Australia information technology report q3 2010

Executive Summary Market Overview Australia’s IT market should continue to provide opportunities in consumer, government and business sectors in 2010, following a relatively robust perf

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TECHNOLOGY REPORT Q3 2010

INCLUDES 5-YEAR FORECASTS TO 2014

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Publication Date: July 2010

CONTENTS

Executive Summary 5

SWOT Analysis 8

Australia IT Sector SWOT 8

Australia Political SWOT 8

Australia Economic SWOT 9

Australia Business Environment SWOT 9

IT Business Environment Ratings 10

Asia IT Business Environment Ratings 10

Table: Asia Pacific IT Business Environment Ratings 10

Asia Regional IT Markets Overview 13

Australia Market Overview 20

Government Authority 20

Background 20

Hardware 20

Software 22

IT Services 24

Industry Developments 25

Table: Computers For Schools Programme, Phase Two – Planned Spending By State 27

Industry Forecast Scenario 28

Table: Australia’s IT Sector (US$mn Unless Otherwise Stated) 30

Internet 31

Table: Telecoms Sector – Internet – Historical Data & Forecasts 31

Macroeconomic Forecast 32

Table: Australia – Economic Activity 34

Competitive Landscape 35

Computers 35

Software 36

IT Services 38

Internet Competitive Landscape 40

Table: Australia Dial-up And Broadband Internet Subscriptions (’000) 40

Company Profiles 46

HP Australia 46

SAP (Australia) 47

Country Snapshot: Australia Demographic Data 48

Section 1: Population 48

Table: Demographic Indicators, 2005-2030 48

Table: Rural/Urban Breakdown, 2005-2012 49

Section 2: Education And Healthcare 49

Table: Education, 2002-2005 49

Table: Vital Statistics, 2005-2030 49

Section 3: Labour Market And Spending Power 50

Table: Employment Indicators, 2001-2006 50

Table: Consumer Expenditure, 2000-2012 (US$) 50

Table: Average Annual Wages, 2000-2012 51

BMI Methodology 52

How We Generate Our Industry Forecasts 52

IT Industry 52

IT Ratings – Methodology 53

Table: IT Business Environment Indicators 54

Weighting 55

Table: Weighting Of Components 55

Sources 55

Executive Summary

Market Overview

Australia’s IT market should continue to provide opportunities in consumer, government and business sectors in 2010, following a relatively robust performance in 2009 The size of the domestic IT market is

projected by BMI to increase from US$19.1bn in 2010 to around US$23.7bn in 2014

2010 should see IT spending a boost from systems upgrades deferred from last year, although much will depend on business confidence In H110, vendors reported a pick-up in demand with the revival of a number of IT projects that had been shelved in 2009 Australian organisations implementing major IT

projects included retail giant Harvey Norman

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

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

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

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

In 2010, national and state governments will continue to roll out new initiatives, with the Victoria

government investing more than US$150mn in IT in schools Around 1,400 high schools were expected

to benefit from phase two of the government’s computers for schools project, announced in 2009 By the end of 2009, the programme was to have provided almost AUD260mn of computers

Company News

In 2010, the release of Apple’s iPad is expected to open a new competitive battleground in tablet

notebooks, with rival vendors planning to release their own rival products The iPad was officially

launched in Australia in May, with local telecoms companies Telstra and Optus offering what were

claimed to be some of the cheapest data rates in the world for iPad users

In February 2010, Microsoft Australia received a boost when Qantas, one of the largest corporate users

of Lotus Notes in Australia, announced that it had dumped the IBM email system in favour of Microsoft

Outlook A long-time user of Notes, Qantas announced that it would migrate 20,000 workers to Outlook

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

Vendors in the Australian market are investing in infrastructure to provide cloud computing services

locally IT services group CSC Australia planned to launch both infrastructure-as-a-service (IaaS) and a

range of Microsoft software-as-a-service (SaaS) from its local data centres Meanwhile, Japanese IT giant Fujitsu announced in April that it would deploy a second IaaS offering from an Australian data centre

Computer Sales

Australian computer hardware sales are projected at US$8.0bn in 2010 and, following a deceleration in

2009, are forecast to grow at a 2010-2014 CAGR of around 4% to reach US$9.3bn by 2014 The main drivers of growth in the PC market will be government programmes, growing broadband penetration and greater affordability The fastest-growing segment is notebooks, which already accounts for more than 50% of the market by value

