Australia information technology report q3 2012

Growth areas in 2012 will include tablets and demand across market segments to take advantage of opportunities presented by cloud computing.. Forecast in US dollar terms unchanged, with

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TECHNOLOGY REPORT Q3 2012

INCLUDES 5-YEAR FORECASTS TO 2016

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: July 2012

CONTENTS

Executive Summary 5

SWOT Analysis 7

Australia IT Sector SWOT 7

Australia Political SWOT 8

Australia Economic SWOT 9

Australia Business Environment SWOT 10

Asia Pacific IT Risk/Reward Ratings 11

Table: Asia Pacific IT Risk/Reward Ratings 16

IT Markets Overview 17

IT Penetration 17

IT Growth and Drivers 19

Sectors And Verticals 21

Market Overview 25

Government Authority 25

Industry Developments 33

Table: Computers For Schools Programme, Phase Two - Planned Spending By State 35

Industry Forecast 36

Market Drivers 37

Segments 37

Summary 38

Table: Australia IT Industry - Historical Data And Forecasts, 2008-2016 38

Internet 39

Table: Telecoms Sector - Internet - Historical Data & Forecasts, 2009-2016 39

Competitive Landscape 41

Computers 41

Software 43

IT Services 44

Internet 46

Table: Australia Dial-Up And Broadband Internet Subscriptions, 2009-2010 46

Table: Australian Broadband Market, June 2009-June 2010 49

ADSL2+ 49

Naked DSL 51

WiMAX 52

National Broadband Network Update 53

Macroeconomic Forecast 57

Table: Australia - Economic Activity, 2011-2016 60

Company Profiles 61

SAP 61

Microsoft Corporation 64

Hewlett-Packard 69

Demographic Outlook 75

Table: Australia's Population By Age Group, 1990-2020 ('000) 76

Table: Australia's Population By Age Group, 1990-2020 (% of total) 77

Table: Australia's Key Population Ratios, 1990-2020 78

Table: Australia's Rural And Urban Population, 1990-2020 78

BMI Methodology 79

How We Generate Our Industry Forecasts 79

Transport Industry 79

Sources 80

Executive Summary

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

increase in consumer and business spending The market should continue to offer opportunities, despite business concerns about the domestic carbon tax and the global economic situation The government's ambitious broadband plans will drive development of Australia's digital economy and services such as online banking and shopping Government tenders will drive considerable spending in future in areas such as education, e-government, transport, and healthcare Growth areas in 2012 will include tablets and demand across market segments to take advantage of opportunities presented by cloud computing

• Headline Expenditure Projections Computer hardware sales: US$9.2bn in 2011 to US$9.4bn in 2012, +1% in US dollar terms

Forecast in US dollar terms unchanged as government programmes should help to shore up demand

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

US dollar terms unchanged and cloud-based delivery should boost sales of enterprise resource planning (ERP) and other e-business products to the small- and medium-sized enterprise (SME) market

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

in US dollar terms unchanged, with cloud services a growth area as local companies try to use computing resources more effectively

Risk/Reward Ratings: Australia's score was 73.2 out of 100.0 Australia ranks second in our latest Asia

region RRR table, still ahead of larger rivals such as China, India and Indonesia

Key Trends & Developments

ƒ We expect the growing popularity of tablets to continue in 2012, with shipments reaching around 2mn units By the end of 2012, it has been forecast that as many as 40% of Australians could be using a tablet PC, with population penetration at around 20% On this forecast, the diffusion curve of tablets would be steeper than for almost any other consumer electronics product of recent years

ƒ 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 2012 more leading Australian private and public sector organisations are expected to launch cloud initiatives, with surveys indicating that cloud computing is a key priority for Australian CIOs

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

authorities were also rolling out IT for schools projects

SWOT Analysis

Australia IT Sector SWOT

ƒ IT-literate population

ƒ Strong financial sector

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

US

rates

ƒ Sensitive to volatility in the global economy

benefits for the IT market

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

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

ƒ Green IT as companies look to make power savings

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

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

ƒ

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

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

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 it is America's 'deputy sheriff' in the region

Australia Economic SWOT

ƒ Blessed with rich natural resources, Australia's economic activity will be augmented by commodity exports and the high investment inflows into the mining sector

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

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

threat to sustained growth

ƒ A collapse in exports from a drop in resource demand from China would severely impact headline GDP growth

ƒ Australia is vulnerable to extreme weather that may lead to droughts and floods, which have become increasingly severe in past years as a result of global climate change

