Australia information technology report q3 2011

IT spending in 2011 should be boosted by growing demand across IT spending sectors to take advantage of opportunities presented by cloud computing.. In 2010 a wide range of leading Austr

Business Monitor International

85 Queen Victoria Street

London, EC4V 4AB

© 2011 Business Monitor International

All rights reserved

All information contained in this publication is copyrighted in the name of Business Monitor International, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher

DISCLAIMER

All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor

TECHNOLOGY REPORT Q3 2011

INCLUDES 5-YEAR FORECASTS TO 2015

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: July 2011

CONTENTS

Executive Summary 5

Market Overview 5

Industry Developments 5

Company News 6

Computer Sales 6

Software 6

IT Services 7

SWOT Analysis 8

Table: Australia IT Sector SWOT 8

Australia Political SWOT 8

Australia Economic SWOT 9

Australia Business Environment SWOT 9

IT Business Environment Ratings 10

Asia 10

Table: Regional IT Business Environment Ratings 10

Asia IT Markets Overview 14

IT Penetration 14

Sectors And Verticals 18

Australia Market Overview 21

Background 21

Hardware 22

Software 24

IT Services 27

Industry Developments 29

Healthcare IT 29

Table: Computers For Schools Programme, Phase Two – Planned Spending By State 31

Industry Forecast Scenario 32

Table: Australia's IT Sector – Historical Data & Forecasts (US$mn Unless Otherwise Stated) 34

Internet 35

Table: Telecoms Sector – Internet – Historical Data & Forecasts 35

Macroeconomic Forecast 37

Australia – Economic Activity 39

Competitive Landscape 40

Computers 40

Software 42

IT Services 44

Internet Competitive Landscape 46

Table: Australia Dial-up And Broadband Internet Subscriptions ('000) 46

Internet Service Revenues 48

ADSL2+ 49

Naked DSL 50

WiMAX 50

Company Profiles 52

HP Australia 52

SAP (Australia) 53

BMI Methodology 55

How We Generate Our Industry Forecasts 55

IT Industry 55

IT Ratings – Methodology 56

Table: IT Business Environment Indicators 57

Weighting 58

Table: Weighting Of Components 58

Sources 58

Executive Summary

Market Overview

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

by BMI to increase from US$20.8bn in 2011 to US$25.7bn in 2015

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

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

Several factors underpin our forecast of a 5% 2011-2015 CAGR for the Australian IT market

Government tenders will drive considerable spending in years to come Banks will continue to need to spend on regulatory compliance, and intense competition in the retail sector is spurring spending on customer relationship management (CRM) and back-office systems Competition and new service

platforms in the telecoms sector are driving the key IT spending segment

Industry Developments

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

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

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

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

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

In H111, one of SAP's largest Australian partners, Oxygen, launched a new SAP Software-as-a-Service

(SaaS) offering that it called 'Oxygen on Demand.' The solution was touted as a 'total SAP' cloud solution,

offering flexibility and speed-of-deployment Many of SAP's Australian clients, including Fairfax Media, Australia Post, CGU Insurance and the Commonwealth Bank of Australia, already use cloud

computing as a means of providing services

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

Apple's rival vendors planning to release their own tablet devices Apple is expected to continue to dominate Australian tablet sales in the Australian market, with the Apple iPad 2, while the price of the entry-level original iPad is now down to about AUD445 However, the number of competitor tablet

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

Computer Sales

Australian computer hardware sales are projected at US$9.2bn in 2011, with the popularity of tablets helping to keep demand buoyant after a strong PC market recovery in 2010 Sales are forecast to grow to around US$10.3bn by 2015, with drivers including new form factors, government programmes and growing broadband penetration

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

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

Software

Software is expected to account for about 17% of the Australian IT market in 2011, with estimated spending of US$3.5bn As the focus moves from hardware to services and solutions, the share of the market accounted for by software will continue to rise through 2015, with businesses seeking greater leverage from their investments

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

popularity and spread beyond initial core application areas Over the forecast period, enterprise resource planning (ERP), CRM and other e-business products will be increasingly popular with the small and medium-sized enterprise (SME) market, as companies look to enhance productivity through automating essential functions

IT Services

IT services are expected to account for about 40% of the domestic IT market in 2011, to US$8.1bn Demand picked up in 2010 with the revival of several IT projects that had been shelved as a result of the economic slowdown, and IT services is forecast to be one of the most dynamic sectors in the Australian

