Australia information technology report q2 2014

Key Trends And DevelopmentsCloud computing is expected to be one of the leading IT market trends globally, but in Australia there ispotential for particularly fast growth thanks to the i

Q2 2014 www.businessmonitor.com

AUSTRALIA

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2018

Report Q2 2014

INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: March 2014

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BMI Industry View 7

Key Trends And Developments 8

IT SWOT 10

Wireline SWOT 11

Political 13

Economic 14

Business Environment 15

Industry Forecast 17

Table: Australia IT Sector - Historical Data And Forecasts (AUDmn) 17

Broadband 22

Table: Telecoms Sector - Broadband - Historical Data & Forecasts 22

Table: Telecoms Sector - Broadband - Historical Data & Forecasts 22

Macroeconomic Forecasts 24

Economic Analysis 24

Monetary Easing Can Only Do So Much 25

Weaker AUD To Provide Some Reprieve 26

Table: AUSTRALIA - ECONOMIC ACTIVITY 27

Industry Risk Reward Ratings 28

Table: Asia Pacific IT Risk/Reward Ratings - Q2 2014 30

Market Overview 31

Hardware 31

Software 37

Services 39

Industry Trends And Developments 46

Regulatory Development 49

Table: Government Authority 49

Government Initiatives 49

Regulatory News 51

Competitive Landscape 53

International Companies 53

Table: Dell 53

Table: Datacom 54

Table: SAP 55

Table: Panasonic 56

Local Company 57

Table: The Good Guys 57

Company Profile 58

SAP 58

Hewlett-Packard 63

Regional Overview 70

Hardware Sales Opportunity Remains 72

Demographic Forecast 74

Table: Australia's Population By Age Group, 1990-2020 ('000) 75

Table: Australia's Population By Age Group, 1990-2020 (% of total) 76

Table: Australia's Key Population Ratios, 1990-2020 77

Table: Australia's Rural And Urban Population, 1990-2020 77

Methodology 78

Industry Forecast Methodology 78

Sources 79

Risk/Reward Ratings Methodology 80

Table: It Risk/Reward Ratings Indicators 81

Table: Weighting Of Components 82

BMI Industry View

BMI View:

Australian IT sales are forecast to reach AUD27.943 in 2014 an increase YOY of 5.8% with the market continuing to anticipate growth against a backdrop of steady, if unspectacular economic growth Tablet sales continue to compensate for declining sales of desktop and notebook devices, with a strong

performance from manufacturers of Android tablets However H213 sales of all "smart devices" may indicate the beginnings of market saturation Meanwhile the government's One Education Programme aims

to have distributed 50,000 laptops to school children across the country by June 2014 Ongoing broadband infrastructure roll out will be beneficial to Australia's digital economy , particularly for e-commerce and cloud computing.

Computer Hardware Sales: AUD11.3bn in 2013 to AUD11.8bn in 2014, up 3.9% in local currency terms.

Strong demand for tablets is compensating for a decline in desktops and notebook shipments The release of

new devices using Intel's upgraded second generation Haswell and Broadwell chipset architectures could

boost shipments in H214

Software Sales: AUD4.3bn in 2013 to AUD4.4bn in 2014, up 3.9% in local currency terms Security

software sales are increasing, particularly for small and medium-sized enterprises (SMEs) and consumers.Enterprise resource planning and other e-business products to the small and medium-sized enterprisemarket remain a key trend driving sales

IT Services Sales: AUD10.8bn in 2013 to AUD11.7bn in 2014, up 8.9% in local currency terms IT

services will be continue to be the highest performing growth area, with cloud services the key growthdriver as local companies try to use efficiencies enabled by the National Broadband Network (NBN)

Risk/Reward Ratings: Australia's score is 68.0 out of 100.0, which remains unchanged Australia's score

has declined due to a lower growth outlook The country ranks fourth in our latest Asia Risk/RewardRatings table, behind Singapore, South Korea and Hong Kong, but still ahead of larger markets in theregion such as China, India and Indonesia

Key Trends And Developments

Cloud computing is expected to be one of the leading IT market trends globally, but in Australia there ispotential for particularly fast growth thanks to the investments in improving connectivity via the NBN Thiswill extend the reach of services, as well as providing the faster upload speeds that are key to advancedcloud computing services Cloud computing has already gained traction in Australia, with the big four banks

deploying solutions and leading international vendors such as IBM, Oracle and Amazon Web Services

investing in the market The NBN and the government's cloud computing strategy, announced in May 2013,are expected to catalyse the cloud market's development in the relatively underpenetrated areas of the publicsector and with SMEs

In June 2013 it was reported that the Australian Communications and Media Authority (ACMA) wasconsidering implementing regulatory measures to oversee the use of cloud technology In a discussionpaper, security, privacy and access to data were all identified as issues that might need regulating

Subsequently, the government outlined a policy for the adoption and use of cloud computing in officialadministrative processes Its guidelines emphasise the importance of striking a balance between takingadvantage of the cost, flexibility and scalability benefits of cloud computing, and of keeping large quantities

of private data secure Of vital importance is that the most sensitive of government-held information is notsubject to any undue threats From 12 March 2014 both the private and Federal public sectors will have tocomply with the 13 new Australia Privacy Principles (APPs) under the Privacy Act that regulate the

collection, holding, use and disclosure of "personal information"

Over the past quarter, there have been a number of important developments in the cloud computing sphere

Thus, in October, the Australia-based cloud services provider Bulletproof unveiled the country's first

Amazon Web Services (AWS) pay-as-you-go support solution, called On Demand The service will

incorporate 24-hour customer support, including assistance in 15 minutes for critical issues On Demandwill have no fixed or ongoing costs, and will employ an as-a-service model whereby customers will

instantly have access to Bulletproof's 24-7 support, but will only pay for the support time they use

Meanwhile, major new cloud services continue to be set up: in August 2013, US virtualisation software

company VMware revealed that it was preparing to roll-out its hybrid cloud service in Australia, working

with a local partner to launch the vCloud Hybrid Service Australia will be the first Asia-Pacific region toreceive the new VMware service due to its high rate of virtualisation and status as a mature market Then, in

November 2013, South Africa-based ICT services provider Dimension Data announced that over the next

three months it would be setting up four new global cloud data centres, one of which would be in

Melbourne, Australia

Metalogix has opened a new sales division in Melbourne, reports PRNewswire This will enable the

company to expand its footprint in Asia Pacific The new sales division will be offering support to market customers who have deployed Metalogix best of breed suite of products in order to enhance the use

in-and performance of enterprise content on Microsoft SharePoint, Exchange in-and Cloud platforms Also, the

division will allow the company to offer timely services to its more than 300 customers in the region, andcomplements the company's 24/7 live customer support centre in Manila, Philippines

Australia has also been quick to embrace the growing bitcoin trend, with Australian-based start-up company