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

Software

Software is expected to account for about 18% of the Australian IT market in 2010, with estimated spending of US$3.4bn As the focus moves from hardware to services and solutions, the share of the market accounted for by software is forecast to rise to 20% by 2014, with businesses seeking greater leverage from their investments Software sales are forecast to have a CAGR of around 8%, rising to US$4.6bn by 2014

Given the focus of many businesses of controlling costs, cloud computing models have also grown in popularity and spread beyond initial core application areas Over the forecast period, enterprise resource planning (ERP), CRM and other e-business products will be increasingly popular with the small and

medium-sized enterprise (SME) market, as companies look to enhance productivity through automating essential functions

IT Services

IT services are expected to account for about 40% of the domestic IT market in 2010 with spending of US$7.7bn, up from US$7.2bn in 2009 CAGR for the segment is estimated at 8% over 2010-2014

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

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

E-Readiness

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

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

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

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

SWOT Analysis

Australia IT Sector SWOT

Strengths ! Strong government support for ICT programmes

! IT-literate population

! Strong financial sector

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

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

! Sensitive to volatility in the global economy

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

benefits for the IT market

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

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

! Green IT as companies look to make power savings

Threats ! The biggest threat is slowdown the global economic slowdown affecting Australia’s

economic activity and leading to a scaling back of IT budgets

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

Australia Political SWOT

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

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

Weaknesses ! Despite enjoying general political stability over the years, the ruling party’s lack of a

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

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

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

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

Threats ! 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 a lingering feeling among some Asian governments that Canberra is Washington’s

‘deputy sheriff’ in the region

Australia Economic SWOT

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

workforce

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

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

and, by extension, currency volatility

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

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

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

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

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

complicates exchange rate forecasting over the near term

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

Australia Business Environment SWOT

Strengths ! A highly educated workforce and comparatively modern transport infrastructure

underpin economic prospects

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

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

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

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

Opportunities ! Australia has opened talks with China, ASEAN, Malaysia, the Gulf Co-operation

Council, Japan and South Korea regarding a free trade agreement (FTA), and is also considering FTAs with India and Indonesia

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

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

IT Business Environment Ratings

Asia IT Business Environment Ratings

Table: Asia Pacific IT Business Environment Ratings

Limits Of Potential Returns

Risks To Realisation Of Returns

IT Market

Country Structure Limits

Market Risks

Country Risk Risks

IT BE Rating

Regional Ranking Australia 56 100 71 80 71 75 72.2 1

Singapore 53 100 69 70 84 78 71.9 2Hong Kong 48 95 65 70 87 80 69.4 3South Korea 52 75 60 75 71 73 63.9 4Malaysia 41 50 44 35 77 60 49.2 5China 52 35 46 35 68 55 48.7 6India 49 15 37 45 58 53 41.9 7Philippines 37 45 40 43 50 47 41.9 8Thailand 40 20 33 35 73 58 40.5 9Indonesia 38 35 37 35 52 45 39.2 10Sri Lanka 30 10 23 35 43 40 28.0 11

Scores out of 100, with 100 highest The IT BE Rating is the principal rating It comprises two sub-ratings, ‘Limits Of Potential Returns’ and ‘Risks To Realisation Of Returns’, which have a 70% and 30% weighting respectively In turn, the ‘Limits’ rating comprises Market and Country Structure, which have a 70% and 30% weighting respectively and are based upon growth/size/maturity/govt policy of IT industry (Market) and the broader economic/socio-demographic environment (Country) The ‘Risks’ rating comprises Market Risks and Country Risk, which have a 40% and 60%

weighting respectively and are based on a subjective evaluation of industry regulatory and IP regulations (Market) and the industry’s broader Country Risk exposure (Country), which is based on BMI’s proprietary Country Risk ratings The ratings structure is aligned across the 14 industries for which BMI provides Business Environment Ratings

methodology and is designed to enable clients to consider each rating individually or as a composite, with the choice depending on their exposure to the industry in each particular state For a list of the data/indicators used, please

consult the appendix at the back of the report Source: BMI

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

markets over our forecast period through to 2014 Our Q310 ratings reflect our consideration of the political and economic risks, as well as risks associated specifically with IT intellectual property (IP) rights protection and the implementation of state spending projects

