Australia information technology report q4 2013

BMI Industry ViewBMI View: Australian IT sales are expected to reach AUD26.413mn in 2013, up 4%, with the market continuing to offer opportunities despite business concerns about a domes

Q4 2013 www.businessmonitor.com

AUSTRALIA

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2017

Report Q4 2013

INCLUDES 5-YEAR FORECASTS TO 2017

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: September 2013

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BMI Industry View 7

Headline Expenditure Projections 7

Key Trends And Developments 7

SWOT 10

IT SWOT 10

Wireline SWOT 12

Political 14

Economic 15

Business Environment 16

Industry Forecast 18

Table: Australia IT Sector - Historical Data And Forecasts (AUDmn) 18

Broadband 22

Table: Telecoms Sector - Broadband - Historical Data & Forecasts 22

Macroeconomic Forecasts 24

Table: AUSTRALIA - MACROECONOMIC FORECASTS 24

Industry Risk Reward Ratings 26

Asia Risk/Reward Ratings 26

Table: Asia Pacific IT Risk/Reward Ratings, Q413 29

Market Overview 30

Hardware 30

Software 36

Services 38

Industry Trends And Developments 45

Regulatory Development 48

Table: Government Authority 48

Government Initiatives 48

Regulatory News 50

Company Profile 52

SAP 52

Hewlett-Packard 57

Demographic Forecast 64

Table: Australia's Population By Age Group, 1990-2020 ('000) 65

Table: Australia's Population By Age Group, 1990-2020 (% of total) 66

Table: Australia's Key Population Ratios, 1990-2020 67

Table: Australia's Rural And Urban Population, 1990-2020 67

Methodology 68

How We Generate Our Industry Forecasts 68

IT Industry 68

IT Ratings - Methodology 69

Table: IT Risk/Reward Ratings Indicators 70

Weighting 71

Table: Weighting Of Components 71

Sources 71

BMI Industry View

BMI View: Australian IT sales are expected to reach AUD26.413mn in 2013, up 4%, with the market

continuing to offer opportunities despite business concerns about a domestic economic slowdown and the global economic situation Tablet sales growth is compensating for the decline in desktop and notebook shipments, while investments in broadband infrastructure are boosting Australia's digital economy, and enabling wider adoption of services such as cloud computing, online banking and e-commerce High- income consumers make Australia a fertile ground for premium devices such as tablets and ultrabooks, while government tenders will also be supportive of spending levels in areas such as education, e-

government, transport and healthcare.

Headline Expenditure Projections

Computer Hardware Sales: AUD11.1bn in 2012 to AUD11.3bn in 2013, up 2.2% in local currency terms.

Strong demand for tablets is compensating for a decline in desktops and notebook shipments The release of

new devices using Intel's latest Haswell chipset architecture could boost shipments in H213.

Software Sales: AUD4.1bn in 2012 to AUD4.3bn in 2013, up 2.2% in local currency terms Security

software sales are increasing, particularly for small and medium-sized enterprises (SMEs) and consumers.Rnterprise resource planning and other e-business products to the small and medium-sized enterprise marketwill be a key trend driving sales

IT Services Sales: AUD10.2bn in 2012 to AUD10.8bn in 2013, up 5.8% in local currency terms IT

services will be the outperforming growth area, with cloud services the key growth driver as local

companies try to use efficiencies enabled by the National Broadband Network (NBN)

Risk/Reward Ratings: Australia's score is 68.0 out of 100.0 Australia's score has declined due to a lower

growth outlook The country ranks fourth in our latest Asia Risk/Reward Ratings table, behind Singapore,South Korea and Hong Kong, but still ahead of larger markets in the region such as China, India andIndonesia

Key Trends And Developments

Cloud computing is expected to be one of the leading IT market trends globally, but in Australia there ispotential for particularly fast growth thanks to the investments in improving connectivity via the NBN Thiswill extend the reach of services, as well as providing the faster upload speeds that are key to advanced

cloud computing services Cloud computing has already gained traction in Australia, with the big four banks

deploying solutions and leading international vendors such as IBM, Oracle and Amazon Web Services

investing in the market The NBN and the government's cloud computing strategy, announced in May 2013,are expected to catalyse the cloud market's development in the relatively underpenetrated areas of the publicsector and with SMEs

