamese government launched a programme entitled One Teacher-One Computer, which offered discounts on PCs for teachers and students

A similarly broad range is found with respect to internet penetration The highest levels of internet penetration are found in Singapore, South Korea, Hong Kong and Australia, with estimated 2011

penetration rates of 78.5%, 76.4% and 75.5% and 67.4% respectively Singapore has by far the highest rate of broadband penetration, which was estimated at 160.2% in 2011 Meanwhile, the Philippines has the one of lowest levels of internet usage, with just 7.1% narrowband and 6.1% broadband penetration estimated in 2011

The fastest growth is expected in Indonesia, where internet penetration is projected to leap from 36% in

2011 to 67.4% by 2015 India is now at above 28% internet penetration despite a lack of fixed-line infrastructure, and this should reach 36% by 2015 Steady growth is also projected for Sri Lanka, where penetration is projected to increase from 14.1% to 19.4% by 2015 Some 60.4% of Malaysians had internet access in 2010

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 Broadband penetration has been boosted by growing numbers of mobile broadband users, as 3G mobile services are expanded across the region In China, broadband penetration is on course to reach 33.1% by 2015 In India,

penetration should increase sixfold to reach 9.4% by 2015 from around 1.5% currently, although this remains below government targets Singapore will also see continued strong growth in broadband

penetration, which is projected to reach 186% by 2015

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 In Australia, the government's commitment to develop the National Broadband Network should further the development of Australia's digital economy

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

Across the region in 2011, IT spending should

benefit from improved economic circumstances

and tenders, previously deferred as a result of the

economic situation, although much will depend on

business confidence 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 some of the region's largest markets, such as

China, lower-tier cities and towns will be among

the fastest growing segment of the IT market BMI expects China's IT market growth to be driven by an

expansion into western China and rural areas well as growing demand from small and medium-sized enterprises (SMEs) The Chinese IT market will also receive a boost in 2011 from a 50% increase in import tariffs on some electronics products, such

as laptops

In Thailand in 2011, demand will be bolstered by

market expansion in the relatively underpenetrated

rural areas SIS forecasts that market growth in

upcountry areas will be 30% in 2011, double that

forecast for the country as a whole A similar

situation pertains to India where in 2011 there are

expected to be strong growth opportunities in

smaller cities

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 particular potential in the lower-end product range India's IT market appears to be positioned for strong growth thanks to an improving economy and consumer sentiment, and government support for modernisation in lagging sectors 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

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 is expected to remain strong in 2010, as evidenced by the positive early reception for Apple's

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

The largest IT market in the region is, unsurprisingly, China, estimated at US$105.4bn in 2011, trailed distantly by Australia (US$20.8bn), India (US$19.7bn) and South Korea (US$17.8bn.) Singapore's IT market (including communications) is the largest as a proportion of national GDP (2.2%), followed by Hong Kong (2.1%) Thailand's IT market was affected last year by a number of exogenous events

including floods in the north east of the country, and political unrest However, in 2011 the country looks

to be back on track

The fastest growing IT markets over the forecast period are projected to be India and Indonesia with 2011-2015 compound growth of 109% and 91% respectively, driven by increasing PC penetration Sri

Lanka is third with the IT market growing by an estimated 89% over BMI's five-year forecast period,

while China's total growth is estimated at a still healthy 70%

IT Markets Compound Growth

2011e-2015f (%)

e/f = estimate/forecast Source: BMI

Sectors And Verticals

Regional IT markets remain hardware-centric, with hardware accounting for 25-74% 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

In mature markets such as Australia and Singapore, PC sales are dominated by replacement sales In Australia, 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

Tablet sales will lead to a new PC market growth area, with triple-digit growth projected in many

markets In China it is estimated that tablets could account for around 6-7% of computer sales in 2011 However, partly thanks to the tablets surge, demand for netbooks has lost momentum in some markets Sales, although initially promising, have sometimes fallen short of perhaps unrealistic expectations In Australia, netbooks sales growth slowed from the first quarter of 2010, and this has continued into 2011

In less developed markets, demand from under-penetrated rural areas, affordable computer programmes and growing broadband penetration should generally drive growth In China, as in much of emerging Asia, demand from smaller towns and rural areas where PC penetration is relatively low will provide the main source of growth Another driver will be 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

Falling prices is another major driver, placing pressure on margins As of the third quarter of 2010, the average price of a PC in China was estimated to have fallen to around US$600, considerably below the price level in developed markets In India, the average price of a PC has nearly halved over the past few years, and rising incomes and greater credit availability will continue to bring computers within the reach

of lower income demographics

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, broadband plans will also help to popularise tablets