CoinJar announcing in December 2013 that it will receive "Australia's first major bitcoin investment", after

it signed a AUD455,000 deal with local venture capital firm Blackbird Ventures Coinjar is a bitcoinbuying/selling exchange that was founded in February 2013 However bitcoin prices have been fluctuatingsignificantly in recent months

The latest data on Australia's hardware market show that tablets have made significant progress, whileshipments of desktops and notebooks are in decline However H213 sales of all "smart devices" mayindicate the beginnings of market saturation

Microsoft's partner vendors have demonstrated the potential for hybrids/convertibles, which combineproductivity and content consumption use cases, in H113, and the release of Intel's latest Broadwell chipsetarchitecture in Q2 2014, enabling slimmer and longer battery life devices, is expected to accelerate thisinnovation and blur the distinctions between devices

IT SWOT

SWOT Analysis

Strengths ■ High incomes and strong supporting infrastructure support high spending

■ Strong government support for ICT programmes

■ IT-literate population with high levels of PC ownership

■ Strong financial sector

■ Tablet sales are compensating for decline in desktop and notebook sales

■ Upgraded economic forecasts for 2014

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

■ Sensitive to volatility in the global economy

Opportunities ■ Government cloud computing strategy creates opportunities for vendors in the public

and SME sectors

■ Considerable demand for cloud computing services

■ Other major IT projects in areas such as healthcare, education and smart cards

Wireline SWOT

Wireline SWOT

Strengths ■ Australia's overall wireline sector is host to a large number of service providers, many

of which offer a full range of voice, data and internet services

■ Many service providers offer broadband internet connectivity by means of severaldifferent technologies

■ The penetration rate, measured as a proportion of buildings reached with broadbandnetwork infrastructure, is extremely high

■ The residential market supports strong demand for pay-TV services

■ The business market supports strong demand for converged data services

■ Australia's leading broadband operators continue to report strong internet andmultimedia service sales

Weaknesses ■ Despite a significant number of service providers, the broadband market continues to

Opportunities ■ The National Broadband Network (NBN), announced in April 2013, aims to be

completed sooner and cheaper, with the trade-off being slower connectivity

■ Demand for wireless broadband services, including WiMAX, 3G datacard and USBmodem-supported services is growing

Wireline SWOT - Continued

■ Australia's leading broadband operators are investing in the development of higherspeed broadband services This has potential to drive demand for new data services

■ The government revealed that it has set aside AUD60mn for regional, rural andremote telecoms projects; satellite and wireless broadband networks are seen as asource of potential investment in remote regions

Threats ■ Fixed-line sector may decline at a more rapid rate than expected, with potentially

negative consequences for ADSL growth

■ Proliferation of naked ADSL could hasten the decline of the fixed-line sector

■ Growing popularity of wireless broadband services could negatively affect the marketfor fixed broadband access based on DSL and cable

■ The high rate of broadband penetration reduces the scope for further growth in thebroadband sector; growth will slow as the market nears saturation point

■ Following the election of the new Liberal-National Coalition (LNC) government inSeptember 2013, the NBN is likely to offer slower connectivity than originallyenvisaged

SWOT Analysis

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

■ Economic stability over recent years supports the current political system and radicalgroups are unlikely to gain substantial support

Weaknesses ■ 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 andhas been hotly debated in parliament in recent times as the capsizing of a boat led tothe death of a number of refugees The issue continues to be debated in the federalparliament with no sign of political parties co-operating to find an alternative thatwould ensure the safe passage and fair processing of the refugees, while reducing thepossibility of people smuggling

■ The fragility of the state governments' finances compared to the large infrastructureprojects that they need to undertake has led to questions with regards to thecompatibility of the federal-state system with the country's current developmentneeds

Opportunities ■ 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 competingmilitary and economic ties

Threats ■ Australia's early support for the US 'War on Terror', among other things, has made

Australians abroad a target for Islamic extremists

■ Australia's close alliance with the US, particularly under John Howard, has left alingering feeling among some Asian governments that it is America's 'deputy sheriff'

in the region

SWOT Analysis

Strengths ■ A free-market economy supported by a highly educated workforce

■ Blessed with rich natural resources, Australia's economic activity has beenaugmented by demand for commodity exports and the investments made in themining sector

Weaknesses ■ The persistent current account deficit increases vulnerability to capital flows and, by

extension, currency volatility

■ The export basket is highly concentrated in commodities, and consequently exposesthe economy and currency to fluctuations in world prices for metals, coal andagricultural goods

Opportunities ■ The rapid expansion of Asian economies in recent years offers new opportunities for

diversifying trading ties from core European markets

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

Threats ■ The high level of private sector debt - especially mortgage loans - fuelled by overseas

funding poses a threat to sustained growth

■ A collapse in exports from a drop in resource demand from China and other hungry countries would severely impact headline GDP growth

resource-■ Australia is vulnerable to extreme weather that may lead to droughts and floods,which have become increasingly severe in past years as a result of global climatechange

Business Environment

SWOT Analysis

Strengths ■ A highly educated workforce and comparatively modern transport infrastructure

underpin economic prospects

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

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

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

■ With a population of just over 23mn, the domestic consumer base is small by regionalstandards

Opportunities ■ Australia is currently in talks with China, Malaysia, the Gulf Co-operation Council,

Indonesia, India, Japan and South Korea regarding potential bilateral free tradeagreements It is also part of negotiations for the Trans-Pacific Partnership and aregional south pacific pact, PACER plus

■ Upgrade and expansion of urban infrastructure will be needed to sustain populationgrowth in Australia's main cities, providing opportunities for public-private

partnerships in the future The government is also targeting infrastructureimprovements to rural areas

■ More healthcare infrastructure will be needed to support the ageing population, andwith the introduction of the federal government's National Disability InsuranceScheme, the industry is likely to see increasing demand for services

Threats ■ Corporate taxes for foreign investors in Australia remain higher than in other

countries, and it seems unlikely that the government will succeed to reduce the rates

in the near future

■ Recent investment proposals by Chinese firms regarding the agricultural and resourceextraction sector have raised fears that strategic assets will be lost to foreign players.This has led to more conditions attached to the sale agreements, which is likely to

SWOT Analysis - Continued

reduce the attractiveness of these assets It remains to be seen if the recentimplementation of a database to increase transparency around foreign-ownedAustralian assets will spur more regulation

Industry Forecast

BMI has estimated growth of 5.8% for the Australian IT market in 2014 Although PC sales have declined,

strong tablet sales mean the overall performance of the hardware market is in line with our expectations Weexpect the IT market to reach AUD27,943mn in 2014, up from AUD26,413mn in 2013 We expect growth

to be on average faster than in 2014 We forecast a total IT market spending compound annual growth rate(CAGR) of 5.3% in 2014-2018, with the market reaching AUD32,578mn in 2017 Over this period themarket will remain stable at around 1.7% of GDP The Australian IT market has considerable medium-termpotential, particularly in areas such as tablets, cloud computing,real-time enterprise software and data centregrowth