In June 2013 it was reported that the Australian Communications and Media Authority (ACMA) wasconsidering implementing regulatory measures to oversee the use of cloud technology In a discussionpaper, security, privacy and access to data were all identified as issues that might need regulating

Subsequently, the government outlined a policy for the adoption and use of cloud computing in officialadministrative processes Its guidelines emphasise the importance of striking a balance between takingadvantage of the cost, flexibility and scalability benefits of cloud computing, and of keeping large quantities

of private data secure Of vital importance is that the most sensitive of government-held information is notsubject to any undue threats

In July 2013 it was reported that US-based telecoms and broadband services company Verizon had signed

a three-year, AUD15mn (US$13.8mn) contract to provide a dual internet gateway service to a number ofAustralian security agencies The company will offer intrusion detection and firewall, anti-spam, anti-virus,and virtual private network services to the Australian Federal Police and its affiliated agencies In the same

month, Telstra secured a contract from the Australian government, worth around US$29mn, which will see

the firm migrate 11 government agencies to a consolidated and secure gateway Both deals are part of thegovernment's effort to reduce the number of internet gateways used in the government, which should result

in efficiency savings of around US$22mn by 2014

Major software and content companies face a number of measures that could hamper their business models

if key recommendations of the Australian government's Inquiry in to IT Pricing are implemented Theinquiry, which looks to explain why some IT services cost a lot more in Australia than in similar countries,could also lead to measures that restrict the ability of IT companies to enforce regional restrictions, or 'geo-blocking' on their products IT companies such as Adobe, Apple and Microsoft have defended the pricesthey charge by highlighting the high cost of doing business in Australia and higher rates charged by

copyright holders in the country

The latest data on Australia's hardware market show that tablets have made significant progress, while

shipments of desktops and notebooks are in decline BMI estimates tablet sales of 2.1mn in 2012, only just

behind notebook shipments, and we expect tablets to overtake notebook shipments in 2013 as a wider range

of form factors and price points deepen the market beyond premium/luxury devices However, the trend of

tablet sales replacing notebook purchases is less clear cut Microsoft's partner vendors have demonstrated

the potential for hybrids/convertibles, which combine productivity and content consumption use cases, inH113, and the release of Intel's latest Haswell chipset architecture in June 2013, enabling slimmer andlonger battery life devices, is expected to accelerate this innovation and blur the distinctions betweendevices

IT SWOT

SWOT Analysis

Strengths ■ High incomes and strong supporting infrastructure support high spending

■ Strong government support for ICT programmes

■ IT-literate population with high levels of PC ownership

■ Strong financial sector

■ Tablet sales are compensating for decline in desktop and notebook sales

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

■ Sensitive to volatility in the global economy

Opportunities ■ Government cloud computing strategy creates opportunities for vendors in the public

and SME sectors

■ Launch of Windows 8 increases growth potential for Microsoft partners in the tabletand laptop hybrid market, particularly following the release of Haswell chips in June2013

■ Considerable demand for cloud computing services

■ Phase two of the computers for schools project was expected to generate anadditional US$800mn of spending

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

Threats ■ The biggest threat is of an economic slowdown in 2013, leading to a scaling back of

IT budgets

■ A cheaper Australian dollar would affect consumer and business demand in theimport-dependent IT market

SWOT Analysis - Continued

■ Vendors face threat of parliamentary enquiry into product pricing and are comingunder pressure regarding tax arrangements

Wireline SWOT

Wireline SWOT

Strengths ■ Australia's overall wireline sector is host to a large number of service providers, many

of which offer a full range of voice, data and internet services

■ Many service providers offer broadband internet connectivity by means of severaldifferent technologies

■ The penetration rate, measured as a proportion of buildings reached with broadbandnetwork infrastructure, is extremely high

■ The residential market supports strong demand for pay-TV services

■ The business market supports strong demand for converged data services

■ Australia's leading broadband operators continue to report strong internet andmultimedia service sales

Weaknesses ■ Despite a significant number of service providers, the broadband market continues to