Australia Business Environment SWOT

underpin economic prospects

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

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

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

ƒ Upgrade and expansion of urban infrastructure will be needed to sustain population growth in Australia's main cities, providing opportunities for public-private partnerships in the future The government is also targeting

infrastructure improvements to rural areas

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

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

Asia Pacific IT Risk/Reward Ratings

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

markets over our forecast period through to 2016 Our Q312 ratings reflect our consideration of the political and economic risks, as well as the risks associated specifically with IT intellectual property (IP) rights protection and the implementation of state spending projects

While there were changes to the countries' individual scores, the rankings were largely unaffected The only change came in the form of Indonesia overtaking India and Thailand to become the eighth-ranked

country among the 12 covered in the Asia Pacific region by BMI

Singapore retained its leader position with an IT Ratings score of 74.1 Although Singapore's IT market is significantly smaller than many of its regional peers, the country has other redeeming factors For

example, Singapore is highly urbanised with a pool of skilled labour The country is also strategically placed at the heart of South East Asia amid emerging markets such as Indonesia and Thailand Its strong infrastructure, which includes access to major submarine cable networks and high-speed broadband connectivity, political stability and pro-business environment attract foreign investors and spur

technological developments

Singapore's ambitions to emerge as a regional cloud computing hub will fuel vendor investment in service capabilities In February 2011, the Infocomm Development Authority of Singapore and the Information Technology Standards Committee (ITSC) formed a Cloud Computing Standards Coordinating Task Force

to 'address the industry demands for cloud computing standards and co-ordinate the cloud computing standardisation efforts across the different Technical Committees in ITSC'

Australia closed the gap with Singapore by achieving an IT Ratings score of 73.2, up from 70.9 in the previous quarter The upgrade was largely due to an improvement in its IT Market score, although an increase in its Country Risk score aided as well Due to the country's sheer size, it is inevitable that certain regions suffer from a deficiency in IT network and services However, the government has been looking to resolve the issue with its ambitious National Broadband Network (NBN), which aims to deliver nationwide high-speed broadband connectivity with a combination of fibre, fixed-wireless and satellite technologies The introduction of high-speed broadband connectivity should fuel demand for sophisticated services such as cloud computing, which is already being embraced by the public sector and enterprises, machine-to-machine (M2M) connectivity and telepresence as well as devices as the industry moves towards ubiquitous connectivity and internet-connected homes

Hong Kong saw its IT Ratings score rise to 72.6 from 69.4 in the previous quarter Like Australia, the improvement was fuelled by an upgrade in its IT Market score, although the positive effect was partially

offset by a decline in the territory's Country Risk score Hong Kong has one of the lowest fibre broadband tariff rates in the world, and this provides the backbone for next generation IT services such as cloud computing and data centres Hong Kong is also well connected to the international submarine cable network, and the territory is one of the 11 landing sites for the new 10,400km Asia Pacific Gateway (APG) system The network, which is scheduled to become operational by June 2014, is designed for an initial transmission speed of 40Gbps per wavelength, using Digital Coherent detection and Optical Add-

Drop Multiplexing technologies, according to Japan's NEC The APG system will be able to

accommodate 100Gbps for increasing efficiency and capacity in the future

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

segment are expected to fuel growing demand to use this technology Other areas of growth include M2M and telecare, which are led by technological advancements in the underlying networks At the end of January 2012, there were 44mn 3G subscribers and 2.8mn 4G (comprising WiBro and LTE) users By comparison, there were only 6.7mn 2G subscribers

However, besides being vulnerable to the global headwind, South Korea's economy has its own

problems Firstly, South Korea's household debt situation remains an overriding concern While a

collapse in the housing debt market looks to be an unlikely scenario, considerable risk remains from households' debt servicing capacities as the economy heads south Secondly, its external debt situation puts the economy in a very precarious position Given that a significant portion of external debt is held by foreign bank branches and is short-term in nature, a sudden bout of risk aversion could see substantial foreign capital outflows

Malaysia remained in fifth position in our Q312 regional ratings There are increasingly attractive

opportunities in the IT services area as the government implements measures to make Malaysia a growing regional services and outsourcing hub Guiding the government and industry is the country's Economic Transformation Programme, which has earmarked areas such as cloud computing as one of its top 10 strategic technology priorities The rollout of the High Speed Broadband network will also boost IT spending outside the Klang Valley and help the country achieve a household broadband penetration rate

of 75% by 2015 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

Our Chinese hard landing view is playing out well with evidence such as the People's Bank of China's

decision to cut its reserve requirement ratio in February 2012 and a sharp drop in the HSBC flash

purchasing managers' index for China to 48.1 in March 2012 from 49.6 in the previous month providing support