Across the Asia Pacific region, the onset of the global economic recovery and an upwards trend in

consumer confidence has led to improved trading conditions for IT vendors India and Malaysia were the gained most in our rankings for Q310, but many markets recorded stronger than expected year-on-year growth in computer shipments in Q110

Australia retains its top regional rating this quarter In Q110, a number of IT projects delayed from 2009 were launched across sectors, ranging from telecoms to retail, underlying the opportunities in the market Market development will be underpinned by government ICT programmes, such as the National

Broadband Network project, which will drive the development of Australia’s digital economy and feed demand for PCs Government tenders will also generate opportunities in years to come in areas such as education, e-government, transport and healthcare

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

respectively in our ratings table, due primarily to their high Country Structure scores Computer sales were strong in Hong Kong in Q110, as the economy recorded positive growth following a contraction in

2009 Hong Kong continues to offer investors in the IT field opportunities associated with its growing links to the vast Chinese market

Singapore benefits from high broadband penetration and initiatives such as the government’s ambitious Intelligent Nation 2015 plan and the standard operating environment IT services spending 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

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

South Korea, in fourth place in the table, should have a resurgence in business orders in 2010 and BMI

forecasts that per capita IT spending will rise from US$750 in 2010 to US$921 by 2014 Consumers appear willing to upgrade their PCs and there is also a trend for households to own more than one

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

In China, factors such as the vast potential rural market, government spending and demand from key verticals such as telecoms should drive growth Over the forecast period, expectations about China’s long-term economic growth will drive IT investments Key sectors include telecoms, government, energy, social security, education and transport However, there are still risks associated with IP rights protection and piracy and a lack of business environment transparency Pressure on hardware prices is also a risk in the current environment

Malaysia rose from sixth to fifth in our regional ratings in Q210 and keeps its place IT spending growth will be driven by a rise in the PC penetration level from around 35%, rising incomes and a hi-tech-

focused national development plan The subsidised rollout of a high-speed broadband network will

address a relative lack of ICT infrastructure outside the Klang Valley There are also increasingly

attractive opportunities in the IT services area as the government implements measures to make Malaysia

a growing regional services and outsourcing hub

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

India was the another country to make gains in our IT market ratings last quarter, following year-on-year computer sales growth of approximately a third in Q110 Even so, the market has yet to return to the high growth recorded before the global economic crisis The potential is obvious, with less than 2% of the population owning a computer, about a fifth of the level in China Realisation of this long-term

growth potential depends on fundamental drivers such as increasing India’s low computer penetration, rising incomes, falling computer prices and the government’s ambitions to connect the country’s vast rural areas to the rest of the world

Three South East Asian markets occupy the final three positions in the table, with low scores due

primarily to business environment factors, despite considerable growth potential In Thailand, once an upturn starts IT spending could drive forward again as customers make good on pent-up demand The fundamentals of growing affordability and low PC penetration should keep the market in positive territory during the forecast period A number of factors should also support momentum, including the

government’s PC for Education programme and 3G mobile and WiMAX broadband service rollouts

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

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

back strongly from the deceleration in 2009 and become one of the best regional IT market growth prospects over the five-year forecast period The SME sector will drive demand for basic hardware and applications as enterprises look to enhance productivity

Sri Lanka’s IT market has felt the effects over the years of the country’s political and economic

instability, from disruption of distribution channels and a flourishing grey market to underdeveloped telecoms infrastructure However, the market will feature on IT vendors’ radars as one of the best

potential growth prospects in South Asia Computerisation has only just got started in government

services and major public and private sector organisations remain largely underpenetrated in terms of basic enterprise software

Asia Regional IT Markets Overview

IT Penetration

Across Asia, government ICT initiatives

and growing affordability will drive

increases in PC penetration during BMI’s

five-year forecast period While some

cities and regions stand out, there is an

unbalanced pattern of regional

development, with PC penetration in

countries like Singapore being above

50%, while in other countries such as

Indonesia, it is less than 2%

The two Asian giants, China and India,

embody the region’s growth potential, as

computer ownership remains the preserve of a minority in both countries In China, PC penetration was only around 18% in 2008 – although it was far higher in cities like Shanghai and Beijing – and projected

to pass 30% overall by 2014 In India, less than 2% of people own a computer However, some 45% of the population is under 25, which provides a promising demographic context for increased PC ownership