At the end of 2010, Australian telecoms operators such as Telstra were competing to offer affordable

tablets bundled with data services

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 However, netbooks and notebooks face competition from other form factors such as

smartphones from Palm, RIM, 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 9-25%

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

In 2011, sales of Microsoft's Windows 7 operating system and new Intel core technology retain the

potential to help trigger hardware upgrades, although much will depend on business confidence

Hundreds of large enterprises and thousands of small enterprises in China have already started migrating

to Windows 7, and this process is expected to continue in 2011

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) As Asian companies have become more integrated into the global supply chain, their multinational business partners often encourage them to install backoffice systems to meet efficiency requirements

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 Although the market remains relatively small, more companies are looking at computing solutions such as Software-as-a-Service (SaaS) Cloud computing business models such as SaaS offer smaller businesses a cost-effective way to deliver

applications such as payroll, tax-return processing and recruitment

The hosted application model may already account for between one-fifth and one-quarter of Chinese software revenues and SaaS has also enjoyed steady growth in the Hong Kong market over the past few years Improved broadband infrastructure will assist the popularisation of the rented software model in markets such as Indonesia Meanwhile, around one-third of Australian organisations already use some cloud computing

New platforms and services in the telecoms field is a driver 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 mean 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 have helped to drive IT-related investments, while in Singapore government ICT projects such as SOE2 provide significant opportunities Meanwhile, the Hong Kong government's Digital 21 initiative will continue to generate spending

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 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 and Hong Kong have both seen

a trend towards larger outsourcing projects in the public and private sectors

Market Structure (% Of Total IT Market)

e/f = estimate/forecast Source: BMI

Australia Market Overview

Government Authority

Government Authority Department for Broadband, Communications and the Digital Economy

Chairman Stephen Conroy

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 and;

ƒ Content policy relating to the information economy

Background

Australia's IT market is based on 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$9.4bn in 2012, with the popularity of tablets keeping demand buoyant in 2011 despite a moderation compared with 2010 Sales are forecast to grow at

a 2012-2016 CAGR of around 3% to reach US$10.3bn by 2016, with drivers including new products such

as ultrabooks and 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 2012, the PC market is projected to report low single-digit growth Business demand remains affected

by concerns about the economic situation in Europe and the US, as well as domestic issues such as the

proposed carbon tax Meanwhile, a shortage in the supply of hard-disk drives (HDDs) resulting from the Thailand floods was also a drag on the market in H112 Meanwhile, vendor expectations of a substantial boost from their promotion of ultrabooks may not be realised until prices come down closer to their US market level

Many of these adverse factors also hit the market in 2011 In Q311, shipment recorded a single-digit annualised decline, although they were up quarter-on-quarter Shortages of AMD processors also had an impact on the market, particularly the self-assembled sector, in Q411 Despite this, aggressive promotions and discounting by retailers such as Harvey Norman with its 2-for-1 offer, as well as sales of tablets, helped to shore up volume sales In Q411, seasonal demand and educational procurements boosted the market back into growth territory

Government programmes are a significant factor in the PC market Firstly, government subsidies

of computers in education provide support for the market National and state governments have continued

to roll out new initiatives, with the Victoria government investing more than US$150mn in IT in schools

In Q411, large education programmes were launched in Queensland and New South Wales, although the Thailand floods were expected to mean some delays in supplies

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 already 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

Single-digit growth in PC shipments is forecast in 2012, as the market is affected by weaker consumer confidence The main driver has been consumer notebooks, with total notebook sales forecast of 3.3mn units in 2011, after sales achieved annualised growth of one-third in 2010 Meanwhile, business sales received a boost from computer hardware tenders previously delayed because of the economic

situation Migrations to Microsoft's Windows 7 operating system have fuelled hardware upgrades and

should continue to do so, although much will depend on confidence

Overall, hardware spending accounted for around 45% of the domestic IT market in 2011, although this share is set to decline Unsurprisingly, given the high penetration levels in 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-The main growth area is consumer notebooks, which grew by at least 25% in H111, desktop sales were flat or in decline This continued the trend of 2010, when consumer notebooks again reported double-digit growth, while consumer desktops recorded a double-digit decline Total notebook sales were forecast at around 3.5mn units in 2011

More than 90% of Australian households now have a PC and consumers seem willing to spend on

upgrading their notebook computers; it is also becoming more popular to purchase a second household

PC Around 30% of households have more than one PC

Sales of netbooks were down in H111, compared with the same period of the previous year In 2010, netbooks sales growth slowed from Q110, due in large part to the popularity of tablets, as well as a blurring of the netbook and notebook categories Netbooks were the fastest-growing segment during the economic downturn and 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