IT market

In 2011, sectors such as government, telecoms, healthcare and banking should continue to supply demand for implementation, consulting and managed services Regulatory compliance will continue to require spending by banks, and intense competition in the retail sector is spurring spending on CRM and back-office systems

E-Readiness

Many alternative Australian internet service providers (ISPs) are in the process of expanding the coverage

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

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

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

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

address the problem of low broadband coverage in rural parts of Australia Meanwhile, fixed penetration rates in urban areas are already very high

SWOT Analysis

Table: Australia IT Sector SWOT

Strengths ƒ Strong government support for ICT programmes

ƒ IT-literate population

ƒ Strong financial sector

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

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

ƒ Sensitive to volatility in the global economy

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

benefits for the IT market

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

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

ƒ Green IT as companies look to make power savings

Threats ƒ The biggest threat is the global economic slowdown affecting Australia's economic

activity and leading to a scaling back of IT budgets

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

Australia Political SWOT

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

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

Weaknesses ƒ As one of the region's largest and most stable states, the country attracts many

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

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

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

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

Australians abroad a target for Islamic extremists

ƒ Australia's close alliance with the US, particularly under John Howard, has left a lingering feeling among some Asian governments that Canberra is Washington's 'deputy sheriff' in the region

Australia Economic SWOT

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

ƒ Blessed with rich natural resources, Australia's economic activity will be augmented by commodity exports, especially to China

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

and, by extension, currency volatility

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

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

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

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

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

Australia Business Environment SWOT

Strengths ƒ A highly-educated workforce and comparatively modern transport infrastructure

underpin economic prospects

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

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

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

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

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

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

ƒ Upgrade and expansion of urban infrastructure will be needed to sustain population growth in Australia's main cities, providing opportunities for public-private partnerships (PPP) in the future

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

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

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

IT Business Environment Ratings

Market Risks

Country

IT BE Rating

Regional Ranking

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

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

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

BMI's Asia IT Business Environment Ratings (BER) compare the potential of a selection of the region's

markets over our forecast period through to 2015 Our Q311 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

There are no changes in country rankings in our updated Asia Q311 BER ratings Across the Asia Pacific region in 2010, global economic recovery and improved consumer confidence resulted in improved trading conditions for IT vendors, and a stronger than expected rebound in PC sales

Australia therefore retains its top regional rating this quarter One area of opportunity in 2011 is growing demand for cloud computing services A wide range of leading Australian private and public sector organisations have launched cloud initiatives, including many of the country's leading banks Meanwhile, the government has unveiled a six-year cloud computing strategy

IT verticals such as government, telecoms, healthcare and banking should continue to supply demand for implementation, consulting and managed services in future The government's commitment to continue to implement the National Broadband Network project will drive the development of Australia's digital economy and feed demand for PCs

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

respectively in our ratings table, due primarily to their high Country Structure scores Hong Kong and Singapore are expected to emerge as cloud computing hubs due to growing interest in cloud computing across the region

Key sectors of the Hong Kong economy such as financial services are investing in modernisation as Hong Kong strives to maintain its regional hub status in the face of competition from rivals such as Shanghai Hong Kong also continues to offer IT investors opportunities associated with its growing links to the vast Chinese market

Singapore benefits from high broadband penetration and initiatives such as the government's ambitious Intelligent Nation 2015 plan, and the standard operating environment Spending on IT services will be boosted by the continuing boom in IT-enabled services such as call centres and back-office financial services Other promising sectors for IT services include healthcare, as the government launches a series

of initiatives to develop health technology

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

BMI forecasts that South Koreans will increasingly choose to spend money on IT products due to a

substantial increase in disposable incomes Consumers appear willing to upgrade their PCs, and there is also a trend for households to own more than one computer

Meanwhile, South Korea's government is encouraging the utilisation of cloud computing by small

businesses New cloud computing offerings and increased competition in this segment are expected to fuel growing demand to utilise this technology IT outsourcing is also expected to show a strong demand trajectory

Malaysia remains in fifth position in our Q311 regional ratings IT spending growth will be driven by the government's drive for greater broadband penetration It has set an optimistic target of 75% by 2015 The rollout of a high-speed broadband network will boost IT spending outside the Klang Valley Other

projected growth and PC market drivers include a rise in the PC penetration level from about 35%, tax exemptions for notebooks and growth in disposable incomes