Lower price will help to drive higher PC

penetration in developing markets The

average price of a PC in India has nearly

halved over the past few years, and rising

incomes and greater credit availability

will continue to bring computers within

the reach of lower-income demographics

Around the region, affordable computer

programmes continue to find favour with

governments In 2009, China launched a

subsidised PC initiative aimed at rural

residents Australia’s computers for

schools programme had provided almost AUD260mn of computers by the end of 2009 In Indonesia, penetration of around 2% could double by 2013 if government initiatives are followed through The Indonesian government is also rolling out new e-learning initiatives, with a target of raising the current 1:3,200 ratio of PCs to students in public schools to 1:20

A similarly broad range is found with respect to internet penetration The highest levels of internet penetration are found in South Korea, Hong Kong and Australia, with estimated 2010 narrowband

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

broadband penetration, which was estimated at 134% in 2010 Meanwhile, the Philippines has the lowest level of internet usage, with just 6.6% narrowband and 8.1% broadband penetration estimated in 2010

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

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

Some 48.3% of Malaysians had internet access in 2010 Across the region, government programmes are

an important driver of ICT penetration The Chinese government has a five-year plan to make the internet available in every administrative village in central and eastern China and every township in the west

Dial-up technology is still the dominant access method in many states However, even in developing markets, the number of broadband subscribers continues to gain ground steadily In China, broadband penetration is on course to reach 43.4% by 2014, surpassing narrowband penetration of 33.6% In India, where the government designated 2007 as ‘the year of broadband’, penetration should increase eightfold

to reach 8% by 2013 from around 1% currently This is far below government targets, however

Singapore will also see continued strong growth in broadband penetration, which is projected to reach 174% by 2014

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

covering more than 200 public venues

IT Growth And Drivers

Most Asian IT markets are expected to

report stronger growth in 2010 Across

the region, 2010 should see IT spending a

boost from systems upgrades deferred

from the previous year, although much

will depend on business confidence In

some cases, companies had IT budgets

that were not spent due to economic

uncertainty, and in H110 vendors

reported a pick-up in project flows

Strong fundamental demand drivers of IT

spending meant that there will be continued opportunities Key factors common to most markets include cheaper PCs and reform in sectors such as telecommunications and finance, as well as government initiatives

In the largest market, China, an

expansion in consumer credit, as well as

a commitment to modernisation in

sectors like education, healthcare and

manufacturing, will help to sustain

market growth BMI expects China’s IT

market growth to be maintained by an

expansion into the western region, rural

areas and lower-tier cities, as well as

growing demand from SMEs IT

spending will also receive a boost from

government spending and IT projects

associated with the Shanghai World Expo

in 2010

2010 IT Market Sizes

US$mn*

*estimates Source: BMI

IT Market Sizes As % Of National GDPs

2010-2014

Source: BMI

The long-term potential of India’s IT market is plain: less than 3% of people in India own a computer (about one-fifth of the level in China), meaning particular potential in the lower-end product range India’s IT market appears to be positioned for a strong recovery in 2010 thanks to improving an economy and stronger consumer sentiment as well as government support for modernisation in lagging sectors It is estimated that around 5% of India’s 7.5mn SMEs could implement a technology solution in 2010

Meanwhile, India’s business process outsourcing industry is growing at around 40% per annum and will continue to generate opportunities for vendors of IT products and services

The Philippines is one of the countries

currently benefiting from low-priced PC

programmes (PC4ALL), which provide

opportunities for vendors to penetrate the

low-income segments Other regional

computer sale drivers over the forecast

period include education, lower prices, IP

telephony, cheaper processors as well as

notebook entertainment and wireless

networking features Meanwhile, in

Indonesia, the basic demographics of

rising computer penetration and growing

affordability should drive growth SMEs

represent a growth opportunity, as currently only around 20% of Indonesian SMEs are estimated to make use of IT Compliance with government and international regulations will be a driver in financial,

manufacturing and other sectors

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

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

spending 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$86.9bn in 2010, trailed distantly by Australia (US$19.1bn), South Korea (US$16.1bn) and India (US$16.0bn) Singapore’s IT market (including communications) is the largest as a proportion of national GDP (2.66%), followed by Hong Kong (2.07%.)