Table: Australia IT Sector - Historical Data And Forecasts (AUDmn)

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f

IT Market Value 24,318 25,390 26,413 27,943 29,530 31,045 32,578 34,126 o/w Hardware 10,814 11,090 11,334 11,772 12,255 12,617 13,064 13,446

- PC 8,781 9,094 9,385 9,753 10,172 10,484 10,869 11,200

- Servers 973 998 1,020 1,060 1,103 1,135 1,176 1,210 o/w Software 4,068 4,118 4,303 4,435 4,695 5,048 5,200 5,399 o/w Services 9,435 10,181 10,777 11,736 12,580 13,380 14,315 15,282

IT Market, % of GDP 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7

e/f = estimate/forecast Source: BMI

BMI has estimatedgrowth of 5.8% for the Australian IT market in 2014 Although PC sales have declined,

strong tablet sales mean the overall performance of the hardware market is in line with our expectations Weexpect the IT market to reach AUD27,943mn in 2014, up from AUD26,413mn in 2013 We expect growth

to be on average faster than in 2014 We forecast a total IT market spending compound annual growth rate(CAGR) of 5.3% in 2014-2018, with the market reaching AUD32,578mn in 2017 Over this period themarket will remain stable at around 1.7% of GDP.The Australian IT market has considerable medium-termpotential, particularly in areas such as tablets, cloud computing,real-time enterprise software and data centregrowth

2014 Outlook

We expect growth in 2014 to outperformthat seen in 2013, growing by 1.8 percentage points (pps) to 5.8%.This is despite our forecast of a further contraction in GDP growth to 2% for 2014, We expect real GDPgrowth will fall to just 2.1% in 2013 from 3.2% in 2012, with the real terms increase in private final

consumption falling to 1.3% from 1.5%

However, Australia remains a very attractive market even taking into account that we forecast GDP percapita to fall modestly until 2017 Disposable incomes are still relatively high in global terms andthis givesAustralian consumers high levels of purchasing power to spend on consumer products such as tablets,laptop-hybrids and ultrabooks

Government spending levels are increasing generally, and the government has a number of programmesspecifically boosting IT spending, eg the National Broadband Network (NBN), which is extending

connectivity across the country We expect government spending to increase by 2% in real terms in 2014 ,the same level as for 2013 Government programmes should also help keep computer hardware sales inpositive growth territory Government subsidies of computers in education will provide support for themarket National and state governments will continue to roll out new initiatives, and the Victoria

government has invested more than US$150mn in IT in schools New South Wales and Queensland werealso rolling out IT for schools projects An initiative by the not for profit organisation One Laptop Per Childwill see 50,000 laptops distributed to the nation's schoolchildren by June 2014

Looking at the enterprise segment, with the exception of a few key areas, demand for IT products andservices will continue to be squeezed by weak business confidence due to an uncertain economic outlook.However, sectors such as government, telecoms, healthcare and banking should continue to supply demandfor implementation, consulting and managed services The potential for a Chinese hard-landing would likelyhave far-reaching consequences for Australia, which could go beyond the impact of any crisis in developedmarkets

Economic concerns aside, there are areas of growth in the enterprise segment, which are mainly based onthe increasing prevalence of connectivity After the narrow victory of the Labor party-led coalition in the

2010 elections, the decision to continue the development of the NBN had a positive impact by boosting thereach and quality of broadband infrastructure The election of a Liberal / National Coalition government in

2013 is likely to result in a swifter roll out of broadband by NBN but at slower connectivity speeds Three

key areas that stand to benefit are cloud computing, data analytics and machine-to-machine

communications

In 2014, uptake of cloud services will continue to increase Surveys indicate that cloud computing is apriority for Australian CIOs, while the release of the government's cloud computing strategy in Q213 shouldalso boost deployments Cloud initiatives have already been implemented by many of the country's leadingbanks, and across sectors cloud adoption is spreading from storage and email to areas such as humanresources management The government has adopted a six-year cloud computing strategy Cloud computingspending could reach around AUD4bn by 2017

Market Drivers

The squeeze on the IT market from a slowdown in economic growth in 2013 will alleviate over the medium

term BMI forecasts the Australian economy will register an average of 2.7% real GDP growth 2014-2018,

with private final consumption increasing slightly slower annual average of 1.7% real growth Australia is ahigh-income market and we expect it to remain attractive for premium products, with low inflation andunemployment, a contrast to many other high-income economies around the world that have higher risklevels

Government initiatives such as e-government, healthcare and education will drive significant opportunitiesfor IT vendors over the medium term The National E-Health Transition Authority aims to create a

paperless environment in Australia's health sector, including public hospitals Although the government ispursuing investments in IT in a number of areas, it is reviewing procurement procedures to reduce cost,which could squeeze vendor margins For instance, in early 2013 the Australian Government Information

Management Office (AGIMO) consolidated its contracts with Microsoft through a single reseller to deliver

cost savings of AUD100mn

Governmental broadband plans will provide a boost to the development of Australia's digital

economy Increased reach of broadband infrastructure will boost activities such as online banking andshopping, while the increased upload speeds delivered by the NBN will be a crucial enabler for widespreadadoption of cloud computing services However NBN roll out targets may be under threat after it announcedthe resignation of Richard Thorpe, its Head Of Construction who was the third incumbent of this role inthree years

Meanwhile, in the enterprise segment, regulatory compliance will result in continued spending by banks,and intense competition in the retail sector is spurring spending on customer relationship management

(CRM) and back-office systems Competition in the telecoms field is a driver for that key IT spendingsegment, where deregulation has led to new entrants High labour costs in Australia will generate demand

for services that replace labour, such as Ask Watson, adopted by ANZ Bank in H113 Such technology is in the early stages of commercial deployments, but BMI believes that Australia could be a fertile market for

such technology over the medium term on the basis of potential cost savings

There has also been a recent announcement that Paycorp, a provider of secure online credit card processing

to 50,000 businesses in Australia has made an agreement to incorporate Paypal into its bouquet of payment

methods, which should significantly increase their market reach throughout the Asia Pacific area of

operations

Segments

BMI estimates that household PC penetration crossed the 90% threshold in H113, meaning there is little

scope for growth in first-time PC sales This means the market will grow slower relative to emergingmarkets in the region However, there are large opportunities in the personal/upgrade device market as weexpect consumers will continue to be willing to spend on innovative devices that offer new use cases.Tablets are the most prominent device meeting these requirements, but we believe hybrids/convertibles andultrabooks that use Haswell and, soon, Broadwell chips could gain traction in Australia

The software market is expected to register slower growth than the hardware market, growing with a CAGR

of 4.6% from 2014 to 2018 Even so it will still remain at less than half the hardware market size by 2018.Enterprise resource planning (ERP), customer relationship management (CRM) and business intelligencesolutions will be increasingly popular in the small and medium-sized enterprise (SME) market, as

companies aim to enhance productivity through the automation of essential functions BMI believes

security software has potential for strong growth over the medium term as awareness about threats grows,particularly among SMEs

