Australia information technology report q4 2012

Executive Summary BMI View: Australian IT sales are expected to reach US$21.9bn in 2012, up 3%, with the market continuing to offer opportunities, despite business concerns about the do

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TECHNOLOGY REPORT Q4 2012

INCLUDES 5-YEAR FORECASTS TO 2016

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: October 2012

Executive Summary 5

SWOT Analysis 7

Australia IT Sector SWOT 7

Australia Political SWOT 7

Australia Economic SWOT 8

Australia Business Environment SWOT 9

Asia Pacific IT Risk/Reward Ratings 10

Table: Asia Risk/Reward Ratings Q412 13

IT Markets Overview 14

IT Penetration 14

IT Growth and Drivers 16

Sectors And Verticals 18

Market Overview 22

Government Authority 22

Software 25

IT Services 28

Industry Developments 29

Government's ICT Policy 30

Healthcare IT 30

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

Industry Forecast 32

Table: Australia IT Sector - Historical Data & Forecasts, 2009-2016 34

Industry Forecast Internet 35

Table: Telecoms Sector - Internet - Historical Data & Forecasts, 2009-2016 35

Competitive Landscape 37

Computers 37

Software 39

IT Services 40

Internet Competitive Landscape 42

Table: Australia Dial-Up And Broadband Internet Subscriptions, 2009-2010 43

Table: Australian Broadband Market, June 2009-June 2010 46

Macroeconomic Forecast 54

Table: Australia - Economic Activity 56

Company Profiles 57

Hewlett-Packard 57

SAP 63

Microsoft Corporation 66

Country Snapshot 71

Table: Australia's Population By Age Group, 1990-2020 (% of total) 73

Table: Australia's Key Population Ratios, 1990-2020 74

Table: Australia's Rural And Urban Population, 1990-2020 74

BMI Methodology 75

How We Generate Our Industry Forecasts 75

IT Industry 75

IT Ratings – Methodology 76

Table: IT Business Environment Indicators 77

Weighting 78

Table: Weighting Of Components 78

Sources 78

Executive Summary

BMI View: Australian IT sales are expected to reach US$21.9bn in 2012, up 3%, with the market

continuing 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$9.5bn in 2011 to US$9.5bn in 2012, +0% in US dollar terms Forecast in

US dollar terms flat, but government programmes will help to shore up demand

Software sales: US$3.6bn in 2011 to US$3.7bn in 2012, +5% in US dollar terms Forecast in US dollar

terms upwardly revised 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$8.3bn in 2011 to US$8.7bn in 2012, +6% in US dollar terms Forecast in US

dollar terms upwardly revised, 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 By 2012, a large number of organisations, across a wide range of Australian sectors, have moved

to full cloud deployments Australia's big four banks have been at the forefront of moves towards cloud computing after revaluating their IT spend during the economic downturn 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

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

SWOT Analysis

Australia IT Sector SWOT

Strengths ƒ Strong government support for ICT programmes

ƒ IT-literate population

ƒ Strong financial sector

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

US

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

rates

ƒ Sensitive to volatility in the global economy

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

benefits for the IT market

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

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

ƒ Green IT as companies look to make power savings

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

economic activity and leading to a scaling back of IT budgets

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

Australia Political SWOT

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

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

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

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

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

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

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

made Australians abroad a target for Islamic extremists

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

Australia Economic SWOT

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

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

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

and, by extension, currency volatility

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

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

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

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

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

threat to 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

Strengths ƒ A highly educated workforce and comparatively modern transport infrastructure

underpin economic prospects

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

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

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

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

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

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

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

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 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 Q412 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 slight changes to the countries' individual scores, their respective rankings were

unaffected Singapore remained the most attractive investment destination on a risk-reward basis among the 12 countries that were assessed with an IT Rating score of 74.1 Developed countries Australia, Hong Kong and South Korea occupied the second, third and fourth position respectively, which is mainly due to their more stable macroeconomic environment as well as factors such as the governments' receptiveness

to innovations and greater protection of IP On the opposite end of the spectrum are emerging markets such as Vietnam and Sri Lanka Besides weak Country Structure and Country Risk scores, their IT markets are still in the infancy stage, with significant barriers holding back growth in the near term