Wireline SWOT - Continued

■ Demand for wireless broadband services, including WiMAX, 3G datacard and USBmodem-supported services is growing

■ Australia's leading broadband operators are investing in the development of higherspeed broadband services This has potential to drive demand for new data services

■ The government revealed that it has set aside AUD60mn for regional, rural andremote telecoms projects; satellite and wireless broadband networks are seen as asource of potential investment in remote regions

Threats ■ Fixed-line sector may decline at a more rapid rate than expected, with potentially

negative consequences for ADSL growth

■ Proliferation of naked ADSL could hasten the decline of the fixed-line sector

■ Growing popularity of wireless broadband services could negatively affect the marketfor fixed broadband access based on DSL and cable

■ The high rate of broadband penetration reduces the scope for further growth in thebroadband sector; growth will slow as the market nears saturation point

SWOT Analysis

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

■ Economic stability over recent years supports the current political system and radicalgroups are unlikely to gain substantial support

Weaknesses ■ 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 andhas been hotly debated in parliament in recent times as the capsizing of a boat led tothe death of a number of refugees The issue continues to be debated in the federalparliament with no sign of political parties co-operating to find an alternative thatwould ensure the safe passage and fair processing of the refugees, while reducing thepossibility of people smuggling

■ The fragility of the state governments' finances compared to the large infrastructureprojects that they need to undertake has led to questions with regards to thecompatibility of the federal-state system with the country's current developmentneeds

Opportunities ■ 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 competingmilitary and economic ties

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

Australians abroad a target for Islamic extremists

■ Australia's close alliance with the US, particularly under John Howard, has left alingering feeling among some Asian governments that it is America's 'deputy sheriff'

in the region

SWOT Analysis

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

■ 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 ■ The persistent current account deficit increases vulnerability to capital flows and, by

extension, currency volatility

■ The export basket is highly concentrated in commodities, with the consequence thatthe economy and currency remain vulnerable to fluctuations in world prices formetals, coal and agricultural goods

Opportunities ■ The rapid expansion of Asian economies in recent years offers new opportunities for

diversifying trading ties from core European markets

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

Threats ■ The high level of private sector debt - especially mortgage loans - poses a threat to

Business Environment

SWOT Analysis

Strengths ■ A highly educated workforce and comparatively modern transport infrastructure

underpin economic prospects

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

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

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

■ With a population of just over 22mn, the domestic consumer base is small by regionalstandards

Opportunities ■ Australia is in talks with China, Malaysia, the Gulf Co-operation Council, Indonesia,

India, Japan and South Korea regarding potential bilateral FTAs It is also part ofnegotiations for the Trans-Pacific Partnership and a regional South Pacific pact,PACER plus

■ Upgrade and expansion of urban infrastructure will be needed to sustain populationgrowth in Australia's main cities, providing opportunities for public-private

partnerships The government is also targeting infrastructure improvements to ruralareas

■ More healthcare infrastructure will be needed to support the ageing population, andwith the introduction of the National Disability Insurance Scheme, the industry is likely

to see increasing demand for services

Threats ■ Corporate taxes for foreign investors remain higher than in other countries, and it

seems unlikely that the government will succeed in reducing the rates in the nearfuture

■ Recent investment proposals by Chinese firms regarding the resource extractionsector have raised fears that strategic assets will be lost to foreign players This hasled to more conditions attached to the sale agreements, which is likely to reduce the

SWOT Analysis - Continued

attractiveness of these assets It remains to be seen if the recent implementation of adatabase to increase transparency around foreign-owned Australian assets will spurmore regulation

■ Changes to the industrial relations law could make it more complicated and costly forbusinesses to hire and fire workers

e/f = estimate/forecast Source: BMI

BMI has maintained its forecast of 4% growth for the Australian IT market in 2013 Although PC sales

have declined, strong tablet sales mean the overall performance of the hardware market is in line with ourexpectations We expect the IT market to reach AUD26,413mn in 2013, up from AUD25,390mn in 2012

We expect growth to be on average faster than in 2013 We forecast a total IT market spending compoundannual growth rate (CAGR) of 5.1% in 2013-2017, with the market reaching AUD32,578mn in 2017 Overthis period the market will remain stable at around 1.7% of GDP