A Chinese economic slowdown would negatively affect the IT market growth, albeit at a lesser extent than other industries such as infrastructure or automotives Factors such as the vast potential rural market and a commitment to modernisation in sectors such as education, healthcare and manufacturing are among the expected drivers We expect growing interest in cloud computing will be stimulated by the establishment of government pilot programmes Besides market risks such as poor intellectual property rights protection, piracy and a lack of business transparency, the overall pace of development has been comparatively slow However, companies have started to seek the help of foreign counterparts to

accelerate the process For example, China Mobile collaborated with South Korea's SK Telecom to develop technologies such as M2M while China Telecom formed a strategic partnership with Internet Initiative Japan to provide cloud computing services in China

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, and it is in the midst of expanding operations outside Metro Manila In order to facilitate the expansion, network operators are extending fibre optic network throughout the country to provide high capacity

connectivity The Philippines is also looking at cloud computing as the next growth driver, with the private sector leading the charge Domestic firms have partnered with foreign IT companies in order to provide the necessary infrastructure and technology to expand their products portfolio, which should attract businesses including small and medium-sized enterprises (SMEs) as they look to cut costs amid an uncertain global economy

Indonesia is ranked eighth with an IT Ratings score of 42.8, up from 39.1 in the previous quarter The significant improvement was driven by an upgrade in its IT Market, Country Structure and Country Risk scores 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, and this has been reflected in the country's movement up the Risk/Reward Ratings table Spending in some key IT verticals such as financial services and banking should continue to be significant in 2012 Government IT spending is also expected to increase and could have accounted for as much as 25% of the IT market The SME sector will drive demand for basic hardware and applications as enterprises focus on enhanced productivity

Indonesia is also susceptible to the global headwind, and weak demand from China will pressure

Indonesia's trade surplus However, we expect resilient private consumption and capital investment to enable the archipelago to continue to outperform the region Wage growth in Indonesia has been strong as the economy's growth has begun to translate into higher employment Reports indicate that minimum wages have been raised by as much as 20% in some cities, and double-digit wage growth is widely expected Consumer strength has translated into increasing demand for goods previously inaccessible to the majority of Indonesians, such as automobiles and consumer electronics

India's IT industry possesses significant growth potential as only a small portion of the country's massive population has access to a personal computer Significant opportunities will also be created by demand from Indian businesses and government agencies to help use more advanced IT solutions to improve efficiency and reduce costs Consequently, India had a relatively high IT Market score of 52.5 However, the country was significantly let down by its weak Country Structure score

Although India has made strides to address its electricity deficit (the country's power supply deficit improved from a 11.1% power deficit in Q1 FY2008/09 to a 6.6% deficit in power supply during the first quarter of FY2011/12), that deficit remains sizeable and India needs to boost investment to cope with demand, which has been growing at a significant pace, fuelled by rapid population growth and continued high levels of economic growth This is set to continue and presents a major obstacle to the country's business environment and economic development

However, it is insufficient for India to only address power generation as the annual power loss through the country's power grid system is estimated at more than 30% As of 2006, about three-quarters of India's villages received an electricity supply, but only 43% of rural households had been provided with a

permanent supply According to the Planning Commission of India, 600mn people are not connected to the power grid That said, India's transmission grids sector is showing significant growth potential for private investors The sector is undergoing a process of liberalisation, requiring state-run companies such

as state-owned Power Grid Corporation of India to compete with private sector companies for

electricity transmission projects

The short-term outlook on Thailand's IT sector is largely mixed Local media have reported that retail IT sales are expected to decline by 15% year-on-year in Q112, attributable to higher living costs

Furthermore, the effects of the flooding are still felt with higher end-product prices in light of supply chain disruptions to hard disk drives However, the industry envisages a recovery in H212 due to the launch of new products such as ultrabooks, which are expected to become more affordable, government-

led projects and increasing 3G network coverage BMI shares the sentiment as the government has been

trying to fulfil its election promise of bridging the digital divide in the country

The Smart Thailand project, which was first unveiled in September 2011, aims to boost the country's competitiveness through greater ICT development The initiative rightly looks at integrating ICT

particularly into the government sector and expanding and upgrading the underlying network

infrastructure, which would improve the overall business environment

Smart Thailand has a two-pronged approach The Smart Network project, which will cost THB80bn, aims

to expand broadband coverage to 95% of the population by 2020, up from 80% in 2015 and the current

service quality and the communication between agencies If both measures are successfully implemented, Thailand should become more attractive to companies and foreign investors

Vietnam remains in 11th position with an IT Ratings score of 33.5 While the sizeable population,

growing affluence and increasing middle class present long-term potential for IT demand, like India, Vietnam's poor Country Structure score has negatively affected the country's attractiveness The

government has digital divide programmes to boost internet and digital utility in rural areas, which theoretically should help to fuel market growth and open PC ownership to a growing number of rural inhabitants Moreover, 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 However, overall progress has been slow, partially due to a lack of clear vision and state-owned companies' dominance in the ICT market