There are increasingly attractive opportunities in the IT services area as the government implements measures to make Malaysia a growing regional services and outsourcing hub Cloud computing will also

be a growth area and the government has named cloud computing as one of its top 10 strategic technology priorities

In China, factors such as the vast potential rural market and a commitment to modernisation in sectors such as education, healthcare and manufacturing will help sustain market growth Over the forecast period, government spending, an expansion of consumer credit and expectations about China's long-term economic growth will also drive IT investments

In the Chinese IT services segment, growing interest in cloud computing will be stimulated by the

establishment of government pilot programmes in five cities However, there are still market risks

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

Vietnamese IT demand, although with a rather smaller market than its leading neighbor to the north, is expected to have several long-term drivers Vietnam's improving ICT infrastructure will facilitate the development of the nation's IT market in a country with just 15% PC penetration

Vietnamese government digital divide programmes to boost internet and digital utility in rural areas will help addressable market growth and open PC ownership to a growing number of rural inhabitants

Vietnam's gradual integration into global trade networks such as ASEAN and the WTO has helped reduce tariff barriers and prices, and has increased opportunities

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

Philippines has a lower PC penetration than many other Asian countries and the IT market offers

corresponding high growth potential over the forecast period

However, the Philippines faces challenges such as labour shortages and rising wages In the enterprise segment, surveys suggest that many enterprises including small and medium-sized enterprises (SMEs) plan to increase IT spending again in 2011

India also recorded impressive double-digit year-on-year (y-o-y) computer sales growth in 2010 The potential is clear, with less than 2% of the population owning a computer, which is about 20% of the level

in China It was estimated that 5% of India's 7.5mn SMEs could implement a technology solution in

2010 Significant opportunities will be created by demand from Indian businesses and government agencies for help to utilise cloud computing

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

The last three markets in our regional ratings have low scores due primarily to business environment factors, despite considerable growth potential In Thailand, the fundamentals of growing affordability and low PC penetration should keep the market in positive territory during the forecast period A number of factors should also support momentum, including the government's PC for Education programme and 3G mobile and WiMAX broadband service 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 be one

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

Sri Lanka's IT market has benefited from the restoration of peace and improvements in the security situation, which helped release pent-up demand for IT solutions The country has felt the effects of instability over the years, from disruption of distribution channels and a flourishing grey market to the underdeveloped telecoms infrastructure However, the Sri Lanka will feature on IT vendors' radars as one

of the best potential growth prospects in South Asia Computerisation has only started in government services Major public and private sector organisations remain largely underpenetrated in terms of basic enterprise software

Asia IT Markets Overview

IT Penetration

Across Asia, government ICT initiatives and

growing affordability will help to drive increases

in PC penetration during BMI's five-year forecast

period While some cities and regions stand out,

there is an unbalanced pattern of regional

development, with PC penetration in countries

such as Singapore above 50%, while in other

countries, such as Indonesia, it is below 5%

The two Asian leaders, China and India, embody

the region's growth potential, as in both countries

computer ownership remains the preserve of a

minority In China, PC penetration was only

around 25% in 2010 – although it was far higher in

cities such as Shanghai and Beijing and urban PC penetration is projected to pass 60% by 2015 In India, less than 5% of people own a computer However, some 45% of the population is under 25, which

provides a promising demographic context for increased PC ownership PC penetration in Vietnam was

estimated by BMI at around 15% in 2010 Notebooks are owned by an estimated 7% of the Vietnamese

population, which points to significant growth

potential for the local PC market

Lower prices will help to drive higher PC

penetration in developing markets The average

price of a PC in the Indian market has nearly

halved over the past few years, and rising incomes

and greater credit availability will continue to

bring computers within the reach of lower-income

demographics Even in more mature markets, there

is room for development, however, with official

data suggesting that as many as 25% of Hong

Kong households do not have a computer at home

Around the region, affordable computer

programmes continue to find favour with

governments In China, a subsidised household electronics products initiative aimed at rural residents has helped to boost PC sales in areas where penetration was low In Australia in 2010, national and state governments continued to roll out new initiatives, with the Victoria government investing more than US$150mn in IT in schools