The Australian IT market has considerable medium-term potential, particularly in areas such as tablets,

cloud computing and real-time enterprise software However, in the short term, BMI forecasts a slowdown

in economic growth in 2013, which we expect to spill over to the IT market Despite the wider economicuncertainty, the IT market will continue to grow throughout our forecast period

2013 Outlook

We expect growth in 2013 to be slower than 2012,

dropping 0.4 percentage points (pps) to 4% The key

factor behind this slowdown is the more downbeat

economic outlook for Australia in 2013 We expect

real GDP growth will fall to just 2.1% in 2013 from

3.2% in 2012, with the real terms increase in private

final consumption falling to 1.2% from 3.0% This

will dampen spending both in the retail and business

market We expect unemployment will peak in 2014

at 6.2%, before falling for the rest of our forecast

period to 2017

The slowdown in economic growth will be a drag on

the IT market in 2013 However, Australia remains a

very attractive market due to a range of factors, not

least of which is the high level of GDP per capita, at

a forecast US$69,483 in 2013 This gives Australian

consumers high levels of purchasing power to spend on consumer products such as tablets, laptop-hybridsand ultrabooks Data for Q113 show that, while demand for desktops and notebooks declined in Q113, sales

of tablets have continued to surge Although consumers are facing a less accommodating environment, theyare still willing to spend on attractive mobile PCs We believe the release of a new generation of desktops,

notebooks, convertibles/hybrids and tablets based on Intel's new Haswell chip architecture could boost

sales

Government spending levels are increasing generally, and the government has a number of programmesspecifically boosting IT spending, eg the National Broadband Network (NBN), which is extending

connectivity across the country We expect government spending to increase by 2% in real terms in 2013,

up from 1% in 2012 Government programmes should also help keep computer hardware sales in positivegrowth territory Government subsidies of computers in education will provide support for the market.National and state governments will continue to roll out new initiatives, and the Victoria government hasinvested more than US$150mn in IT in schools New South Wales and Queensland were also rolling out ITfor schools projects

IT Market Industry Trends

2010-2017

e/f = estimate/forecast Source: BMI

Looking at the enterprise segment, with the exception of a few key areas, demand for IT products andservices will continue to be squeezed by weak business confidence due to an uncertain economic outlook In

2011 business demand was hit by concerns about the economic situation in Europe and the US, as well asdomestic issues such as the proposed carbon tax However, sectors such as government, telecoms,

healthcare and banking should continue to supply demand for implementation, consulting and managedservices The potential for a Chinese hard-landing would likely have far-reaching consequences for

Australia, which could go beyond the impact of the crisis in developed markets

Economic concerns aside, there are areas of growth in the enterprise segment, which are mainly based onthe increasing prevalence of connectivity After the narrow victory of the Labor party-led coalition in the

2010 elections, the decision to continue the development of the NBN had a positive impact by boosting thereach and quality of broadband infrastructure Three key areas that stand to benefit are cloud computing,data analytics and machine-to-machine communications

In 2013 leading Australian private and public sector organisations are expected to continue their

deployment of cloud services Surveys indicate that cloud computing is a priority for Australian CIOs, whilethe release of the government's cloud computing strategy in Q213 should also boost deployments Cloudinitiatives have already been implemented by many of the country's leading banks, and across sectors cloudadoption is spreading from storage and email to areas such as human resources management The

government has adopted a six-year cloud computing strategy Cloud computing spending could reacharound AUD4bn by 2017

Market Drivers

The squeeze on the IT market from a slowdown in economic growth in 2013 will alleviate over the medium

term BMI forecasts the Australian economy will register an average of 2.4% real GDP growth 2013-2017,

with private final consumption increasing slightly slower annual average of 1.5% real growth Australia is ahigh-income market and we expect it to remain attractive for premium products, with low inflation andunemployment, a contrast to many other high-income economies around the world that have higher risklevels

Government initiatives such as e-government, healthcare and education will drive significant opportunitiesfor IT vendors over the medium term The National E-Health Transition Authority aims to create a

paperless environment in Australia's health sector, including public hospitals Although the government ispursuing investments in IT in a number of areas, it is reviewing procurement procedures to reduce cost,which could squeeze vendor margins For instance, in early 2013 the Australian Government Information