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 result

in a continued decline in the netbook share

We expect the growing popularity of tablets to continue in 2012, with Apple's iPad continuing 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

South Korean OEM Samsung Electronics had planned to launch its Galaxy Tab 10.1 in Australia, but

was unable to sell the device after iPad manufacturer Apple sued for infringement on its patents With no sign of a reversal, Samsung will likely lose out on the lucrative end-of-year festive sales season While

BMI does not expect this to have a major impact on our hardware sales forecast in Australia, it is

detrimental to customer choice and retail sales

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 AUD200, with an entry-level model now costing only about AUD445

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, some vendors have heavily promoted the concept of ultrabooks, which are being touted as premium, more fully-featured notebooks, and a reaction to the recent market dominance of netbooks

However, BMI believes that vendor forecasts that ultrabooks could capture 40% of the PC market are

unlikely to be accurate in the short-term, due to their high price points Some models are currently selling

in the Australia market with 50% or more mark-up over their US prices In 2012 therefore, BMI expects

ultrabooks to be restricted to around 10-15% of the market, but this share should grow to around one-third over our five-year forecast period

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

that 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 2012, with estimated spending of US$3.7bn As the focus moves from hardware to services and solutions, the share of the market accounted for by software is forecast to rise by 2016, with businesses seeking greater leverage from their investments Software sales are forecast to have a CAGR of around 8%, rising to US$4.9bn by

2016

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

popular in the SME market, as companies try 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 believed have the most growth potential

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 These technologies are interacting and generating multiplier effects, with the growth of cloud-enabled mobile applications and mobile devices Migration to the Windows 7 operating system retains

the potential to make a positive impact on sales in 2012 However, due to global economic uncertainties, some companies, particularly in the export segment, will continue to experience a difficult trading

environment, leading to caution about IT investments

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 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 try 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 2012 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 An explosion in stored data is another factor behind the cloud trend

SaaS and other services are likely to be promoted by vendors and ICT service providers, with a survey by

research company Longhaus in H111 indicating that more than 115 are now offering such services in the

Australian market Around one-third of Australian organisations already use cloud computing, according

to an estimate by market research firm Frost & Sullivan CSC Australia launched cloud computing

services from its Australian datacentres in July 2010 Vendors are looking for channel partners to help them offer cloud computing services to local organisations

Surveys indicate that cloud computing is a top priority for Australian CIOs New cloud computing

offerings and increased competition in this segment are expected to fuel demand from end-users for this

technology In addition to cost savings, businesses will aim 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 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 Commonwealth 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, one 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

The IT services market has become 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 Exactly

29 respondents in a 2011 IDC survey said that they were either using or planning to use a Virtual private cloud (vPC.) This model; where cloud services are provided through a secured network, but not

necessarily exclusively to a single organisation; was regarded as more secure than the public cloud model

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

Telecoms companies such as Telstra and Optus have rolled out cloud computing service offerings from

Australian datacentres Meanwhile, the majority of Australia's top banks such as ANZ and the

Commonwealth Bank of Australia have launched cloud computing strategies 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 rollbacks 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 will encourage business spending on system updates Businesses are likely to remain cautious However, there will be a focus on operational efficiency and the bottom line The retail sector

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

Industry Developments

Common Operating Environment Policy

In Q411 the Australian government's Peak IT Strategy Group issued a clarification of its strategy about file formats used in government and the merits of open standards versus proprietary file format,

particularly those of Microsoft In January 2011, the first draft of the government's Common Operating Environment Policy suggested various guidelines about setting up desktop PCs for departments and agencies across the federal government The guidelines included a stipulation that Microsoft's Office Open XML should become a standard

The endorsement of Office Open XML was criticised by many as being biased against alternative office suites such as OpenOffice.org Meanwhile, some organisations such as the National Archives of Australia had already picked other standards Seemingly in reaction to such feedback, the new draft of the COE policy lists the area of the government's standard as 'to be decided' However, the debate about the

government's apparent focus on Office and associated Microsoft file formats is likely to continue

Cloud Computing Draft Strategy

The Australian federal government is implementing 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 began in 2011, with

pan-government integration now taking place from 2012 onwards A 'whole-of-pan-government' service provider panel will provide services to government agencies

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 been criticised particularly by 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

While most government IT programmes were relatively immune to the global slowdown, the 2009 economic 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 of the government's

computers for schools project, announced in January 2009 According to then-computer minister and the current Prime 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'

As a result, total spending committed to the programme was set to reach 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 just 1% of parents believed 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