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

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

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

IT Markets Compound Growth

2010f-2014f, %

f = forecast Source: BMI

Sectors And Verticals

Regional IT markets remain hardware-centric, with hardware accounting for 42-71% of total spending in all markets in 2010 However, spending on software and services will grow faster Notebook sales are growing much faster than the PC market as a whole, with growth driven by falling prices and more features

BMI expects a trend of rising hardware investment to establish itself over the next few quarters The PC

market contracted in many markets in H109, following a slowdown towards the end of 2008 However,

growth had returned in most markets by the end of 2009 Sales of Microsoft’s Windows 7 operating system and new Intel core technology also have the potential to help trigger a new cycle of hardware

upgrades in 2010, although much will depend on business confidence

In mature markets like Australia and Singapore, PC sales are dominated by replacement sales In the former, upgrades are estimated to account for at least 80% of business purchases and more than 50% in the case of households More than 90% of Australian households now have a PC, but consumers have appeared willing to spend on upgrading their notebook computers and it is also becoming more popular to purchase a second household PC Indeed, around 30% of households have more than one PC

In less developed markets, demand from under-penetrated rural areas, affordable computer programmes and growing broadband penetration should generally drive growth In much of emerging Asia, demand from smaller towns and rural areas will provide the main source of growth, along with replacement of desktops with notebooks SMEs will be one of the strong growth segments over the forecast period, with SME demand for servers and networking equipment a significant growth opportunity

In both emerging and more mature markets, the growing popularity of broadband will help to support

computer sales China Telecom is among regional telecoms companies to have rolled out PC bundling

offers as part of its broadband packages The Australian government’s National Broadband Network plan should drive development of Australia’s digital economy and services such as online banking and

shopping

Meanwhile, a wave of 3G launches across the region should also provide a stimulus to sales of notebooks,

with Vodafone Hong Kong among service providers offering 3G/HSPA USB modems bundled with

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

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

spearheaded by Apple’s iPad

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

11-25% among countries covered by BMI Efforts are being made to tackle the issue of piracy, but despite

government crackdowns in China and the Philippines, software piracy remains above 70% in most of emerging Asia

Across the region, there is a growing trend for smaller companies to seek greater efficiency by using IT to improve productivity and reduce costs (including labour costs) In general, enterprise resource planning (ERP) and other e-business products still dominate the enterprise software market, but vendors are also looking to other areas such as customer relationship management (CRM) and business intelligence, where faster growth is possible

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

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,

Market Structure (% Of Total IT Market)

f = forecast Scores out of 100 Source: BMI

a brightening business climate should mean more opportunities in key IT-spending verticals like 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, with the government planning to invest around SGD1.73bn in ICT projects in its last fiscal year through March 2010 Australia’s National E-Health Transition Authority has targeted the creation of a ‘paperless environment’ for the health sector and was also expected to launch a standardised reporting system scheme in 2010 Meanwhile, the Hong Kong government’s Digital 21 initiative will continue to generate spending

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

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

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

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

In many countries, the number and size of local outsourcing deals are increasing Outsourcing could account for as much as 30% of China’s IT services spending by 2013, while in India there have been

some large contracts such as that awarded by Idea Cellular to IBM Singapore – where the government

was to tender a major outsourcing contract in 2008 – and Hong Kong have both seen a trend towards larger outsourcing projects in the public and private sectors

Australia Market Overview

Government Authority

Government Authority Department for Broadband, Communications and the Digital Economy

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

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

! Broadband policy and programmes;

! Postal and telecommunications policies and programmes;

! Spectrum policy management;

! Broadcasting policy;

! National policy issues relating to the digital economy;

! Content policy relating to the information economy

Background

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

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

substantial presence

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

Hardware

Australian computer hardware sales are projected at US$8.0bn in 2010 and, following a deceleration in

2009, are forecast to grow at a 2010-2014 CAGR of around 4% to reach US$9.3bn by 2014 The main drivers of growth in the PC segment will be government programmes, growing broadband penetration and

greater affordability The fastest-growing segment is notebooks, which already accounts for more than 50% of the market by value

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

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

PC market is dominated by replacement sales Upgrades are estimated to account for at least 80% of

business purchases and more than 50% in the case of households BMI expects a trend of rising

investment to establish itself over the next few quarters The PC market contracted in H109, following a slowdown towards the end of 2008 However, the decline slowed to low single digits in the second quarter, with double-digit sequential growth from Q109