In Indonesia, PC penetration of around 2% could double by 2013 if government initiatives are followed through The Indonesian government is also rolling out new e-learning initiatives, with a target of raising the current 1:3,200 ratio of PCs to students in public schools to 1:20 Meanwhile, in 2010, the Vietnamese government launched a programme entitled One Teacher-One Computer, which offered discounts on PCs for teachers and students

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

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

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

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

Dial-up technology is still the dominant access method in many states However, even in developing markets, the number of broadband subscribers continues to gain ground steadily Broadband penetration has been boosted by growing numbers of mobile broadband users, as 3G mobile services are expanded across the region In China, broadband penetration is on course to reach 33.1% by 2015 In India,

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

penetration, which is projected to reach 186% by 2015

Across the region, government programmes are an important driver of ICT penetration The Chinese government has a five-year plan to make the internet available in every administrative village in central and eastern China and every township in the west In Australia, the government's commitment to develop the National Broadband Network should further the development of Australia's digital economy

Meanwhile, the growth of Wi-Fi coverage will be one driver of notebook sales in places such as Hong Kong, where the government has committed another HKD200mn to the deployment of a Wi-Fi network covering more than 200 public venues

IT Growth And Drivers

Across the region in 2011, IT spending should

benefit from improved economic circumstances

and tenders, previously deferred as a result of the

economic situation, although much will depend on

business confidence Strong fundamental demand

drivers of IT spending mean that there will be

continued opportunities Key factors common to

most markets include cheaper PCs and reform in

sectors such as telecommunications and finance,

as well as government initiatives

In some of the region's largest markets, such as

China, lower-tier cities and towns will be among

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

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

In Thailand in 2011, demand will be bolstered by market expansion in the relatively underpenetrated rural

areas SIS forecasts that market growth in

upcountry areas will be 30% in 2011, double that

forecast for the country as a whole A similar

situation pertains to India where in 2011 there are

expected to be strong growth opportunities in

smaller cities

The long-term potential of India's IT market is

plain: less than 3% of people in India own a

computer (about one-fifth of the level in China),

meaning particular potential in the lower-end

product range India's IT market appears to be

positioned for strong growth thanks to an

improving economy and consumer sentiment, and

2011e IT Market Sizes

government support for modernisation in lagging sectors Meanwhile, India's business process

outsourcing industry is growing at around 40% per annum and will continue to generate opportunities for vendors of IT products and 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$105.4bn in 2011, trailed distantly by Australia (US$20.8bn), India (US$19.7bn) and South Korea (US$17.8bn.) Singapore's IT market (including communications) is the largest as a proportion of national GDP (2.2%), followed by Hong Kong (2.1%) Thailand's IT market was affected last year by a number of exogenous events

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

to be back on track

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

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

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

IT Markets Compound Growth

2011e-2015f (%)

e/f = estimate/forecast Source: BMI

Sectors And Verticals

Regional IT markets remain hardware-centric, with hardware accounting for 25-74% of total spending in all markets in 2010 However, spending on software and services will grow faster Notebook sales are growing much faster than the PC market as a whole with growth driven by falling prices and more

features

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

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

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

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

of the strong growth segments over the forecast period, with SME demand for servers and networking equipment a significant growth opportunity

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

of lower income demographics

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

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

offers as part of its broadband packages Meanwhile, broadband plans will also help to popularise tablets

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

tablets bundled with data services

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

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

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

smartphones from Palm, RIM, Apple and other vendors, and tablet notebooks, spearheaded by Apple's

iPad,

Due in part to high levels of piracy, software's share of IT spending is relatively low, ranging from 9-25%

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

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

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

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

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

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

Across the region there is a growing trend for smaller companies to seek greater efficiency by using IT to improve productivity and reduce costs (including labour costs) As Asian companies have become more integrated into the global supply chain, their multinational business partners often encourage them to install backoffice systems to meet efficiency requirements

In general, enterprise resource planning (ERP) and other e-business products still dominate the enterprise software market, but vendors are also looking to other areas such as customer relationship management (CRM) and business intelligence, where faster growth is possible Although the market remains relatively small, more companies are looking at computing solutions such as Software-as-a-Service (SaaS) Cloud computing business models such as SaaS offer smaller businesses a cost-effective way to deliver

applications such as payroll, tax-return processing and recruitment

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

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

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

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

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

a brightening business climate should mean more opportunities in key IT-spending verticals such as Financial Services, Telecoms, Government, Healthcare and Logistics