BMI expects IT services will be the outperforming segment of the IT market in the medium term, as

demand is driven by cloud computing services, data analytics and machine-to-machine communications.Cloud computing should see strong growth with the rollout of the NBN and the release of the government'scloud computing strategy in 2013 Opportunities will exist in telecoms, healthcare and utilities

verticals Cloud computing will be key as businesses look for opportunities to reduce cost and increaseflexibility, and has already gained traction in the market and spread beyond initial core application areas,with around one-third of Australian organisations estimated to be using some cloud services

Over the medium term the development of supporting infrastructure, new cloud computing offerings andincreased 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' computingsystems to a public cloud environment Australia's big four banks will remain in the vanguard of movestowards cloud computing after revaluating their IT spend during the economic downturn

Summary

The hardware market is forecast to grow from AUD11,772mn in 2014 to AUD13,446mn in 2018, with PCsales (including accessories) forecast to rise from AUD9,753mn to AUD11,200mn, boosted by computerprocurement for education and new form factors Software spending is forecast to rise from AUD4,435mn

to AUD5,399mn and IT services from AUD11,736mn to AUD15,282mn

IT Market Industry Trends

2011-2018

MARKET: IT market value, AUDmn (RHS) MARKET: IT market value, % of GDP (LHS)

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f 1.6

1.65 1.7 1.75

0 20,000 40,000

e/f - estimate/forecast Source: BMI

Table: Telecoms Sector - Broadband - Historical Data & Forecasts

2011 2012 2013 2014f 2015f 2016f 2017f 2018f

No of internet users ('000) 28,920 30,950 31,492 31,940 32,224 32,635 33,185 33,886

No of internet users/100 inhabitants 127.2 134.3 134.9 135.2 134.7 134.7 135.3 136.5

No of broadband internet subscribers ('000) 11,123 12,161 12,647 13,090 13,483 13,887 14,304 14,733

No of broadband internet subscribers/100

inhabitants 48.9 52.8 54.2 55.4 56.4 57.3 58.3 59.3

f = BMI forecast Source: BMI, ITU, Australian Bureau of Statistics, operators

Table: Telecoms Sector - Broadband - Historical Data & Forecasts

2010 2011 2012 2013f 2014f 2015f 2016f 2017f

No of internet users ('000) 16,922 17,859 18,752 19,690 20,675 21,502 22,362 23,256

No of internet users/100 inhabitants 75.5 78.5 81.4 84.4 87.5 89.9 92.3 94.8

No of broadband internet subscribers ('000) 9,739 11,123 12,161 12,647 13,090 13,483 13,887 14,304

No of broadband internet subscribers/100

inhabitants 43.5 48.9 52.8 54.2 55.4 56.4 57.3 58.3

f = BMI forecast Source: BMI, ITU, Australian Bureau of Statistics, operators

We have lowered our broadband forecast for Australia to reflect the risk of disruption to the NationalBroadband Network (NBN) project Following the appointment of new Communications Minister Malcolm

Turnbull, the entire board of state-owned NBN Co has resigned Besides having to revisit the ownership

structure of the NBN Co, which could involve private sector participation to fund the rollout, massivechanges will also be needed to renegotiate contracts with network vendors, causing delay to the protractedNBN project

We expect the Australian broadband market to continue exhibiting growth potential with the mobile

broadband segment forming the main growth driver It is also increasingly common for customers to own afixed and mobile broadband connection The NBN aims to deliver broadband services, either by fixed orwireless means, to the entire population, and achieving this goal on target should provide a boost to thebroadband uptake towards the end of our forecast period

Industry Trends - Broadband

2011-2018

f = BMI forecast Source: BMI, Australian Bureau of Statistics, operators

Macroeconomic Forecasts

Economic Analysis

BMI View: The greater-than-expected job loss print recorded in December 2013 is in line with our outlook

for Australia's unemployment rate to head higher in 2014 The weak job report has fuelled increased expectations for the Reserve Bank of Australia to cut rates further, which in turn,has weighed on the Australian dollar While the weaker currency is likely to provide some breathing room for businesses, we believe that these factors will prove to be no panacea, and we maintain our outlook for real GDP growth to weaken to 2.0% in 2014, versus an estimated 2.4% in 2013.

In line with our downbeat expectations for the Australian labour market, the December report showed thatthe economy lost more full-time positions than the addition of part-time ones While workers leaving the jobmarket (or simply given up looking for a job) helped keep the overall unemployment rate steady at 5.8% atthe end of 2013, we believe that further job losses in the months ahead will outweigh the impact from thistrend, and force the overall unemployment rate to head towards our end-2014 forecast of 6.5%

Current Stability Driven By Unsustainable Factors

Australia - Seasonally-Adjusted Unemployment Rate & Labour Participation Rate (RHS), %

Source: BMI, Australia Bureau of Statistics

Monetary Easing Can Only Do So Much

On the back of this weak job market report, many market participants are now cheering for further rate cutsfrom the Reserve Bank of Australia (RBA), expecting that these interest rate cuts could help revive

economic activity We, however, hold a less optimistic outlook on the benefits that monetary easing canbring To be sure, we expect the central bank to heed softening economic indicators and add another 50basis points (bps) to the 225bps worth of cuts that they have delivered over the past one-and-a-half years.These cuts have supported growing investor interest in the Australian housing market that has help pushed

up house prices, which, in turn, has propped up the balance sheets of many households However, thisincrease in household wealth is not sustainable, especially given the lack of fundamental factors to supporthouse prices at current levels (except for the low interest rate environment) Indeed, with activity and neworder levels in the manufacturing and services sectors remaining in contractionary territory according to theAustralian Industry Group's performance indices, we see little reason for house prices to head higher overthe coming months As such, we maintain our outlook for the RBA's monetary easing to provide littlesupport to economic growth, and expect real GDP growth to slow further to 2.0% in 2014 from an already-downcast forecast of 2.4% in 2013

Little Room For Optimism

Australia - New Orders Sub-Index For Manufacturing And Services

*A level about 50 indicates expansion, Source: BMI, Australian Industry Group

Weaker AUD To Provide Some Reprieve

That said, the increased expectations for further rate cuts have also reduced demand for Australian assets

We see room for the weaker AUD to provide some reprieve to exporters, even while the general economicoutlook remains quite weak Indeed, the weaker AUD could be especially helpful to the mining industry, asminers often sell their products in US dollars Although we believe currency depreciation will prove to be

no panacea for the high costs environment in Australia, the declines will allow businesses some breathingspace (and time) while reforms are being negotiated and capital redeployed away from the mining sectorand into other productive industries That said, we caution that should the government fail to enact theurgent structural reforms that the economy needs, the Australian economy could be set to experience alonger period of adjustment