The slowdown in 2009 was despite a boost from the stimulus package and lower interest rates Amid economic uncertainty, some IT budgets were cut in the commercial sector in 2009, with the replacement cycle for computer systems stretching for some companies However, government ICT programmes and continuing demand for notebooks and netbooks helped to limit stagnation

The main growth area was consumer notebooks, which grew by at least 25%, while consumer desktops recorded a double-digit decline 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

Netbooks were the fastest-growing segment, with triple-digit growth in H109 over the same period of

2008 Netbook shipments reached close to 15% of notebook sales in Q209, with more than 90,000 units sold However, the popularity of netbooks added to the downward pressure on average sales prices as consumers demonstrated a preference for lower-priced models

Corporate IT spending is expected to pick up in 2010 and had started to recover by the end of 2009, as companies looked to achieve greater efficiencies in the wake of the economic slowdown PC penetration

is high among businesses, with around 95% of small businesses and 100% of medium-sized and large businesses having computers Small business comprise more than 99% of all Australian businesses and slightly more than 50% of business PC sales

There could be a boost, particularly in the second half of 2010, from computer hardware tenders delayed

from 2009 Sales of Microsoft’s Windows 7 operating system and new Intel core technology also has the

potential to help trigger a new cycle of hardware upgrades in 2010, although much will depend on

business confidence

A number of government programmes should help to keep computer hardware demand in positive growth territory First, government subsidies of computers in education will provide support for the market In

2010, national and state governments will continue to roll out new initiatives, with the Victoria

government investing more than US$150mn in IT in schools

The second phase of the national government’s computers for schools programme was expected to provide 141,600 new computers to schools around the country, with the value of the programme forecast

to have reached around AUD260mn by the end of 2009 Meanwhile, in July 2008, the government had passed a measure that allowed households to reclaim a 50% rebate of up to US$625 a year for primary and US$1,500 for secondary students for laptops and other IT-related equipment

Secondly, the government’s ambitious broadband plans will also drive expansion The government’s National Broadband Network plan should drive development of Australia’s digital economy and services such as online banking and shopping Converged multimedia services such as internet protocol television (IPTV) will also feed demand for PCs and notebooks with entertainment features Bundling deals by 3G

mobile telecoms service providers like Vodafone will help to drive sales of portable computers as

connectivity devices

Software

Software is expected to account for about 18% of the Australian IT market in 2010, with estimated spending of US$3.4bn As the focus moves from hardware to services and solutions, the share of the market accounted for by software is forecast to rise to 20% by 2014, with businesses seeking greater leverage from their investments Software sales are forecast to have a CAGR of around 8%, rising to US$4.6bn by 2014

2010 should see a boost from systems upgrades deferred from last year, although much will depend on business confidence In some cases, companies had IT budgets that were not spent due to economic

uncertainty In May, retail giant Harvey Norman kicked off a AUD50mn+ project, postponed from 2009

due to the financial crisis, to replace all of its core business systems over the next five-years More routine software procurements were also squeezed as enterprises focused on costs and made cuts to protect the bottom line

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

popular with the SME market, as companies look to enhance productivity through automating essential functions As evidence of the importance of this segment to vendors, Microsoft recently teamed up with

Telstra to offer a suite of enterprise software products to SMEs In 2010, the public and financial sectors,

healthcare, telecoms, utilities and SMEs are among verticals seen by vendors as having the most growth

potential Towards the end of 2009, there was software spending by organisations such as Newcrest Mining, National Australia Bank and the defence department

Sales of the Windows 7 operating system have the potential to impact positively on sales this year There should also be a boost from systems upgrades delayed from 2009 Growing PC shipments, new

technologies and business models including 3G mobile, WiMAX as well as industry trends such as SaaS, green IT and virtualisation will provide areas of software segment growth going forward

Software piracy has fallen in Australia in recent years but remains an issue in some segments of the market According to the Business Software 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’ PCs was credited with reducing the use of pirated software Meanwhile, some recent studies have found a rise in the use of illegal software among Western Australian companies, particularly in the booming mining sector The overall trend, however, has been one of improved general awareness, backed

by appropriate legislation

Demand slowed in 2009 as some companies reviewed IT budgets and looked to defer systems updates in light of the global economic slowdown In April 2009, Telstra revealed that it had abandoned plans to migrate enterprise and government customers to a new billing software platform due to cost concerns