Government spending will account for a larger share of spending in many markets In China, government stimulus packages have helped to drive IT-related investments, while in Singapore government ICT projects such as SOE2 provide significant opportunities Meanwhile, the Hong Kong government's Digital 21 initiative will continue to generate spending

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

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

as well as governments Even in emerging markets such as India, IT vendors are having to pay more attention to value-added services such as technical support and product troubleshooting, or basic IT and hardware consulting

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

large contracts such as that awarded by Idea Cellular to IBM Singapore and Hong Kong have both seen

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

Market Structure (% Of Total IT Market)

e/f = estimate/forecast Source: BMI

Australia Market Overview

Government Authority

Government Authority Department for Broadband, Communications and the Digital Economy

The Department for Broadband, Communications and the Digital Economy was

established in 2007 after the election of the Rudd government and was a successor to the former Department of Communications, Information Technology and the Arts The main policy responsibilities of the ministry include:

ƒ Broadband policy and programmes;

ƒ Postal and telecommunications policies and programmes;

ƒ Spectrum policy management;

ƒ Broadcasting policy;

ƒ National policy issues relating to the digital economy;

ƒ Content policy relating to the information economy

Background

Australia's IT market is based around imports, with a relatively small local IT sector Multinational

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

presence

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

Hardware

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

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

2011-2015 CAGR of around 3% to reach US$10.3bn by 2011-2015, with drivers including new products such as tablets, as well as government programmes, and growing broadband penetration The fastest-growing segment is notebooks, which already accounts for more than 60% of the market by value

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

The second phase of the national government's computers for schools programme was expected to

provide 141,600 new computers to schools around the country, with the value of the programme

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

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

deals by 3G mobile telecoms service providers such as Vodafone will help drive sales of portable

computers as connectivity devices

Single-digit growth in PC shipments is forecast in 2011, as the market consolidates the double-digit shipments growth reported in 2009 The main driver last year was consumer notebooks, with total

notebook sales forecast at 3.2mn units, after sales achieved annualised growth of more than one-third in H110 Meanwhile, business sales received a boost from computer hardware tenders delayed from

2009 Migrations to Microsoft's Windows 7 operating system and new Intel core technology fuelled

hardware upgrades and should continue to do so in 2011, although much will depend on confidence

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

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

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

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

investment to establish itself over the next few quarters

PC penetration is high among businesses, with around 95% of small businesses and 100% of sized and large businesses having computers Small business comprises more than 99% of all Australian businesses and slightly more than 50% of business PC sales Corporate IT spending had already begun to recover by the end of 2009, and companies will look to achieve greater efficiencies in the wake of the economic slowdown

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

The main growth area is consumer notebooks, which grew by at least 25% in 2010, while consumer desktops recorded a double-digit decline This trend continued in H111, with desktop sales flat or in decline, while notebook sales growth remained healthy Total notebook sales are forecast at around 3.5mn units in 2011

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

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

PC Indeed, around 30% of households have more than one PC

Netbooks were the fastest-growing segment during the economic downturn with triple-digit growth for the relatively low-priced connectivity devices in H109, compared to the same period in 2008 Netbook shipments reached nearly 15% of notebook sales in Q209, with more than 90,000 units sold However, the popularity of netbooks added to the downward pressure on average sales prices as consumers

preferred lower-priced models

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

popularity of tablets, as well as a blurring of the netbook and notebook categories This trend continued in the first half of 2011, with netbook sales down by a double-digit factor in Q111, compared with the same period of the previous year

Going forward, consumer purchases are likely to be motivated by speed and processing power and there could be a trend of demand for higher functionality netbooks Netbooks were never as popular in

Australia as in some other markets, peaking at around 16% of the PC market, and the emergence of tablets is expected to see continued decline in the netbook share

We expect to see the continued growing popularity of tablets in 2011, with Apple's iPad continuing to

dominate The Apple iPad 2, featuring new cameras and a 8.8mm slim body, was due to be released in Australia in late March Several other vendors followed Apple in releasing net tablet devices — which have a form factor between the size of a smartphone and a netbook — onto the Australian market

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

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

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

with data services Falling prices should continue to fuel market growth, due to increasing competition The price of the original iPad has now fallen by around AUD200, with an entry-level model now costing only about AUD445