Although Singapore's IT market is significantly smaller than many of its regional peers, the country has other redeeming factors Besides a pool of skilled labour in a highly urbanised environment, the country

is strategically located in the heart of South East Asia amid emerging markets such as Indonesia and Thailand, which allows Singapore to form the hub for companies' regional expansion plans 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

Hong Kong's position as one of Asia's most important financial hubs presents significant IT services growth opportunities We expect enterprises to increasingly turn to IT solutions to reduce operating costs and facilitate cross-border transactions, in addition to affordable high-speed broadband connectivity - the territory has some of the world's lowest fibre broadband tariff rates Further, Hong Kong's geographical proximity and relationship with China makes it a good investment location for IT companies interested in tapping into the Chinese market

New offerings such as cloud computing, machine-to-machine (M2M) and telecare are some areas that are driving demand for IT solutions in South Korea Besides government-led initiatives, telecoms operators are playing their part by deploying the latest technologies to ensure networks are able to cope with

bandwidth-intensive services At present, South Korea has the most number of LTE subscribers in Asia Pacific, largely due to the fact that all three mobile operators have launched commercial services The market also has a growing pool of M2M subscribers, which grew by 9.6% from 1.429mn in November

2011 to 1.566mn in May 2012

Malaysia remained in fifth position in our Q412 regional ratings with an IT Rating score of 51.8 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 (ETP), which has earmarked areas such as cloud computing as one of its top 10 strategic technology priorities The roll-out 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

China's HSBC manufacturing purchasing managers' index posted its eighth consecutive sub-50 print (at

48.2) in June 2012, meaning that the country's structural slowdown is becoming increasingly difficult to ignore The country's manufacturing sector, which accounts for roughly 40% of the economy, is clearly in

a prolonged contractionary phase, and we do not envisage a turnaround anytime soon Not only is the headline index on the decline, but new export orders also came in at their weakest level in seven months, and the employment reading contracted for a fourth month running 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 However, market risks such as poor IP rights protection and a lack of business transparency remain threats to IT development

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 currently 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 number of internet users in Indonesia is projected to increase from the estimated 84.755mn in 2011 to 171.183mn in 2016, representing 68.9% penetration rate While the country's low personal computer ownership and fixed broadband penetration imply significant room for growth, we believe that

development is largely limited to richer areas such as Java We expect government-led initiatives to help

Like China, India's IT Market score was bolstered by the county's population size, which in turn attract

businesses According to Dimension Data, which partnered with Bharat Sanchar Nigam Limited in

April 2012 to provide data centre services such as video-as-a-service and infrastructure-on-demand, India's IT market is worth INR24bn Dimension Data expects the sector to grow a compound annual growth rate of 22% to INR65bn in 2016.However, India faces a host of challenges if it wishes to fulfil its potential For example, at present, India's business environment is clouded with regulatory uncertainties, which have caused ICT investments to grind to a halt

Thailand's IT sector is gradually recovering from the floods, partially due to the government's Smart Thailand project, which was unveiled in September 2011 Like Malaysia's ETP, the Smart Thailand project aims to boost the country's competitiveness through greater ICT development by integrating ICT

in the government sector At a cost of THB80bn, Thailand aims to increase broadband coverage to 95% of the population by 2020, up from 80% in 2015 and the current 33% At the same time, all 800 government services across the education, health, government service and agriculture sectors are to be migrated to an electronic platform, which should improve service quality and the communication between agencies

Vietnam is trying to catch up with regional peers, with the government pledging to invest US$8.5bn in the ICT sector in the next 10 years The government is also looking to attract US$5bn worth of foreign

investments in the IT sector by 2015, according to Avaya Consequently, business communications

solutions provider Avaya opened a representative office in Ho Chi Minh in end-June with an eye on the country's enterprise telephony, internet protocol and contact centres sectors

There was a slight deterioration in Sri Lanka's IT Rating score of 28.3, which fell from 28.3 the previous quarter to 27.7 However, we maintain our view 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 Computerisation has only started in government services Major public and private sector organisations remain largely underpenetrated in terms of basic enterprise software