There were no changes to Sri Lanka's IT Rating score of 28.3, although we highlight that the country holds long-term potential in light of the restoration of peace and improvements in the security situation, which will help to release pent-up demand for IT solutions The country has felt the effects of instability over the years, from disruption of distribution channels and a flourishing grey market to the

underdeveloped telecoms infrastructure However, Sri Lanka will feature on IT vendors' radars as one of the best potential growth prospects in South Asia Computerisation has only just started in government services Major public and private sector organisations remain largely underpenetrated in terms of basic enterprise software

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

Table: Asia Pacific IT Risk/Reward Ratings

Risks To Realisation Of Potential Returns

Country

Market Risks

Country

IT Rating

Regional Rank

Singapore 57.0 100.0 72.1 70.0 85.1 79.0 74.1 1

Hong Kong 53.3 100.0 69.7 70.0 85.7 79.4 72.6 3 South Korea 53.3 70.0 59.2 75.0 76.0 75.6 64.1 4 Malaysia 44.0 55.0 47.9 35.0 77.7 60.6 51.7 5 China 55.6 30.0 46.7 35.0 65.1 53.1 48.6 6 Philippines 39.3 45.0 41.3 42.5 53.6 49.1 43.7 7 Indonesia 41.3 40.0 40.8 35.0 55.8 47.5 42.8 8 India 52.5 15.0 39.4 45.0 53.6 50.1 42.6 9 Thailand 40.0 20.0 33.0 35.0 70.3 56.2 39.9 10 Vietnam 38.1 15.0 30.0 35.0 45.9 41.5 33.5 11 Sri Lanka 30.0 10.0 23.0 35.0 44.2 40.5 28.3 12

Regional Average 47.0 49.6 47.9 49.4 65.4 59.0 51.3

Scores out of 100, with 100 highest The IT Risk/Reward 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 Source: BMI

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 giants, 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 is only around 30% in 2012 - although it is far higher in cities such as Shanghai and Beijing and urban PC penetration is projected to pass 60% by 2016 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 is estimated by BMI at

around 20% in 2012 Notebooks are owned by an estimated 10% of the Vietnamese population, which points to significant growth potential for the local PC market

Lower price 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, national and state governments continue to roll out new initiatives, with the Victoria government investing more than US$150mn in IT in schools

Narrowband Penetration

Per 100 Population

e/f = BMI estimate/forecast Source: BMI, Regulators

In Indonesia, PC penetration of around 3% could double by 2016 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, the Vietnamese

government has launched a programme entitled One Teacher-One Computer, which offers 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 South Korea, Hong Kong, Singapore, and Australia, with estimated 2012

penetration rates of 76.9%, 74.0% and 73.3% and 71.0% respectively Singapore has by far the highest rate of broadband penetration, which was estimated at 189.5% in 2012 Meanwhile, the Philippines has the lowest levels of internet usage, with just 8.3% narrowband and 7.4% broadband penetration estimated

in 2012

The fastest growth is expected in

Indonesia, where internet penetration is

projected to leap from 45.4% in 2012 to

68.9% in 2016, and the Philippines,

where penetration is forecast to reach

12.6% by 2016 India is still at only

11.8% internet penetration despite an

improvement in fixed-line infrastructure,

and penetration is forecast to reach only

16.2% by 2016 Steady growth is also

projected for Sri Lanka, where

penetration is projected to increase from

18.8% to 25.4% by 2016 Some 56.4% of

Malaysians have internet access in 2012

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 a growing number of mobile broadband users, as 3G mobile services are expanded across the region In China, broadband penetration is on course to reach 20.9% by 2016 In India,

penetration should increase more than double to reach 2.8% by 2016 from around 1.2% currently,

although this remains below government targets Sri Lanka will also see continued solid growth in

broadband penetration, which is projected to reach 21.7% by 2016

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

Broadband Penetration

Per 100 Population

e/f = BMI estimate/forecast Source: BMI, Regulators

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 Asia in 2012, IT spending should

benefit from improved economic

circumstances and tenders previously

deferred as a result of the economic

situation, although a forecast slowdown

in China could act as a drag on some

markets 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 some of the region's largest markets 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 as well as growing demand from small and sized enterprises (SMEs)

medium-Despite these drivers, BMI expects a moderation in Chinese consumer and business IT investment in

2012 owing to government economic cooling measures and uncertainty about the global economic situation However, an expansion in consumer credit and a modernisation drive in sectors such as

education, healthcare and manufacturing will sustain market growth

The long-term IT market potential of another Asian giant, India, 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 Having postponed IT projects during the economic slowdown, many Indian private and public sector organisations are now investing again in upgrading their IT infrastructure