Total No Of Computers Delivered

1,303 computers delivered

to 37 secondary schools 2,041

Sources: BMI, official figures

Industry Forecast

In 2012, BMI forecasts Australian IT market growth of 4%, with spending of US$21.6bn, compared with

US$20.8bn in 2011 According to our forecasts for IT spending, we expect the market to grow to a value

of US$26.7bn by 2016, a 5% CAGR for the market

The market should continue to offer opportunities, despite an expected deceleration due to adverse factors such as business concerns about the domestic carbon tax and the global economic situation One growth area will be increasing demand for cloud computing across market segments

Sectors such as government, telecoms, healthcare, and banking should continue to supply demand for implementation, consulting and managed services In 2012 more leading Australian private and public sector organisations are expected to launched cloud initiatives, with surveys indicating that cloud

computing is a key priority for Australian CIOs Cloud initiatives have already been implemented by many of the country's leading banks Meanwhile, the government has adopted a six-year cloud computing strategy

Government programmes should also help keep computer hardware sales in positive growth territory Government subsidies of computers in education will provide support for the market In 2011, national and state governments continued to roll out new initiatives, and the Victoria government has invested more than US$150mn in IT in schools New South Wales and Queensland authorities were also rolling out IT for schools projects

The enterprise segment should continue to benefit from projects that were previously deferred because of economic uncertainty After the narrow victory of the Labour party-led coalition in Australia's 2010 elections, the eventual decision to continue the development of the National Broadband Network (NBN) had positive implications for the future growth of the IT market

In 2012, government projects in sectors such as e-government, healthcare, and education will drive significant opportunities for IT vendors The National E-Health Transition Authority aims to create a paperless environment in Australia's health sector, including public hospitals

Market Drivers

Several factors underpin our forecast of a 5% 2012-2016 CAGR for the Australian IT market

Government tenders will drive considerable spending in future in areas such as education, e-government, transport, and healthcare Regulatory compliance will result in continued 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 government's ambitious broadband plans will drive development of Australia's digital economy and services such as online banking and shopping Converged multimedia services such as IPTV will also feed demand for PCs and notebooks, with entertainment features Bundling deals by 3G mobile telecoms

service providers such as Vodafone will also help drive sales of portable computers as connectivity

devices

Segments

In the consumer hardware segment, growing broadband penetration and the popularity of netbooks will be the main drivers The main growth area is consumer notebooks, which have recorded double-digit growth, while consumer desktops have been flat or in decline Netbooks enjoyed a brief surge in popularity, but have faced increasing competition from other form factors such as smartphones and tablet notebooks

Growth in notebooks sales has boosted the segment as a whole and stimulated new vendor retail tactics Around 90% of Australian households now have a PC and consumers seem willing to upgrade As there

is a trend for households to own more than one PC, the main demand component is now replacement sales

Software is projected to be the fastest-growing IT segment over the forecast period ERP, CRM, and business intelligence solutions will be increasingly popular with the SME market, as companies aim to enhance productivity through the automation of essential functions IT services account for around 42%

of total IT spending Opportunities will exist in telecoms, healthcare and utilities verticals

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

popularity and spread beyond initial core application areas, with around one-third of Australian

organisations estimated to be using some cloud services

New cloud computing offerings and increased competition in this segment are expected to fuel further demand from end-users for this technology The federal government has set out a timetable for migrating government agencies' computing systems to a public cloud environment Australia's big four banks will remain in the vanguard of moves towards cloud computing after revaluating their IT spend during the economic downturn

Summary

The hardware market is forecast to grow from US$9.4bn in 2012 to US$10.3bn in 2016, with PC sales

(including accessories) forecast to rise from US$7.8bn to US$8.7bn, boosted by computer procurement for education Software spending is forecast to rise from US$3.7bn to US$4.9bn and IT services from US$8.5bn to US$11.5bn.

Table: Australia IT Sector - Historical Data & Forecasts (US$mn Unless Otherwise Stated)

IT Market (US$mn) 17,806 19,409 20,768 21,598 22,246 23,359 24,994 26,743

IT Market as % GDP 1.8% 1.6% 1.4% 1.6% 1.9% 1.9% 1.9% 2.0%Hardware (Computer

market sales) (US$mn) 7,574 8,773 9,235 9,365 9,394 9,594 9,971 10,347Services (US$mn) 7,158 7,453 8,058 8,548 8,980 9,618 10,497 11,456Software (US$mn) 3,074 3,183 3,474 3,686 3,872 4,147 4,526 4,940PCs (including

notebooks) (US$mn) 6,135 7,106 7,499 7,679 7,778 7,944 8,256 8,567Servers (US$mn) 682 790 831 843 845 863 897 931

e/f = estimate/forecast Sources: BMI, ITU (Internet and broadband penetration)