Table: Asia Risk/Reward Ratings Q412

Limits Of Potential Returns

Risks To Realisation Of Potential Returns

Country IT Market

Country Structure Limits

Market Risks

Country Risk Risks IT Rating

Regional Rank

Singapore 57.0 100.0 72.1 70.0 85.1 79.0 74.1 1

Australia 60.0 95.0 72.3 80.0 72.9 75.7 73.3 2

Hong Kong 53.3 100.0 69.7 70.0 85.7 79.4 72.6 3South Korea 53.3 70.0 59.2 75.0 75.4 75.2 64.0 4

Malaysia 44.0 55.0 47.9 35.0 78.3 61.0 51.8 5China 55.6 30.0 46.7 35.0 65.1 53.1 48.6 6

Philippines 38.0 45.0 40.5 42.5 53.6 49.1 43.1 7Indonesia 41.3 40.0 40.8 35.0 55.1 47.1 42.7 8

India 52.5 15.0 39.4 45.0 50.9 48.5 42.1 9Thailand 40.0 20.0 33.0 35.0 70.3 56.2 39.9 10

Vietnam 36.9 15.0 29.2 35.0 47.2 42.3 33.2 11 Sri Lanka 28.8 10.0 22.2 35.0 44.2 40.5 27.7 12

proprietary Country Risk ratings The ratings structure is aligned across the 14 industries for which BMI provides

Risk/Reward methodology and is designed to enable clients to consider each rating individually or as a composite, 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

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

f = BMI 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

Broadband Penetration

Per 100 Population

f = BMI 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 medium-sized enterprises (SMEs)

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 owing 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

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

IT Market Sizes

As % Of National GDP

f = BMI forecast Source: BMI

IT Markets Compound Growth

2012f-2016f (%)

f = BMI forecast Source: BMI

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 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 owing 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 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 revenue 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

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

Market Structure (% of IT Market)

2012f (LHS) & 2016f (RHS)

f = BMI forecast Source: BMI

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 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

Government Authority Department for Broadband, Communications and the Digital Economy

Chairman Stephen Conroy

Australian computer hardware sales are projected at US$9.5bn 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$10.5bn 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

Despite the recent discounting, prices remain on average higher in the Australian market compared with many other development country markets, a fact which triggered a recent parliamentary enquiry The Parliamentary Committee looking into IT said the enquiry had struck a chord with the public, resulting in

a high level of submissions from consumers Consumer groups have blamed differential pricing by multinationals for prices which are sometimes as much as 80% higher, than for equivalent products in other countries In a study of more than 200 products, consumer group Choice found that a selection of 12

Dell computers were 41% more expensive on average in Australia However IT companies argued that

higher Australian prices were not IT-industry specific They pointed to higher wages and distribution costs, and high prices charged by Australian channel agents

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

computers as connectivity devices

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 understood 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 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 6%, rising to US$4.8bn 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

Cloud computing may remain a relatively small slice of the overall IT budget, but the indications are that this could grow to a level exceeding 10% As a potential sign of things to come, a 2012 survey by

research firm Frost & Sullivan found that 53% of Australian companies using cloud computing services spend more than 10% of their total IT budgets on cloud solutions or services, while 31% spend more than 20% About 70% of them will increase their cloud-based budget significantly over the next 12 months Larger companies currently spend much more on cloud computing than smaller companies, but the latter group are expected to represent a growing opportunity

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

In 2010 many Australian organisations launched cloud pilot programmes By 2012, the majority of these organisations, across a wide range of Australian sectors, have moved to full cloud deployments

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, 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

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

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

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

Telstra's infrastructure is incorporated in the National Broadband Network (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

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

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

Education Projects

Around 1,400 high schools were expected to benefit from the second phase of the government's

computers for schools project, announced in January 2009 According to then-computer minister and the 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