2012 IT Market Sizes

US$mn, forecast

f = BMI forecast Source: BMI

India's IT market appears to be

positioned for strong growth thanks to an

improving economy and consumer

sentiment as well as 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

In Thailand, demand will be bolstered by

market expansion in the relatively

underpenetrated rural areas SIS

estimates that market growth in

upcountry areas should be 30% in 2011, double that it has forecast for the country as a whole A similar situation pertains in India where in 2012 there are expected to be strong growth opportunities in smaller cities

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 and 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

IT Market Size

As % Of National GDP

f = BMI forecast Source: BMI

In more developed markets, such as

Hong Kong and Singapore, robust retail

sales the led way in 2011, as evidenced

by the strong advance sales of Apple's

iPad2 In 2012 vendors hope that the iPad

3 and ultrabooks will provide new growth

areas Economic expansion and

improving business conditions are

underpinning stronger business sector

demand while a strong property market

and lower unemployment have boosted

confidence among consumers However,

a potential cooling of the Chinese

economy as a result of monetary

tightening would quickly spread to both

markets

The largest IT market in the region is, unsurprisingly, China, estimated at US$124.4bn in 2012, trailed distantly by Australia (US$22.0bn), India (US$20.7bn) and South Korea (US$18.5bn) Singapore's IT market (including communications) is the largest as a proportion of national GDP (2.4%), followed by Hong Kong (2.1%) Thailand's IT market has been affected by a number of exogenous events including floods, which in late 2011 disrupted its production of hard disk drives, but in 2012 it looks to be back on track

The fastest growing IT markets over the forecast period looks set to be India and Indonesia with

2012-2016 compound growth of 109% and 96% respectively, driven by increasing PC penetration Sri Lanka is

third with the IT market growing by an estimated 83% over BMI's five-year forecast period, while

China's total growth is estimated at a still healthy 55%, slower than Vietnam at 69%

Sectors And Verticals

Regional IT markets remain hardware-centric, with hardware accounting for 43-73% of total spending in all markets in 2012 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 over 50% in the case of households Over 90% of Australian households now have a PC, but consumers have appeared

IT Market Compound Growth

2012-2016 (%)

Source: BMI

willing to spend on upgrading their notebook computers and it is also becoming more popular to purchase

a second household PC Around 30% of households have more than one PC

Tablet sales will provide a PC market growth area, with triple-digit growth projected in many markets In China it is estimated that tablets accounted for around 6-7% of computer sales in 2011 The tariff on an imported iPad was previously set at around CNY1,000 and has now been reduced to CNY500 In 2012, tablets should be a growth area in India as well, with sales surpassing 1mn units, although much will depend on greater affordability The arrival on the market of cheaper, locally produced tablets, retailing for as low as US$30, will help expand the market

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 Meanwhile, vendor expectations of a substantial boost from their promotion of high-tier ultrabooks may not be realised until prices come down closer to their US market level

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 In India, 2011 saw a wave of computer procurements by local governments Another driver in emerging Asian markets 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 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

Australia telecoms operators such as Telstra were competing to offer affordable tablets bundled with data

services

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

11-36% 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 2012, growing numbers of SMEs are expected to invest in enterprise resource planning (ERP), while many of those that already have it will explore efficiencies through consolidation and virtualisation As Asian companies have become more integrated into the global supply chain, their multinational business partners often encourage them to install back-office systems to meet requirements of efficiency The growing global ambitions of many Asian companies, as well as often booming domestic markets, will fuel investments in software

In general, 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 China 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 The cloud computing market in India is currently very small but is forecast to expand rapidly

Market Structure (% of IT Market)

2012f (LHS) & 2016f (RHS)

f = BMI forecast Source: BMI

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 17-41% 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 2012

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

Meanwhile, growing interest in cloud computing will be further stimulated by government programmes

In China, government cloud pilots are under way in at least five cities The Hong Kong government announced plans in 2011 for an escalation of its cloud strategy over the next few years In 2012 more leading Australian private and public sector organisations are expected to launched cloud initiatives and the government has adopted a six-year cloud computing strategy

Market Overview

Government Authority

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

ƒ Broadband policy and programmes;

ƒ Postal and telecommunications policies and programmes;

ƒ Spectrum policy management;

ƒ Broadcasting policy;

ƒ National policy issues relating to the digital economy and;

ƒ Content policy relating to the information economy

Background

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

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

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

Hardware

Australian computer hardware sales are projected at US$9.4bn in 2012, with the popularity of tablets expected to help keep shipments in positive growth area despite a moderation compared with 2010 Sales are forecast to grow at a 2012-2016 CAGR of around 3% to reach US$10.3bn by 2016, with drivers including new products such as ultrabooks and tablets, as well as government programmes and growing

broadband penetration The fastest-growing segment is notebooks, which already accounts for more than 60% of the market by value

