Australia information technology report q4 2011

Industry Developments In 2010, the Australian federal government announced a six-year plan to transfer government agencies' computing systems to a public cloud environment.. Computer Sa

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REPORT Q4 2011

INCLUDES 5-YEAR FORECASTS TO 2015

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Copy Deadline: October 2011

CONTENTS

Executive Summary 5

SWOT Analysis 8

Australia IT Sector SWOT 8

Australia Political SWOT 8

Australia Economic SWOT 9

Australia Business Environment SWOT 9

IT Business Environment Ratings 10

Table: Regional It Business Environment Ratings 13

Asia IT Markets Overview 14

Australia Market Overview 21

Government Authority 21

Background 21

Hardware 21

Software 24

IT Services 26

Industry Developments 28

Table: Computers For Schools Programme, Phase Two – Planned Spending By State 30

Industry Forecast 31

Table: Australia's IT Sector – Historical Data & Forecasts (US$mn Unless Otherwise Stated) 33

Industry Forecast Internet 34

Internet 34

Table: Telecoms Sector Internet Historical Data & Forecasts, 2008-2015 34

Macroeconomic Forecast 36

Table: Australia – Economic Activity, 2008-2015 38

Competitive Landscape 39

Computers 39

Software 41

IT Services 42

Internet Competitive Landscape 44

Table: Australia Dial-Up And Broadband Internet Subscriptions, 2009-2010 45

Table: Australian Broadband Market, June 2009-June 2010 48

ADSL2+ 48

Naked DSL 50

WiMAX 50

National Broadband Network Update 52

Company Profiles 55

HP Australia 55

SAP (Australia) 56

Country Snapshot: Australia Demographic Data 58

Section 1: Population 58

Table: Demographic Indicators, 2005-2030 58

Table: Rural/Urban Breakdown, 2005-2012 59

Section 2: Education And Healthcare 59

Table: Education, 2002-2005 59

Table: Vital Statistics, 2005-2030 59

Section 3: Labour Market And Spending Power 60

Table: Employment Indicators, 2001-2006 60

Table: Consumer Expenditure, 2000-2012 (US$) 60

Table: Average Annual Wages, 2000-2012 61

BMI Methodology 62

How We Generate Our Industry Forecasts 62

Transport Industry 62

Sources 63

Executive Summary

Market Overview

Opportunities in consumer, government and business sectors will drive growth in the Australian IT

market marking a second year of strong recovery BMI forecasts the market's total value at US$20.8bn in

2011, projected to reach US$25.7bn by 2015

New services such as cloud computing will pay a large part in the market's continued growth drigin spending on IT services The government's six-year cloud computing strategy has been joined by a

number of private and public sector organisations launching their own initiatives EMC Australia signed several large organisations up to its Service Provider Program in October 2010, including Telstra,

Macquarie Telecom and Dimension Data

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

Company News

Telecoms service providers in the Australian market are investing in infrastructure to provide cloud computing services In Q111, telecoms company Telstra, in partnership with consulting leader

Accenture, launched a 45-day free trial of its cloud infrastructure for government agencies Meanwhile, rival telecoms company Optus already claims a number of high-profile customers for its trial services, including property company Savills and South Australia's Royal District Nursing Service (RDNS)

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 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, at 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 are 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

Australia IT Sector SWOT

ƒ Strong financial sector

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

ƒ Sensitive to volatility in the global economy

benefits for the IT market

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

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

ƒ Green IT as companies look to make power savings

activity and leading to a scaling back of IT budgets

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

Australia Political SWOT

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

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

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

Australians abroad a target for Islamic extremists

ƒ Australia's close alliance with the US, particularly under John Howard, has left a lingering feeling among some Asian governments that Canberra is Washington'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, especially to China

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

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

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

Australia Business Environment SWOT

underpin economic prospects

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

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

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

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

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

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

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 Q411 ratings reflect our consideration of the political and economic risks, as well as the risks associated specifically with IT intellectual property (IP) rights protection and the implementation of state spending projects

There are no changes in country rankings in our updated Asia Q411 BER ratings 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

We forecast solid IT market growth in these markets in 2011 However, this will depend on continued business and consumer confidence in the economic recovery, which could feel an impact if China

experiences a slowdown 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

Meanwhile, Singapore's ambitions to emerge as a regional cloud computing hub will fuel vendor

investment in service capabilities Moreover, ambitious projects such as the national healthcare register and the schools standard operating environment will bolster the IT market Singapore benefits from high broadband penetration and initiatives such as the government's ambitious Intelligent Nation 2015 plan