Industry Forecast Internet

Table: Telecoms Sector - Internet - Historical Data & Forecasts

No of Internet Users ('000) 13,478 14,392 15,250 15,977 16,692 17,324 17,953 13,478

No of Internet Users/100

f = forecast Source: BMI

The latest data provided by ABS was for a

total of 10.328mn broadband subscribers at

the end of June 2011, following y-o-y

growth of 18.5% Although more rapid

growth is expected for the number of

mobile broadband subscriptions (ABS

notes that mobile wireless excluding

mobile handset connections - was the

fastest growing internet access technology

in actual numbers, increasing from 3.4mn

in June 2010 to 4.7mn in June 2011), cable

and high-speed DSL services will also

remain prominent Australia's broadband

operators continue to invest in upgrading

networks to ADSL 2+ as they witness stronger demand for capacity Meanwhile, the NBN will bring together the vast majority of Australia's fixed broadband infrastructure, augmenting and extending its footprint as necessary in areas that were traditionally bypassed by fixed operators due to low population density and poor economic prospects Efforts in terms of the state-planned NBN project are still to bear

fruit although, once under way - and the signing of equipment (with Corning) and construction (with Syntheo) contracts during Q411 indicate that progress is being made - would contribute significantly to

broadband take-up, especially in rural regions

The introduction of the NBN would enable smaller internet providers such as iiNet to compete on a level

playing field and challenge the dominance of Telstra and Optus, which in turn would boost the country's

Industry Trends – Internet Sector

2009-2016

Source: BMI

broadband subscriber base In Q411, iiNet's acquisition of Canberra-based broadband supplier

TransACT indicates the operator's ambitions to compete with larger firms

We expect the number of broadband subscribers to drop to 8.172mn in 2016 We estimate there were 15.250mn internet users in the country at the end of 2011, an increase from 14.392mn in 2010 We continue to expect internet growth to remain slow in future due to market saturation in cities such as Sydney and Melbourne

Macroeconomic Forecast

Teetering On The Edge

BMI View: Three risks threaten the Australian economy: the weak external environment, which could

adversely impact exports; the debt-laden consumer troubled by a weaker housing market and bleak employment outlook; and the acute currency weakness that could further weaken the economy should the Australian market lose favour with investors While 2011 has been a relatively smooth year for the economy, 2012 looks to be a much tougher year for businesses and consumers, and we expect growth to come in much weaker at 0.8% for 2012, before regaining its footing to grow at 3.0% in 2013

2012 looks to be a turbulent year for Australia's economy as some of the risks we have highlighted have grown even larger, while others have started to play out The external environment continues to weaken, with a weaker Chinese economy threatening to blow out hopes of greater export demand A fall in

external investor confidence in the economy could deal a blow to the economy by exposing the weakness

in Australia's external accounts Coupled with our poor outlook for exports, the overreliance on term capital inflows could result in currency weakness, which will reduce the country's purchasing power Domestically, credit growth is still weak, with overburdened households showing weakness under the increasing cost of loans and falling house prices While the economy performed relatively well in 2011,

short-we do not expect that to hold up, and expect the economy to grow at 0.8% in 2012, loshort-wer than the

Bloomberg consensus forecast of 3.0%

Australian Consumption Veering Off The Long-Term Trend

The Australian consumer will continue to face troubles, which will hamper its consumption and reduce profits We expect growth in private consumption to slow, coming in at 1.5% in 2012 and 1.7% in 2013 compared to the Treasury's estimates of 3% The deleveraging consumer remains the main driver of our core view, and we expect the impact to filter into headline GDP figures as 2012 progresses While the trend of shrinking household debt has been largely gradual, the pace could quickly escalate as the burden

of debt increases Two of the biggest banks in Australia have already announced lending rate hikes, citing increases in funding cost As interest rates rise and debt repayments grow, a larger proportion of

disposable income will be used to repay debt, forcing households to cut back on consumption goods The results posted by retailers have started to reflect this, reporting weaker than expected end-of-year sales, and we expect this weakness in retail sales to persist As the burden of debt repayments grows, declining property prices will likely force home owners to sell their properties as banks call back loans Realising the fall in house prices will reduce the overall net worth of the household and impair the ability and willingness to spend Should this risk play out, we see shrinking labour employed in retail and

construction sectors that accounts for about 20% of the jobs

With the announcement of job cuts by a number of financial institutions and manufacturers despite the heat from various unions, businesses are clearly feeling a profit margin squeeze Such a poor employment