Private Consumption Growth: With the job market weakness finally showing up in the headline

unemployment rate, we believe that private consumption growth will show significant weakness in 2014.Indeed, the soft job market will weigh on wage growth, and together with high levels of household debt of94.4% of GDP as of end-2013, suggest that households could begin deleveraging While we project thegrowth of private consumption to slow to 1.3% in 2014, from an estimated 1.5% in 2013, we highlight thatthere is a possibility that should the global environment weaken significantly, we see the risks of evengreater job cuts, which could lead to an overall contraction in private consumption

Government Consumption: The Liberal-National coalition government, elected in September 2013, has

promised that it will re-evaluate government spending through its commissioned audit This is on top of theother cuts (such as to the foreign aid budget) that it has already delivered earlier in December 2013 Despitethis, the government is keen to go ahead with its new Direct Action plans and paid-parental leave, both ofwhich are likely to increase fiscal expenditures As such, we believe that public consumption growth willgrow by 2.0% in 2014, and expect any little improvement in the fiscal balance to be far smaller thangovernment projections

Gross Capital Formation: With many mining projects reaching the end of their investment phrase, as well

as increasing downside risks to a number of Australia's key mineral and energy exports, we expect overallinvestment growth to slow Indeed, the value of private sector commercial infrastructure remains higherthan new housing projects and public infrastructure projects put together Although we expect the

governments, both at the state and federal levels, to face increasing pressures to ease regulations in order tostoke private sector investment once again, we expect political and citizen opposition to slow the pace ofthese reforms

Net Exports: On the back of our expectation for domestic demand to weaken, we forecast the pace of

growth for net exports to accelerate in 2014 Indeed, we believe that import growth will remain weak,projecting it to come in at a pace of 2.7% compared to the 10-year average of 8.8% On the flipside, webelieve that the depreciating Australian dollar will help provide some upside to the exports in both goodsand services, and thus, forecast export growth to rise to 4.5% in 2014 versus 2.3% in 2013

Table: AUSTRALIA - ECONOMIC ACTIVITY

2009 2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Nominal GDP,

AUDbn 1,3 1,254.60 1,356.00 1,444.60 1,488.30 1,561.80 1,630.40 1,706.70 1,798.00 1,901.90 2,011.40 Nominal GDP, US

$bn 1,3 980 1,244.80 1,491.10 1,541.30 1,538.50 1,379.30 1,365.30 1,375.50 1,426.50 1,508.50 Real GDP

growth, % y-o-y

GDP per capita,

US$ 1,3 44,872 56,895 66,786 66,074 63,244 59,981 58,801 58,670 60,252 63,111 Population, mn 4 22 22.4 22.7 23.1 23.3 23.6 23.9 24.2 24.5 24.8 Industrial

production, %

y-o-y, ave 3 -0.8 4.7 1.2 4.6 2.9 1.2 1.6 2.1 2 2 Unemployment,

% of labour

force, eop 3 5.5 4.9 5.2 5.4 5.8 6.5 6.1 5.7 5.5 5.5

Notes: e BMI estimates f BMI forecasts 1 Calendar Years; 2 Calendar Years, Base Year = FY2008/09 (July-June).

Sources: 3 ABS/BMI calculation; 4 World Bank/UN/BMI.

Industry 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, which now extends to 2018 Our Q214 ratings reflect our analyses ofmacroeconomic and country risk factors that impact the IT market, as well as key market trends and

industry-specific risks such as intellectual property (IP) rights protection

Most of the 12 countries on our table saw changes to their scores in three categories - Industry Rewards,Country Rewards and Country Risks - of our ratings As a result, the regional average scores for thesecategories also changed, along with their respective aggregate scores and the regional average aggregatescore The increases in the Industry Rewards and Country Rewards scores were mainly due to IT marketvalue and GDP per capita figures following the extension of our forecast period to 2018 and the use ofYE13 as our base year data Despite these changes, there were only two movements on the table in thisquarter's update The Philippines moved up two places to eighth while Indonesia dropped two places to 10th.The relative stability of our rankings is down to two factors - the large spread between the aggregate scores

of the countries and the fact that the increases in the aggregate scores were largely proportional

Industry Rewards

The main factors in BMI's industry rewards rating are value of the addressable IT market, our five year

growth outlook, government initiatives and IT spending as well as market depth, which assesses the

proportion of hardware sales to other IT products and services sales South Korea and China record thehighest score of 75 in this category This reflects the depth of South Korea's IT market, with hardware salesaccounting for around 24% of the market, and the sheer size of China's IT market, which is forecast to reachUS$148.8bn in 2014 India has the third highest score in this category owing to the size of its market andstrong government ICT initiatives aimed at sustaining the country's global competitive advantage in

software development and business processes outsourcing (BPO)

Australia is the only other country with a score above the regional average in this category The remainingeight countries recorded scores that were below the regional average Despite being high-tech countries,Singapore and Hong Kong score below the regional average owing to their relatively small populations and,consequently, IT market values On the other hand, Indonesia, Malaysia and the Philippines are held back inthis category by a lack of depth in the IT market

Country Rewards

BMI's country rewards ratings incorporates key factors that impact the sale of IT products and services in a

particularly market These include the rate of urbanisation, GDP per capita and rate of unemployment.There is a wide gap between the lowest score of 15 in this category and the highest score of 100 Thisreflects the wide range in the figures in some of these indicators for the 12 countries in our table Forexample, China and India have populations of more than 1bn but Singapore and Honk Kong have

populations less than 10mn Again, Australia has a GDP per capita of more than US$60,000 but this figure

is less than US$2,000 in India and Vietnam

Singapore and Hong Kong make up for their relatively weak industry rewards scores with the maximumscore of 100 in the country rewards category In addition to high GDP per capita (US$40,000 in Hong Kongand US$56,000 in Singapore), both countries have 0% rural populations and high rates of IT literacy.Australia and South Korea are not too far behind, with country rewards scores of 95 and 80 respectively.Australia and South Korea are the only other two countries with rural population of less than 20% of thetotal population

Unsurprisingly, countries with a high proportion of rural dwellers and relatively low GDP per capitaunderperform in this category Of these countries, India, Vietnam and Sri Lanka have the lowest score of

15, compared to the regional average of score of 50 Sri Lanka has the highest rural population of 84%,followed by India at 68% India and Vietnam's GDP per capita were just US$1,400 and US$1,800

respectively The other countries recorded scores around the regional average, as the high values of someindicators were counterbalanced by scores in others

Industry Risks

BMI's industry risk rating assesses the threat from piracy and counterfeiting of IT products as well as the

existence and level of implementation of laws to protect intellectual property (IP) rights There is no change

to our ratings in this category this quarter, with South Korea and Singapore outperforming their regionalpeers in this category with scores of 75 and 70 respectively At the other end of our table, five countries -Malaysia, Indonesia, Thailand, Sri Lanka and Vietnam - recorded the lowest score of 35 The risk of IPright infringements is high in these countries, partly due to lax government regulation