State Funding, AUDmn Additional Computers

Total No Of Computers Delivered Under Plan

Industry Forecast

In 2012, BMI forecasts Australian IT market growth of 4%, with spending of US$21.9bn, 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$26.4bn 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 PC growth segment as the market is expected to be hit 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 continue their deployments of cloud services, 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 and across sectors, cloud adoption is spreading from storage and email to areas such as HR management 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$9.5bn in 2012 to US$10.5bn in 2016, with PC sales (including accessories) forecast to rise from US$7.8bn to US$8.7bn, boosted by computer procurement for education Software spending is forecast to rise from US$3.7bn to US$4.8bn and IT services from US$8.7bn to US$11.1bn

Table: Australia IT Sector - Historical Data & Forecasts, 2009-2016

notebooks) (US$mn) 6,135 7,472 7,702 7,774 8,120 8,069 8,109 8,729Servers (US$mn) 682 830 854 853 883 877 881 949

Source: BMI, ITU (Internet and broadband penetration)

Industry Forecast Internet

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

2009 2010 2011e 2012f 2013f 2014f 2015f 2016f

No of Internet Users ('000) 13,478 14,392 15,428 16,318 17,212 18,036 18,690 19,157

No of Broadband Internet

Subscribers ('000) 8,172 9,739 12,606 14,370 16,064 17,381 18,337 18,960

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

The latest set of data from the ABS

dates the end of December 2011

when there was a total of 12.606mn

broadband subscribers These figures

were higher than we had expected

and we have raised our forecasts as a

result Mobile broadband

subscriptions are believed to be

powering growth with 7.513mn

subscribers in Q411 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 see 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 Considerable progress has been made over the past quarter, with the NBN laying out a new timetable that, if fulfilled, will see 3.5mn premises with a completed fibre connection, or the start of one, by June 2015

The US$35.9bn NBN project will offer high-speed broadband services through fibre-optic cable to 93%

of the country's 13mn homes, schools and businesses by 2021

We expect the number of broadband subscribers to increase to 18.960mn in 2016 Similarly, forecasts for the number of internet users are increased slightly, to 19.157mn at the end of the forecast period We

Industry Trends - Internet Sector

2009-2016

Source: BMI, operatorst

2010 Market saturation in urban cities such as Sydney and Melbourne will mean internet penetration growth will remain low

Competitive Landscape

Computers

ƒ HP retains first place in PC market due to aggressive seasonal discounting

ƒ Australian vendors target small business market

Multinational brands dominate the PC market in Australia HP is the overall brand PC market leader in

2011, followed by Dell, while other major players include Toshiba, Acer, Lenovo, and iPad-maker Apple The share of unbranded 'white box' products in the Australian market has dropped below 20% HP

has around a 20% share of the brand PC market, ahead of nearest rival Acer, with around 17%, and Apple which, as a result of sales of the iPad, has a share of around 15% The top four vendors, including Acer and Dell, together account for above 60% of the market

The release of Apple's iPad created a new competitive battleground, with Apple's rival vendors releasing their own products Moreover, Apple has gained major momentum in the Australian market from its aggressive retail store expansion as well as the launch of the Macbook Air Sandy Bridge refresh model However, Apple has so far dominated tablet sales in the Australian market, with the Apple iPad 2,

featuring new cameras and an 8.8mm slim body

In Q411, Apple overtook Acer and Dell for the first time to take second place in the Australia and New Zealand consumer PC market, according to estimates by research firm IDC Apple has responded to

growing competition from Samsung and others by reducing prices, with the price of an entry-level

original iPad now down to about AUD445 However, in Q411 Apple actually slipped back from second

to third in the Australian PC market overall, as Acer overtook it as a result of a major contract with Queensland schools Meanwhile, HP kept its top spot with a share of around 19%, as it engaged in major seasonal discounting

The iPad was officially launched in Australia in May 2010, with local telecoms companies Telstra and Optus offering what were claimed to be some of the cheapest data rates in the world for iPad users As of

the end of 2010, it was estimated that around 250,000 iPads had been sold in Australia, although firm

sales figures had not been confirmed by Apple According to an estimate by market research firm IDC,

the performance was enough to lift Apple into fifth spot in the Australian PC rankings in Q310

Meanwhile, the number of competitor tablet devices continues to grow, with Samsung, Lenovo, HP, Acer, and Dell all reportedly working on new tablets Telecoms operators such as Telstra are competing