Singaporean spending on IT services will be boosted by the continuing boom in IT-enabled services such

as call centres and back-office financial services Other promising sectors for IT services include

healthcare, as the government launches a series of initiatives to develop health technology

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 Q411 regional ratings Demand is expected to stay resilient, even

as economic growth moderates Government spending may become more constrained, because of

commitments to tackle the budget deficit, but there will be growth areas IT spending growth will be driven by the government's drive for greater broadband penetration It has set an optimistic target of 75%

by 2015

The rollout of a Malaysian 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, despite an expected moderation in investment and retail spending over the next year, an

expansion in consumer credit will help drive IT market growth The rural electronics subsidy programme will continue to boost demand from the vast, underpenetrated rural areas The lower tier city and towns are expected to be the fastest growing segment of the PC market but pressure on hardware prices is also a risk in the current environment

Factors such as the vast potential rural market and a commitment to modernisation in sectors such as education, healthcare and manufacturing are among other expected drivers 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

Vietnamese IT demand, although with a rather smaller market than its leading neighbour 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 PC subsidy

programmes will support the PC market this year as the government continues to roll out the One

Teacher-One Computer programme

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 businesses 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 to help utilise cloud computing

In 2011, having postponed IT projects during the economic slowdown, many Indian private and public sector organisations are now investing again in upgrading their IT infrastructure 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 BMI's view is that the fundamentals of growing

affordability and low PC penetration will keep the market on a positive growth trajectory

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 Spending in some key IT verticals, such as financial services and banking should continue to be significant in 2010 Government IT spending

is also expected to increase and could have accounted for as much as 25% of the IT market in 2010 The SME sector will drive demand for basic hardware and applications as enterprises focus on enhanced productivity

Sri Lanka's IT market has benefited from the restoration of peace and improvements in the security situation, which helped release pent-up demand for IT solutions The country has felt the effects of instability over the years, from disruption of distribution channels and a flourishing grey market to the underdeveloped telecoms infrastructure However, Sri Lanka will feature on IT vendors' radars as one of the best potential growth prospects in South Asia Computerisation has only started in government services Major public and private sector organisations remain largely underpenetrated in terms of basic enterprise software

Table: Regional It Business Environment Ratings

Limits Of Potential Returns Risks To Realisation Of Returns

IT Market

Country Structure Limits

Market Risks

Country Risk Risks

IT BE Rating

Regional Ranking

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

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 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

2011e IT Market Sizes

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%

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

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

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 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$9.2bn 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 Firstly, 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 Q410 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 began to recover by end-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, and 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 Q110, due in large part to the popularity of tablets, as well as

a blurring of the netbook and notebook categories This trend continued in H111, with netbook sales down by a double-digit factor in Q111, compared with the same period of the previous year

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

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

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

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

detrimental to customer choice and retail sales

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

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

end-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 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 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 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, 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

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 launched cloud

computing strategies in the same year 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, 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

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

transport and cards from other licensing authorities These programmes should drive IT spending in both government and tangential sectors

While most government IT programmes were relatively immune to the global slowdown, international meltdown encouraged the government to seek greater efficiency in IT procurement In April 2009, it was reported government IT departments had been ordered to reduce the number of IT contractors

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

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

Education Projects

Around 1,400 high schools were expected to benefit from the second phase phase of the government's computers for schools project, announced in January 2009 According to then-computer 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

Industry Forecast

Our forecasts for IT market growth in 2011 remain unchanged, with US$25.7bn expected by 2015, a 5.8% CAGR for the market The market is expected to reach US$20.8bn by the end of 2011, after a strong recovery in 2010

In 2011, BMI forecasts IT spending growth of 7%, consolidating a strong bounce-back in PC sales in

2010, with the revival of IT projects that had been shelved in 2009 One major area of opportunity will be growing demand across market segments to take advantage of opportunities presented by cloud

Government programmes should help to keep computer hardware sales in positive growth territory, following a strong recovery in 2010 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 enterprise segment should continue to benefit from projects that were previously deferred because of

economic uncertainty In May 2010, retail leader Harvey Norman kicked off a AUD50mn project,

postponed from 2009 due to the financial crisis, to replace all of its core business systems over the next five years Meanwhile, in the wake of the devastating Queensland floods, the IT repair and replacement bill is expected to run into hundreds of millions of dollars

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) should have positive implications for the future growth of the IT market

In 2011, government projects in sectors such as e-government, healthcare, and education will drive significant opportunities for IT vendors In mid-2010, the Australian government announced the launch of

a standardised reporting system scheme The National E-Health Transition Authority aims to create a paperless environment in Australia's health sector, including public hospitals