Country Risks

The country risk category assesses the impact of key macroeconomic factors on the IT market Some of thefactors we consider in our analysis include short-term external and financial risks, trade bureaucracy andlegal framework We also incorporate Transparency International's corruption index in our ratings Thescores in the country risk category have the narrowest range and highest average score among the fourcategories in our table Hong Kong has the highest score of 77.7, followed by Singapore on 74.4 HongKong's score is boosted by its strong legal framework, transparent and efficient trade policies and a strongcorruption score

Table: Asia Pacific IT Risk/Reward Ratings - Q2 2014

Country Industry rewards rewards Country Industry risks Country risks IT rating Rank Previous rank

economic profile, based on BMI's proprietary Country Risk Ratings that could affect the realisation of anticipated returns Source: BMI

Market Overview

Hardware

BMI forecasts Australian computer hardware value will increase to a total of AUD11.8bn in 2014, with the

popularity of tablets keeping total PC shipments in positive growth territory by countering the decline indesktop and notebook sales We expect the hardware market to grow at a compound annual growth rate(CAGR) of around 3.5% 2014 to 2018 and reach a value of AUD13.4bn by 2018, with drivers includingnew products such as hybrid/convertible ultrabooks and tablets Meanwhile, government procurementprogrammes and growing broadband penetration will also boost sales

Data for Q113 show the market is performing in line with our expectations Research firm Gartner reported

that desktop shipments declined 20.2% year-on-year (y-o-y) to 393,352 in Q113, while notebook sales weredown 16.8% y-o-y to 724,822 Tablet sales have continued to soar, driven higher by the broader range ofdevices by price and screen size, and compensating for declining unit shipments of desktops and notebooks

In 2014 BMI expects the PC market is projected to report low single-digit growth

While tablet sales are booming, there is a fightback under way from Microsoft's partner vendors The

launch of touch-integrated Windows 8 operating system, a new wave of lower-cost ultrabooks, and the

release of Intel's new Haswell and Broadwell chipset architecture should stimulate new cycles of

hardware upgrades, and also blur device categories by enabling ultrabooks and convertibles/hybrids to offerthe mobility benefits of tablets and the productivity benefits of notebooks

In 2012 business demand was hit by concerns about the economic situation in Europe and the US, as well asdomestic issues such as the proposed carbon tax Meanwhile, Q112 there was a shortage in the supply ofhard-disk drives (HDDs) resulting from the floods in Thailand, although this was not as severe as expected.Large Australian retailers were given priority by regional suppliers, but the expectation of shortages meant acurtailment of seasonal promotions, and was a drag on the market Against a backdrop of economic

headwinds, promotions and discounting by retailers (such as Harvey Norman with its two-for-one offer)

and sales of tablets have generally helped to shore up volume sales

Despite the recent discounting, prices remain on average higher in Australia compared with many otherdevelopment country markets, a fact that triggered a parliamentary enquiry The Parliamentary Committeelooking into IT said in 2012 that the enquiry had struck a chord with the public, resulting in a high level ofsubmissions from consumers Consumer groups have blamed differential pricing by multinationals for

prices, sometimes as much as 80% higher than for equivalent products in other countries In a study of more

than 200 products, consumer group Choice found that a selection of 12 Dell computers were 41% more

expensive on average in Australia However, IT companies argued that higher Australian prices were notIT-specific They pointed to higher wages and distribution costs, and high prices charged by Australianchannel agents

Government programmes are significant factors in the PC market Government subsidies of computers ineducation provide support for the market National and state governments have continued to roll out newinitiatives, with the Victoria government investing more than US$150mn in IT in schools Large educationprogrammes were rolled out in Queensland and New South Wales in 2012

The government's ambitious broadband plans will also drive expansion The National Broadband Network(NBN) plan should further the development of Australia's digital economy and services such as onlinebanking and shopping Converged multimedia services such as internet protocol television (IPTV) will alsofeed 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.

Desktops And Notebooks

Single-digit growth in PC shipments is forecast in 2013, as the market is affected by weaker consumerconfidence There is also a shift under way from desktops and notebooks to tablets, hybrids/convertibles andultrabooks Device categories will become less significant in coming years, as tablets become higher

powered, and hybrids/convertibles gain ground, but BMI forecasts continued declines in conventional

desktops and notebooks

Household PC penetration is high We estimate it crossed the 90% threshold in early 2013 This means there

is a limited first-time buyer market, with vendors instead focusing on the upgrade/replacement market when

it comes to conventional desktops and notebooks Upgrades are estimated to account for at least 80% ofbusiness purchases, and more than 50% in the case of households However, we believe this figure isbeginning to erode, with the lifecycle of desktops especially lengthened as consumers maintain devices andinstead purchase mobile computing devices

The enterprise market is a stalwart for desktop sales, but PC penetration is high among Australian

businesses, with around 95% of small businesses and 100% of medium-sized and large businesses havingcomputers Small business comprises more than 99% of all Australian businesses and slightly more than50% of business PC sales

In the notebook market, sales of netbooks have declined since 2010, due in large part to the popularity oftablets, as well as a blurring of the netbook and notebook categories Netbooks were the fastest growingsegment during the economic downturn and reached nearly 15% of notebook sales in Q209, with more than90,000 units sold However, the popularity of netbooks added to the downward pressure on average salesprices as consumers preferred lower-priced models Netbooks were never as popular in Australia as in someother 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

Tablets

BMI estimates tablet sales of 4.1mn in 2014 in Australia, just behind total PC sales of4.6mn (according to

Gartner data) We expect the growing popularity of tablets to continue through 2013, with shipmentsreaching around 3mn units However, it should be noted that hybrids/convertibles will increasingly blur thedistinction between tablets and notebooks

By the end of 2012 it had been forecast that as many as 40% of Australians would be using a tablet PC, withpopulation penetration at around 20% On this forecast, the diffusion curve of tablets would be steeper thanfor almost any other consumer electronics product of recent years According to an estimate by market

research firm Telesyte, by the end of September 2010 around 300,000 tablets had been sold in Australia, of

which the large majority were understood to be iPads Telesyte estimates tablet sales reached 2.4mn in

2012, with Apple again leading the market BMI estimates a lower sales figure for 2012 compared to

Telesyte However, we share their assessment of Apple dominating the market This is unsurprising giventhe high incomes of Australian consumers, meaning they have the disposable income to pay a premium forthe cachet of owning Apple devices

Data from Statcounter support our view that it dominates the tablet market The data show that Apple's

iOS, run on its tablets, accounted for 10.0% of Australian PC browsing traffic in August 2013, a figure that

was up by 3.9 percentage points (pps) y-o-y Google's Android OS, which is used on Samsung, Asus and