Management Office (AGIMO) consolidated its contracts with Microsoft through a single reseller to deliver

cost savings of AUD100mn

Governmental broadband plans will provide a boost to the development of Australia's digital

economy Increased reach of broadband infrastructure will boost activities such as online banking andshopping, while the increased upload speeds delivered by the NBN will be a crucial enabler for widespreadadoption of cloud computing services

Meanwhile, in the enterprise segment regulatory compliance will result in continued spending by banks, andintense competition in the retail sector is spurring spending on customer relationship management (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 High labour costs in Australia will generate demand for services

that replace labour, such as Ask Watson, adopted by ANZ Bank in H113 Such technology is in the early stages of commercial deployments, but BMI believes that Australia could be a fertile market for such

technology over the medium term on the basis of potential cost savings

Segments

BMI estimates that household PC penetration crossed the 90% threshold in H113, meaning there is little

scope for growth in first-time PC sales This means the market will grow slower relative to emergingmarkets in the region However, there are large opportunities in the personal/upgrade device market as weexpect consumers will continue to be willing to spend on innovative devices that offer new use cases.Tablets are the most prominent device meeting these requirements, but we believe hybrids/convertibles andultrabooks that use Haswell chips could gain traction in Australia

The software market is expected to register faster growth than the hardware market, growing with a CAGR

of 4.8% from 2013 to 2017 Even so it will still remain at less than half the hardware market size by 2017.Enterprise resource planning (ERP), customer relationship management (CRM) and business intelligencesolutions will be increasingly popular in the small and medium-sized enterprise (SME) market, as

companies aim to enhance productivity through the automation of essential functions BMI believes

security software has potential for strong growth over the medium term as awareness about threats grows,particularly among SMEs

BMI expects IT services will be the outperforming segment of the IT market in the medium term, as

demand is driven by cloud computing services, data analytics and machine-to-machine communications.Cloud computing should see strong growth with the rollout of the NBN and the release of the government's

cloud computing strategy in 2013 Opportunities will exist in telecoms, healthcare and utilities

verticals Cloud computing will be key as businesses look for opportunities to reduce cost and increaseflexibility, and has already gained traction in the market and spread beyond initial core application areas,with around one-third of Australian organisations estimated to be using some cloud services

Over the medium term the development of supporting infrastructure, new cloud computing offerings andincreased 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' computingsystems to a public cloud environment Australia's big four banks will remain in the vanguard of movestowards cloud computing after revaluating their IT spend during the economic downturn

Summary

The hardware market is forecast to grow from AUD11,334mn in 2013 to AUD13,064mn in 2017, with PCsales (including accessories) forecast to rise from AUD9,385mn to AUD10,817mn, boosted by computerprocurement for education and new form factors Software spending is forecast to rise from AUD4,303mn

to AUD5,200mn and IT services from AUD10,777mn to AUD14,315mn

Broadband

Table: Telecoms Sector - Broadband - Historical Data & Forecasts

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

No of internet users ('000) 16,922 17,859 18,752 19,690 20,675 21,708 22,685 23,706

No of internet users/100 inhabitants 76.0 79.0 81.8 84.8 88.0 91.2 94.2 97.2

No of broadband internet subscribers ('000) 9,739 11,123 12,013 12,613 13,118 13,643 14,461 15,474

No of broadband internet subscribers/100

inhabitants 43.7 49.2 52.4 54.3 55.8 57.3 60.0 63.5

e/f = BMI estimate/forecast Source: BMI, ITU, Australian Bureau of Statistics, operators