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

Given the focus of many businesses of controlling costs, cloud computing models have also grown in popularity and spread beyond initial core application areas SaaS and other services are likely to be

promoted by vendors and ICT service providers IT services provider CSC Australia planned to launch

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

New cloud computing offerings and increased competition in this segment are expected to fuel further demand from end-users to utilise this technology In addition to cost savings, businesses will look to boost efficiency and increase flexibility of response to customer needs Large businesses are most likely

to put IT applications like 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 Meanwhile, the federal government is

exploring a shared services platform for more than 60 small agencies, following initiatives by larger bodies such as the Department of Human Services 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

Australia faces a particular geographic challenge in that the servers large enough to host applications for large organisations are realsticially likely to be in an offshore location – most likely the US – which raises regulatory and data security issues The financial services and government segments, which are the most promising ones for large organisation adoption of cloud computing, are also particularly sensitive to issues of data security Finance regulatory body, the Australian Prudential Regulatory Authority,

considers every offshoring deal on a case-by-case basis

IT Services

IT services are expected to account for about 40% of the domestic IT market in 2010, with spending of US$7.7bn, up from US$7.2bn in 2009 CAGR for the segment is estimated at 8% over 2010-2014 Research in 2009 indicated that the number of Australian companies, including SMEs, cancelling

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

In 2010, sectors such as government, telecoms, healthcare and banking should continue to supply demand for implementation, consulting and managed services H110 saw a pick-up in demand, with the revival of

a number of IT projects that had been shelved in 2009 Telecoms giant Optus was considering a virtual

desktop environment for its call centres and an upgrade to Windows 7, having put on hold a US$160mn

transformation last July Meanwhile, bookseller chain Dymocks was said to be looking ‘very seriously’ at

cloud computing services

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

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

investments made in hardware and software Outsourcing is an increasingly important spur to growth for

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

a number of IT services vendors including Fujitsu and CSC have rolled-out new cloud computing service

offerings from Australian data centres

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

There were a number of high-profile roll-backs of contacts last year 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 the cut IT system management costs In the short term, maintenance and other services generally regarded as operating expenses were less vulnerable to cutbacks than new projects requiring major capital expenditure

Industry Developments

Government Spending

Government IT spending was estimated at above US$4bn in FY2008/09 The Australian IT market also received a boost in 2009 from federal and local government stimulus spending packages The Rudd government’s five-year AUD15.1bn spending plan aimed to create 133,000 jobs and revive productivity growth Together with a AUD300mn local spending plan, the package was designed to provide a stimulus across the economy

Healthcare IT

Among sectors expected to be a priority for government IT projects is healthcare Australia has a National E-Health Transition Authority, which has the goal to create a paperless environment in the health sector, including public hospitals Meanwhile, another public body, the National Health and Hospitals Reform Commission, has a focus on personal electronic health records Recent healthcare IT projects have

included Northern Sydney Central Coast Health’s award to HP of a AUD1.15mn networking contract,

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

network

E-Government

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

allowing business to submit reports to a range of agencies

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

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

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

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

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

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

Education Projects

Around 1,400 high schools were expected to benefit from phase two of the government’s computers for schools project, announced in January 2009 According to Computer Minister Julia Gillard, phase two will provide 141,600 new computes to 1,394 schools around the country By the end of 2009, the

programme would have provided almost AUD260mn of computers

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

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

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

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

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

politicians A recent survey found that 1% of parents believed that new computers should be a priority for

government Meanwhile, the Australia Computer Society called for further initiatives beyond simply providing students and teachers with hardware

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

State Funding, AUDmn Additional Computers

Total No Of Computers Delivered Under Plan

New South Wales 16.8 16,839 91,677

South Australia 14.3 14,336 19,819

Queensland 41 40,955 computers delivered to 363 schools 47,759

Tasmania 5.2 5,269 computers delivered to 80 secondary schools 6,316

ACT 2.8 2,819 computers delivered to 24 secondary schools 5,837

Northern Territory 1.3 1,303 computers delivered to 37 secondary schools 2,041

Source: Official figures, BMI