In 2012, the PC market is projected to report low single-digit growth By Q411, there were signs of weakening consumer demand Meanwhile, business demand was hit by concerns about the economic situation in Europe and the US, as well as domestic issues such as the proposed carbon tax Meanwhile, there was a shortage in the supply of hard-disk drives (HDDs) resulting from the Thailand floods,

although ultimately this was not as severe as first expected, but still hit the market Large Australian retailers were given priority by regional suppliers, but the expectation of shortages meant a curtailment of seasonal promotions, and was therefore a drag on the market Against the backdrop of economic

headwinds, promotions and discounting by retailers, such as Harvey Norman with its 2-for-1 offer as

well as sales of tablets, have generally helped to shore up volume sales

The weakening economy hit the market in 2011 and in the end, government PC procurements played a major part in keeping the PC market in positive growth territory of around 7% for the year Quarterly shipments were up by around 2% in Q411, due almost entirely to large school purchases under the

governments Digital Education Revolution (DER) programme In Q311, shipment recorded a single-digit annualised decline, although they were up quarter-on-quarter Shortages of AMD processors also had an impact on the market, particularly the self-assembled sector, in Q411

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

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

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

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

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

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

estimated to have already reached around AUD260mn by the end of 2009 In July 2008, the

government had passed a measure allowing households to reclaim a 50% rebate of up to US$625 a year for primary and US$1,500 for secondary students for laptops and other IT-related equipment

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

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

Single-digit growth in PC shipments is forecast in 2012, as the market is affected by weaker consumer confidence The main driver has been consumer notebooks, with total notebook sales forecast of 3.6mn units in 2011, after sales achieved annualised growth of one-third in 2010 Meanwhile, business sales received a boost from computer hardware tenders previously delayed because of the economic

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

should continue to do so, although much will depend on confidence Meanwhile, vendor expectations of a substantial boost from their promotion of ultrabooks may not be realised until prices come down closer to their US market level

Overall, hardware spending accounted for around 45% of the domestic IT market in 2011, although this share is set to decline Unsurprisingly, given the high penetration levels in business and consumer

segments, the Australian PC market is dominated by replacement sales Upgrades are estimated to

account for at least 80% of business purchases and more than 50% in the case of households BMI

expects a trend of rising investment to establish itself over the next few quarters

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

medium-The main growth area is consumer notebooks, which grew by at least 25% in H111, desktop sales were flat or in decline This continued the trend of 2010, when consumer notebooks again reported double-digit growth, while consumer desktops recorded a double-digit decline Total PC sales were forecast at around 7.5mn units in 2011, up by 7%

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

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

PC Around 30% of households have more than one PC

Sales of netbooks were down in H111, compared with the same period of the previous year In 2010, netbooks sales growth slowed from Q110, due in large part to the popularity of tablets, as well as a blurring of the netbook and notebook categories Netbooks were the fastest-growing segment during the economic downturn and reached nearly 15% of notebook sales in Q209, with more than 90,000 units sold However, the popularity of netbooks added to the downward pressure on average sales prices as

consumers preferred lower-priced models

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

of demand for higher functionality netbooks Netbooks were never as popular in Australia as in some

other markets, peaking at around 16% of the PC market, and the emergence of tablets is expected to result

in a continued decline in the netbook share

We expect the growing popularity of tablets to continue in 2012, with shipments reaching around 2mn

units Apple's iPad continuing to dominate, following the release of the new iPad The new Apple iPad 2,

featuring a higher resolution screen and camera, was due to be released in Australia in late March Several other vendors have 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

Tablet sales were expected to reach above 1mn units in 2011, and by the end of 2012, it has been forecast that as many as 40% of Australians could be using a tablet PC, with population penetration at around 20% On this forecast, the diffusion curve of tablets would be steeper than for almost any other consumer

electronics product of recent years According to an estimate by market research firm Telsyte, by the end

of September 2010, around 300,000 tablets had been sold in the Australian market, of which the large

majority were thought to be iPads At the end of 2010, telecoms operators such as Telstra were

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

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

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

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

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

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

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

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

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

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

Software

Software is expected to account for about 17% of the Australian IT market in 2012, with estimated spending of US$3.7bn As the focus moves from hardware to services and solutions, the share of the market accounted for by software is forecast to rise by 2016, with businesses seeking greater leverage from their investments Software sales are forecast to have a CAGR of around 8%, rising to US$4.9bn by

2016

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

popular in the SME market, as companies try to enhance productivity through automating essential functions As evidence of the importance of this segment to vendors, Microsoft recently teamed up with Telstra to offer a suite of enterprise software products to SMEs In 2010, the public and financial sectors, healthcare, telecoms, utilities, and SMEs were among the verticals vendors believed have the most growth potential