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

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

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

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

Software

Software is expected to account for about 17% of the Australian IT market in 2011, with estimated spending of US$3.5bn As the focus moves from hardware to services and solutions, the share of the market accounted for by software is forecast to rise by 2015, with businesses seeking greater leverage from their investments Software sales are forecast to have a CAGR of around 9%, rising to US$4.7bn by

2015

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

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

Telstra to offer a suite of enterprise software products to SMEs In 2010, the public and financial sectors, healthcare, telecoms, utilities and SMEs were among the verticals vendors saw as having the most growth potential

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

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

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

In 2010 we saw a boost from systems upgrades that had previously been deferred as a result of the

economic situation Routine software procurements were also squeezed as enterprises focused on costs and made cuts to protect the bottom line Consequently, some companies had still not spent their IT

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

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

Software piracy has fallen in Australia in recent years but remains an issue in some segments of the market According to the Business Software Alliance, the overall software piracy rate had dropped to 28% from 31% in 2003 However, most of the fall occurred in the consumer segment, where the drop in 'white box' unbranded PCs was credited with reducing the use of pirated software Meanwhile, some recent studies have found a rise in the use of illegal software among Western Australian companies, particularly in the booming mining sector The overall trend, however, has been one of improved general awareness, backed by appropriate legislation

Business intelligence demand has grown at a double-digit rate for the past few years and accounts for around 5% of the total software market Australia will remain a major market for business intelligence software in the Asia Pacific, but growth may slow as users seek to get value from existing investments Security is likely to be another growth area

Meanwhile, the cost efficiencies of virtualisation – running multiple systems on a single piece of

hardware – makes sense in the current economic climate, but creates new security issues Local research has suggested that, for the past few years, Australia has been the global vanguard of virtualisation of X86 servers, even if the rate is slackening

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

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

computing models have also grown in popularity and spread beyond initial core application areas An explosion in stored data is another factor behind the cloud trend

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

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

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

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

computing services from its Australian datacentres in July 2010 Vendors are looking for channel partners

to help them offer cloud computing services to local organisations

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

offerings and increased competition in this segment are expected to fuel further demand from end-users for this technology In addition to cost savings, businesses will look to boost efficiency and increase flexibility in response to customer needs Large businesses are most likely to put IT applications such as mail, phone systems and document management into the cloud

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

their IT spend during the economic downturn Many Australian financial organisations such as the ANZ Bank and CBA have adopted some hosted software from providers such as Salesforce.com Indeed,

more than 80% of Australia's largest financial institutions are reported to use some Salesforce.com applications, even as Australia's financial sector regulator ARPA raised concerns about data sovereignty and location

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

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

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

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

challenge in that servers large enough to host applications for large organisations are likely to be in an offshore location – most likely the US – which raises regulatory and data security issues Regardless of

this, in H111 some state government agencies were proceeding independently, with the Victorian

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

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

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

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

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

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

Dymocks among those looking 'very seriously' at cloud computing services

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

The IT services market is therefore becoming one of the most dynamic drivers of IT spending in

Australia Local companies are trying to use computing resources more effectively and integrate

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

the IT services sector; according to a recent survey by market research firm Technology Advisory Partners, Australia was the dominant buyer of outsourcing services in the Asia Pacific region in

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

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

In 2010, IT services vendors including Fujitsu and CSC, and telecoms companies such as Telstra and

Optus, rolled out cloud computing service offerings from Australian datacentres Meanwhile, the majority

of Australia's top banks such as ANZ and the Commonwealth Bank of Australia, and telecoms companies

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

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

outsourcing contracts as a result of the economic slowdown was relatively small There were also several high-profile rollbacks of contracts as a result of the economic slowdown In March 2009, Telstra launched

a consolidation exercise to reduce its number of IT services providers from four to two The goal of the exercise was to cut IT system management costs In the short term, maintenance and other services regarded as operating expenses were less vulnerable to cutbacks than new projects requiring major capital expenditure

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

Industry Developments

Cloud Computing Draft Strategy

In 2010, the Australian federal government announced a six-year plan for migrating government agencies' computing to a public cloud environment However, the government's lengthy six-year timetable for the cloud migration underlines that it has security concerns, particularly about migrating data about private citizens The Australian government's draft cloud strategy requires government agencies to notify the Department of Finance Deregulation of their intention to move to cloud

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

New Government's ICT Policy

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

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

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

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