Google's own Nexus range, accounted for just 1.3% of PC browsing traffic (up 0.8pps y-o-y) Android hashad relatively little success in the higher income Australian market compared to in Europe, where Androiddevices have made serious inroads into Apple's dominance

Despite a longer relatively unchallenged reign at the top of the market, BMI expects Android will have an

impact in Australia, with a range of high-quality devices running the OS now available and offering serious

competition to Apple The release of popular tablets such as the Kindle Fire from Amazon, the Nexus 7 and

10 and Samsung's Galaxy Tab range represented a turning point globally, and we believe this dynamic will

affect Australia as well in 2013 and 2014

The success of Android vendors came only after the release of lower cost tablets and were mainly thesmaller 7" form factor This contrasted with Apple's larger and more expensive iPad, and the popularity ofthe smaller, cheaper devices, catalysed the development of Apple's own iPad Mini Apple is set to facecompetition throughout 2013 from rival Android vendors that will offer consumers a greater choice in terms

of price and size, as well as specifications and features

It is also important to note the gap between the strategies of some of the leading players Apple and

Samsung are hardware vendors and look to profit from the sale of devices, while Google and Amazon are

services firms and offer tablets almost at cost The strategies of services firms (combined with low costOEM tablets from China) will likely put pressure on the margins of hardware-centric vendors

Another development that will affect both the tablet and notebook markets is the arrival of Windows 8 InOctober 2012, with the launch of the new OS, Windows vendors were able to introduce touch devices, with

a number of tablets released The addition of more vendors and another touch OS will add to competition inthe market

Hybrids And Ultrabooks

The more significant development derived from Windows 8, and the arrival of more energy-efficientHaswell chipsets, is the medium-term impact on innovation and form factors Windows has a traditionalstrength in productivity use cases and software, with the OS being central to the enterprise market andMicrosoft's Office Suite ubiquitous There is an opportunity for vendors to leverage this strength over rivaliOS and Android devices by designing tablets with strong productivity functionality alongside the passivemedia consumption features Early examples have been hybrid devices such as Microsoft's own Surface

(RT & Pro), Hewlett-Packard (HP)'s Envy and Lenovo's Yoga and Helix Although design innovation has

some way to go, and prices of hybrids will need to decline, the multi-use device has scope to capture a share

of the tablet market by offering a stronger value proposition to consumers while not compromising userexperience

Some vendors have heavily promoted the concept of ultrabooks, which are being touted as premium, morefully featured notebooks, and a reaction to the previous market dominance of netbooks Ultrabooks, higherperformance notebooks designed as a response to Apple's increasingly popular MacBooks, are an emerging

product category that Intel and certain vendors backed heavily However, sales fell short of Intel's

projections due to initially high prices

Vendors appear to have realised that high prices stunted adoption of ultrabooks and are moving ahead withplans to supply low-end ultrabooks Intel reportedly has resisted lowering Ivy Bridge CPU prices, butmanufacturers are attempting to reduce costs by using cheaper Sandy Bridge CPUs and cheap batteries Thearrival of Haswell chipsets in June 2013 will enable a new generation of higher powered, slimline and longbattery life devices, as well as presaging cheaper Ivy Bridge prices This should deepen the ultrabook and

hybrid/convertible market, which BMI believes will drive sales higher in H213 and 2014.

Vendor Performance

Multinational brands dominate the Australian PC

market The major players include HP, Apple, Dell,

Lenovo and Acer The share of unbranded 'white

box' products in Australia has dropped to less than

20% HP has around a 19% share of the brand PC

market, ahead of nearest rival Apple with around

17%, and Dell has a share of around 14% The top

five vendors, including Acer and Dell, together

account for more than 70% of the market

The release of Apple's iPad created a new

competitive battleground, with Apple's rival vendors

releasing their own products Moreover, Apple has

gained major momentum in Australia from its

aggressive retail store expansion as well as the

launch of the MacBook Air Sandy Bridge refresh

model However, Apple has so far dominated tablet

sales in Australia, with the Apple iPad Air featuring new cameras, Retina display and improved battery life

The iPad has received a boost in Australia by local telecoms companies Telstra and Optus offering what

were claimed to be some of the cheapest data rates in the world for iPad users As of the end of 2010 it wasestimated that around 250,000 iPads had been sold in Australia, although firm sales figures had not beenconfirmed by Apple The number of competitor tablet devices continues to grow, with Samsung, Lenovo,

HP, Acer and Dell all reportedly working on new tablets Telecoms operators such as Telstra are competing

Australia's PC Browsing Traffic By

OS (% and percentage point

change y-o-y)

May 2013

Source: Statcounter

to offer tablets bundled with data services Telstra has released its own-branded tablet, the T-touch Tab,which runs on its Next G network.

Many of the competitor devices, including Telstra's T-touch Tab, are powered by Google's Android

operating system Other such devices include one from Lenovo named LePad, and Dell's Streak device.Samsung has enjoyed success with its Galaxy Tab, which was available from all of Australia's majortelecoms carriers for a price of AUD999 However, the device's progress in Australia was stalled by a patentinjunction brought by Apple against it In December 2011 a court overturned a sales ban that had preventedSamsung from marketing or selling the Galaxy 10.1 However, the injunction was subsequently extended,disrupting Samsung's bid for the Christmas holiday market

Competition for government tenders continues to be a significant part of the market, particularly in

connection with the computers in education programme Chinese vendor Lenovo has won a number oftenders to provide computers to New South Wales schools These have included a three-year contract inpartnership with an IT deployment company to roll out 10,000 netbooks to Victoria public schools over2009-2012 The project will provide Lenovo and Acer netbooks to students in years five through to eight

More recently, in June 2013, Lenovo and Dell became the first two technology companies to sign up to theNew South Wales government's IT hardware panel The panel, worth US$85.68mn, will provide IT

hardware for the whole of government as part of the NSW government's IT policy reforms It will initiallycover desktops, laptops and tablets but will be extended to servers, storage, imaging devices and

virtualisation Both companies will be on the panel until April 30 2015, with three 12-month extensionoffers

Lenovo remains a relatively small player in Australia and spends little in the country on mass mediaadvertising Lenovo's brand is hardly a presence in major consumer electronics retail chains such as Harvey

Norman and JBN HiFi Instead the company relies on smaller independent retailers However, it still has some large organisation clients inherited from IBM, including several banks It also has an ongoing

relationship with several government departments, with the New South Wales Education department beingone major client

Australian hardware vendors have been trying to expand their client bases by targeting the small businessmarket with new payment models to stimulate spending A former Dell executive set up an organisation

called PowerBuy that aimed to use the combined buying power of small businesses in negotiations with IT

suppliers

Vendors in Australia have also broadened their retail strategies to take advantage of relatively robustdemand in the consumer segment In 2008 Dell moved further away from its former direct selling modelwhen it started to sell its range of desktops and notebooks through 104 Officeworks stores The movemarked a dramatic shift after 10 years in the country, but was in line with its new global strategy Dell has

expanded this new strategy through an arrangement with the Good Guys discount chain.