Industry trends such as cloud computing, virtualisation, and green IT will drive software segment growth,

as will rising PC shipments, new technologies, and the growing ubiquity of 3G mobile and WiMAX These technologies are interacting and generating multiplier effects, with the growth of cloud-enabled mobile applications and mobile devices Migration to the Windows 7 operating system retains

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

environment, leading to caution about IT investments

Software piracy has fallen in Australia in recent years, but remains an issue in some segments of the market According to the Business Software Alliance, the overall software piracy rate had dropped to 28% from 31% in 2003 However, most of the fall occurred in the consumer segment, where the drop in 'white box' unbranded PCs was credited with reducing the use of pirated software Meanwhile, some studies have found a rise in the use of illegal software among western Australian companies, particularly

in the booming mining sector The overall trend, however, has been one of improved general awareness, backed by appropriate legislation

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

Meanwhile, the cost efficiencies of virtualisation, running multiple systems on a single piece of hardware, makes sense in the current economic climate, but creates new security issues Local research has

suggested that, for the past few years, Australia has been the global vanguard of virtualisation of X86 servers, even if the rate is slackening

Strong growth in demand for cloud computing services is expected in 2012 A broad range of Australian

organisations, from Australia Post to the Commonwealth Bank of Australia, now use cloud computing

as a means to deliver individual services Given many businesses' focus on controlling costs, cloud computing models have also grown in popularity and spread beyond initial core application areas An explosion in stored data is another factor behind the cloud trend By the end of our forecast period in

2016, BMI forecasts that the Australian cloud market could be worth around US$2bn, making up around

12.5% of total software and IT services spending

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

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

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

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

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

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

offerings and increased competition in this segment are expected to fuel demand from end-users for this technology In addition to cost savings, businesses will aim to boost efficiency and increase flexibility in response to customer needs Large businesses are most likely to put IT applications such as mail, phone systems, and document management into the cloud Australia also enjoys a relatively cloud-favourable regulatory environment, with a 2012 survey by the Business Software Alliance ranking Australia the second friendliest country in the world for global cloud interoperability

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

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

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

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

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

The federal government has set out a timetable for migrating government agencies' computing to a public cloud environment In 2010, some government agencies, such as the Australian Bureau of Statistics,

require a high level of customisation or which are subject to regulatory or data-sensitivity constraints, are more likely to stay on premise

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

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

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

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

The financial services segment, one of the most promising areas for large organisation adoption of cloud computing, is particularly sensitive to issues of data security Financial regulatory body the Australian Prudential Regulatory Authority considers every offshoring deal on a case-by-case basis

The IT services market has become one of the most dynamic drivers of IT spending in Australia Local companies are trying to use computing resources more effectively and integrate investments made in hardware and software Outsourcing is an increasingly important spur to growth for the IT services sector;

according to a recent survey by market research firm Technology Advisory Partners, Australia was the

dominant buyer of outsourcing services in the Asia Pacific region in 2009 However, traditional services such as desktop support are still the mainstay of the market, while applications services support is less developed

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

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

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

Regulatory compliance will continue to require spending by banks, and intense competition in the retail sector is spurring spending on CRM and back-office systems Competition in the telecoms field will drive that key IT spending segment, where deregulation has led to new entrants The current economic crisis

may reinforce the logic of outsourcing non-core functions in some cases, as companies will be less willing to spend on in-house IT capabilities

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

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

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

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

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

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

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

Industry Developments

Cloud Computing Draft Strategy

The Australian federal government is implementing a six-year plan for migrating government agencies' computing to a public cloud environment However, the government's lengthy six-year timetable for the cloud migration underscores the fact that it has security concerns, particularly about migrating

data about private citizens The Australian government's draft cloud strategy requires government

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

According to the plan, public cloud adoption for public-facing websites began in 2011, with

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

Common Operating Environment Policy

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

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

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

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

Government's ICT Policy

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 National Broadband Network (NBN) policy had been criticised, particularly by the opposition party This led to speculation that the government may cut the NBN project However, the need to ensure support from independent MPs representing rural areas was one factor that induced the government

to subsequently confirm support for the NBN

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

as Telstra's infrastructure is incorporated in the NBN project The 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

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

While most government IT programmes were relatively immune to the global slowdown, the 2009 economic meltdown encouraged the government to seek greater efficiency in IT procurement In April

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

contractors

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

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

Education Projects

current Prime Minister, Julia Gillard, this will provide 141,600 new computers to 1,394 schools around the country By the end of 2009, the programme would have provided almost AUD260mn of computers