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

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

operating system Other such devices include one from Lenovo named LePad, and Dell's Streak device, which was launched by Optus in October 2010 and retailed for AUD649 In November 2010, Samsung launched its much-hyped Galaxy Tab, which was available from all of Australia's major telecoms carriers for a price of AUD999 However, the devices progress in the Australian market was stalled by a patent injunction brought by Apple against it In December 2011, a court overturned a sales ban that had

prevented Samsung from marketing or selling the Galaxy 10.1 However, the injunction was subsequently extended, disrupting Samsung's bid for the Christmas holiday market

However, e-readers represent another potential challenge to rival form factors such as netbooks and tablet

PCs More of these specialist devices arrived on the Australian market in 2010 In September 2010, Sony

released its first book reader onto the Australian market in time for Father's Day The compact new device was priced at AUD229 for the cheapest model, and provided iPad-style touchscreen technology The

device will compete with established rivals such as Amazon's Kindle, Borders' Kobo, and Apple's iPad

The release of Kindle's lower cost Wi-Fi Kindle, which will retail in Australia for AUD178, is likely to help bring down average prices

Competition for government tenders continues to be a significant part of the market, particularly in connection with the computers in education programme In April 2009, Lenovo won a tender to provide computers to New South Wales schools This followed a big win for Lenovo in February 2009, when it partnered with an IT deployment company to roll out 10,000 netbooks to Victoria public schools over a three-year period The project will provide Lenovo and Acer netbooks to students in years five through to eight

However, Lenovo remains a relatively small player in the Australian market and spends little in the country on mass media advertising Lenovo's brand is hardly a presence in major consumer electronics

retail chains such as Harvey Norman and JBN HiFi, and instead the company relies on smaller

independent retailers However, the company still has some large organisation clients inherited from IBM, including several banks The company also has an ongoing relationship with several government departments, with the New South Wales Education department being one major client

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

organisation called PowerBuy that aimed to leverage the combined buying power of small businesses in

negotiations with IT suppliers

Meanwhile, vendors in the Australian market have also broadened their retail strategies to take advantage

of relatively robust demand in the consumer segment In 2008, Dell moved further away from its former

direct selling model when it started to sell its range of desktops and notebooks through 104 Officeworks

stores The move marked a dramatic shift after 10 years in the country, but was in line with its new global

strategy In December 2008, Dell expanded this new strategy through an arrangement with the Good Guys discount chain By Q310, Dell was estimated to have around a 15% share of the Australian PC

market, placing it third behind HP and Acer

The economic slowdown led some government organisations and companies to focus on making IT savings through vendor consolidation In 2008, the New South Wales education department launched a rationalisation of its IT supplier base According to the new arrangement, HP became the sole provider of

laser printers to the agency, while similar deals were reached with Fuji Xerox for photocopies, Canon for fax machines, and Ricoh for ink jet printers The department aimed to save about one-third of its

current annual bill of AUD100bn

Software

ƒ IBM to deploy enterprise-class cloud infrastructure in Australia

ƒ SAP wins contract from NSW Trade & Investment Agency.

Microsoft's Windows 7 release provided a boost to the operating system software market The new system has attracted more support from businesses than Windows Vista, largely because Vista's

predecessor, Windows XP, is now getting old Many businesses that declined to upgrade from XP to Vista, due to reported problems with the latter, may now go straight to Windows 7 Microsoft will still offer reduced support for XP until 2015, but hardware manufacturers will start to wind down their support from about 2012 This will be a key factor that should drive business upgrades to Windows 7

Windows 7 is also better suited to virtualisation than either Windows XP or Windows Vista

Virtualisation looks set to become an important trend in IT spending in the next few years, as it allows businesses to simplify the management of desktop PCs by running desktop applications and storing user data within the datacentre Given the current economic climate, IT directors will need to justify any upgrade in terms of cost savings

In the enterprise software segment, European giant SAP has enjoyed recent successes in the Australian markets Among the company's high-profile contracts wins was a substantial stake of the Commonwealth Bank' core banking replacement project SAP is working on the estimated A$1bn project with partner

Accenture Other recent deals included a project for the National Australia Bank, as well as companies