Software

Despite high penetration rates of enterprise software, BMI believes there is potential for further investment.

Labour costs are very high, so any automation software that can provide a cost basis for implementation islikely to find a receptive market Software is expected to account for about 16% of the Australian IT market

in 2014, with forecast spending of AUD4.4bn As the focus moves from hardware to services and solutions,the share of the market accounted for by software is forecast to rise by 2018, with businesses seekinggreater leverage from their investments Software sales are forecast to have a CAGR of 4.6%, rising toAUD5.4bn by 2018

Cost-saving software including enterprise resource planning (ERP), customer relationship management(CRM) and other e-business products will be increasingly popular in the small and medium-sized enterprise(SME) market, as companies try to enhance productivity through automating essential functions and easethe pressure of high labour costs As evidence of the importance of this segment to vendors, Microsoftrecently teamed up with Telstra to offer a suite of enterprise software products to SMEs The public andfinancial sectors, healthcare, telecoms, utilities and SMEs are among the verticals vendors believe have themost growth potential

Meanwhile, in terms of operating systems, migration to the Windows 8 operating system retained thepotential to have a positive impact on sales in 2013

Recent research by Statcounter shows that Australian consumers are upgrading from Microsoft's Windows

XP operating system more quickly than their counterparts in The US and UK markets XP usage has fallen

in Australia from 71% in 2008 to 7.8% in 2014 (compared to a 12.4% in the US and 9.5% in the UK

However, due to global economic uncertainties, some companies, particularly in the export segment, willcontinue to experience a difficult trading environment, leading to caution about IT investments

Business intelligence demand has grown at a double-digit rate for the past few years and accounts foraround 5% of the total software market Australia will remain a major market for business intelligence

software in 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,make sense in the current economic climate, but create new security issues Local research has suggestedthat, for the past few years, Australia has been the global vanguard of virtualisation of X86 servers, even ifthe rate is slackening

Piracy

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 dropped to 23% in 2011 from31% 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 Some studies have found a rise in theuse of illegal software among western Australian companies, particularly in the booming mining sector Theoverall trend, however, has been one of improved general awareness, backed by appropriate legislation thathas seen Australia with one of the lowest piracy rates in APAC

Microsoft has touted the touchscreen capabilities of Windows 8, which is driving the emergence of a newgeneration of touchscreen tablets Windows 7 is also better suited to virtualisation than either Windows XP

or Windows Vista Virtualisation looks set to become an important trend in IT spending in the next fewyears, as it allows businesses to simplify the management of desktop PCs by running desktop applicationsand storing user data within the data centre Given the current economic climate, IT directors will need tojustify any upgrade in terms of cost savings

In April 2013 retailer Spend-less Shoes purchased the Microsoft Dynamics ERP system, implemented by Microsoft partner OST Microsoft's retail ERP solution is designed to provide firms with capacity adapt to

the marketplace with in-store sales techniques and monitoring consumer buying preferences OST willintroduce the ERP system in three phases, integrating POS, multi-channel management, store operations,merchandising and supply chain Previously the firm's business system was labour intensive, with highlabour costs putting pressure on margins.

In the enterprise software segment, European giant SAP has enjoyed recent successes in the Australian

markets Among the company's high-profile contracts wins in 2012 was a deployment of version 7.0 of itsCRM platform for the Victoria government's Environmental Protection Authority (EPA) The EPA wentlive with the first phase of the transformation project in July 2012 Other local SAP clients include the

Commonwealth Bank of Australia (CBA), whose estimated AUD1bn core banking replacement project SAP worked on with partner Accenture Other high-profile deals have included a project for the National Australia Bank, as well as companies like AGL Energy and public sector entities such as Queensland Rail

and the Department of Defence In mid-2012 the company won a three-year, AUD14.5mn tender from theNew South Wales Trade & Investment agency to deliver cloud-based solutions, including SAP Business ByDesign, SAP Payroll and cloud consulting services

Rivals to SAP, Microsoft and Oracle have made inroads into the enterprise software market In 2012,

Microsoft reported a number of local cloud computing business software deals These include a SaaS CRM

deal with Redback Conferencing In 2010 Microsoft Australia received a boost when Qantas, one of the largest corporate users of Lotus Notes in Australia, announced it had dumped the IBM email system in

favour of Microsoft Outlook A long-time user of Notes, Qantas announced it would migrate 20,000

workers to Outlook by the end of 2010, with the project being managed by Fujitsu Office 2009 will remain

the dominant Microsoft suite, with support continued until April 2014, but Microsoft will start encouragingusers to upgrade to the new Office 14 suite Microsoft regards smaller businesses as a growth area and hascooperated with Telstra to launch a suite of products for SMEs

IBM has proceeded with plans to deploy its enterprise-class public cloud computing infrastructure inAustralia The company aims to give Australian organisations another option for using public cloud

facilities in Australia, as opposed to offshore IBM remains one of the major IT services players in

Australia, with a particularly strong position in the government sector, and clients including Westpac, the

Department of Immigration and Citizenship, and Telstra

Services

The IT services market is expected to be an outperforming sub-segment of the IT market over the mediumterm as cloud computing pushes growth rates higher IT services are forecast to account for about 42% of

the domestic IT market in 2014, with spending of AUD11.7bn, up from AUD10.8bn in 2013 CAGR for thesegment is estimated at 7.2% from 2014 to 2018 Key verticals including government, telecoms, healthcareand banking should continue to supply demand for implementation, consulting and managed services, withthe growing popularity of cloud computing creating new opportunities.

Local companies are trying to use computing resources more effectively and integrate investments made inhardware 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 servicessuch as desktop support are still the mainstay of the market, while applications services support is lessdeveloped

Cloud Computing

The cloud computing market has already developed well in the large enterprises segment, and, with the

NBN progressing and the government announcing its cloud strategy in H113, BMI expects it to maintain

high growth rates in the medium term as adoption by public authorities and SMEs picks up

Strong growth in demand for cloud computing services is expected in 2014 A broad range of Australian

organisations, from Australia Post to CBA, now use cloud computing as a means to deliver individual

services Given many businesses' focus on controlling costs, cloud computing models have also grown inpopularity and spread beyond initial core application areas An explosion in stored data is another factorbehind the cloud trend

Organisations in many industries are keen to drive down costs by using cloud computing models

However, one priority for IT services vendors will be to address concerns about cloud security that is still adrag on service uptake

Telecoms companies such as Telstra and Optus have rolled out cloud computing service offerings from Australian datacentres Meanwhile, most of Australia's top banks, such as ANZ and CBA, have launched

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

The move towards cloud computing has been encouraged by the global economic slowdown In 2009Telstra launched a consolidation exercise to reduce its number of IT services providers from four to two