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

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

As a result, total spending committed to the programme was set to reach AUD1.2bn In July 2008, the government introduced an education rebate, allowing households to reclaim a 50% refund on education costs of up to AUD625 a year for primary students and AUD1,500 for secondary students for broadband and other IT-related equipment

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

politicians A recent survey found just 1% of parents believed new computers should be a priority for government Meanwhile, the Australia Computer Society called for further initiatives beyond simply providing students and teachers with hardware

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

Total No Of Computers Delivered Under Plan

New South Wales 16.8 16,839 91,677

South Australia 14.3 14,336 19,819Queensland 41 40,955 computers delivered to 363 schools 47,759

Industry Forecast

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

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

of US$26.5bn by 2016, a 5% CAGR for the market

The market should continue to offer opportunities, despite an expected deceleration in 2012 due to adverse factors such as business concerns about the domestic carbon tax and the global economic

situation Growth areas will include tablets and the increasing demand for cloud computing across market segments

2012 Outlook

In 2012 tablets are expected to be the main growth segment and the PC market is expected to be affected

by weakening consumer demand The PC market was restricted to single-digit in 2011, with only

substantial schools procurements preventing a contraction in Q411 The popularity of tablets should help keep PC market demand above water in 2012 as consumers cut back on spending Tablet sales could pass 2mn in 2012, with penetration reaching around 20% of the Australian population Vendors will look to ultrabooks as a new growth area, but sales are likely to be restricted to 10-15% of the PC market in 2012, due to high prices

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

computing is a key priority for Australian CIOs Cloud initiatives have already been implemented by many of the country's leading banks Meanwhile, the government has adopted a six-year cloud computing strategy Cloud computing spending could reach around US$2bn by 2016

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

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

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

Market Drivers

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

Government tenders will drive considerable spending in future in areas such as education, e-government, transport, and healthcare Regulatory compliance will result in continued spending by banks, and intense competition in the retail sector is spurring spending on CRM and back-office systems Competition in the telecoms field is a driver for that key IT spending segment, where deregulation has led to new entrants

The government's ambitious broadband plans will drive development of Australia's digital economy and services such as online banking and shopping Converged multimedia services such as IPTV will also feed demand for PCs and notebooks, with entertainment features Bundling deals by 3G mobile telecoms

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

devices

Segments

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

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

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

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

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

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

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

organisations estimated to be using some cloud services

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

Summary

The hardware market is forecast to grow from US$9.4bn in 2012 to US$10.2bn in 2016, with PC sales (including accessories) forecast to rise from US$7.8bn to US$8.5bn, boosted by computer procurement for education Software spending is forecast to rise from US$3.7bn to US$4.9bn and IT services from US$8.5bn to US$11.3bn

Table: Australia IT Industry - Historical Data And Forecasts, 2008-2016

IT Market (US$mn) 17,986.3 17,806.4 19,409.0 20,767.6 21,598.3 22,246.3 23,136.1 24,755.6 26,488.5

IT Market as % GDP 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Hardware (Computer

market sales) (US$mn) 7,489.1 7,573.9 8,772.5 9,235.4 9,364.9 9,393.9 9,502.3 9,875.7 10,248.6Services (US$mn) 7,482.3 7,158.2 7,453.1 8,057.8 8,547.8 8,980.3 9,526.3 10,397.0 11,347.3Software (US$mn) 3,014.9 3,074.3 3,183.4 3,474.4 3,685.6 3,872.1 4,107.6 4,483.0 4,892.7PCs (including notebooks)

(US$mn) 5,991.3 6,134.9 7,105.7 7,499.1 7,679.2 7,778.1 7,867.9 8,177.1 8,485.8Servers (US$mn) 674.0 681.7 789.5 831.2 842.8 845.4 855.2 888.8 922.4

e/f = BMI estimate/forecast Source: BMI, ITU (internet and broadband penetration)

Internet

Table: Telecoms Sector - Internet - Historical Data & Forecasts, 2009-2016

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

No of Internet Users/100

e/f = estimate/forecast Source: BMI

The latest data provided by ABS was for a

total of 10.328mn broadband subscribers at

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

growth of 18.5% Although more rapid

growth is expected for the number of

mobile broadband subscriptions (ABS

notes that mobile wireless excluding

mobile handset connections - was the

fastest growing internet access technology

in actual numbers, increasing from 3.4mn

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

and high-speed DSL services will also

remain prominent Australia's broadband

operators continue to invest in upgrading

networks to ADSL 2+ as they witness

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

signing of equipment (with Corning) and construction (with Syntheo) contracts during Q411 indicate

that progress is being made - would contribute significantly to broadband take-up, especially in rural regions

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

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

Industry Trends - Internet Sector

2009-2016

Source: BMI