BMI has not changed its forecasts for the Q413

period due to limited new available data from the

regulator and operators We believe the number of

internet users will continue trending upwards in light

of the growing affordability of internet subscriptions

The large-scale deployment of Australia's National

Broadband Network (NBN) will ensure that the

country's entire population will have access to

high-speed internet connectivity We envisage 23.7mn

internet users by end-2017, representing a

penetration rate of 97.2%

According to the Australian Bureau of Statistics,

there were 12.0mn internet subscribers in the

country at the end of June 2012 The majority of the

subscribers, 96.4%, were using some forms of

broadband connections, while a decreasing number

of users were using dial-up services Mobile

broadband overtook DSL as the main form of broadband connection in December 2010, and the gap

between the two continues to widen

We expect the Australian broadband market to continue exhibiting growth potential with the mobile

broadband segment forming the main growth driver It is also increasingly common for customers to own afixed and mobile broadband connection The NBN aims to deliver broadband services, either by fixed orwireless means, to the entire population, and achieving this goal on target should provide a boost to thebroadband uptake towards the end of our forecast period

The Australian broadband sector grew by 12.2% year-on-year (y-o-y) at the end of June 2012, and thegrowth rate should soon fall into the single-digit range in light of market saturation We expect this scenarioplayed out in 2012 with the number of broadband subscribers reaching 12.0mn, up from 11.6mn in June

2012 Thereafter, we forecast the number of broadband subscribers to reach 15.5mn in 2017, up from12.6mn in 2013

Industry Trends - Broadband

2010-2017

e/f = BMI estimate/forecast Source: BMI, ITU, Australian Bureau of Statistics, operators

Macroeconomic Forecasts

A survey done by the Australasian Institute of Mining and Metallurgy found that unemployment amongprofessionals within the mining industry has soared to 10.9%, highlighting the change in focus for thesefirms since the change in growth trajectory of the Chinese economy We believe that the rebalancing in theChinese economy suggests that the fortunes of Australia's miners are unlikely to return to their heydays.Together with the contracting manufacturing and services sectors, we believe that headline unemploymentrate is likely to head higher over the coming months and forecast Australia's unemployment rate to reach6.0% by the end of 2013

Table: AUSTRALIA - MACROECONOMIC FORECASTS

2011 2012 Latest Period 2013f 2014f

Population, mn 3 22.7 23.1 - - 23.3 23.6 Nominal GDP, US$bn 1,4 1,491.1 1,541.3 - - 1,527.2 1,406.0 GDP per capita, US$ 1,4 66,785 68,351 - - 67,065 61,141 Real GDP growth, % change y-o-

Industrial production index, %

y-o-y, ave 4 -0.6 3.6 3.0 Jun-13 2.5 1.2 Fiscal revenue, AUDbn 5 320.1 349.1 - - 365.4 378.2 Fiscal expenditure, AUDbn 5 366.9 379.6 - - 387.2 401.7 Budget balance, % of GDP 5 -3.2 -2.1 - - -1.4 -1.5 Consumer price index, % y-o-y,

Exchange rate AUD/US$, eop 7 0.98 0.96 1.09 Jun-13 1.08 1.22 Goods imports, US$bn 8 240.3 264.0 18.4 Jun-13 239.7 213.5 Goods exports, US$bn 8 268.5 259.0 19.8 Jun-13 242.9 231.3 Balance of trade in goods, US

$bn 8 28.2 -5.0 1.4 Jun-13 3.1 17.8 Current account balance, US$bn

AUSTRALIA - MACROECONOMIC FORECASTS - Continued

2011 2012 Latest Period 2013f 2014f

Total external debt stock, % of

Notes: e BMI estimates f BMI forecasts 1 Calendar Years; 2 Calendar Years, Base Year = FY2008/09 (July-June).

Sources: 3 World Bank/UN/BMI; 4 ABS/BMI calculation; 5 ABS/BMI calculation, adjusted to calendar-year basis; 6 RBA/ BMI calculation; 7 BMI; 8 ABS/BMI.

Industry Risk Reward Ratings

Asia Risk/Reward Ratings

There are several positional changes in BMI's Asia Pacific IT Risk/Reward Ratings (RRR) in the Q4 2013

update, as well as minor adjustment to country scores Our ratings compare the potential of a selection ofthe region's markets over our forecast period through to 2017 Key factors affecting the IT market ratingsinclude our growth forecasts and political and economic risks, as well as the risks associated specificallywith IT intellectual property (IP) rights protection and the implementation of state spending projects

Singapore has leapfrogged South Korea to take top spot in the Q4 2013 ratings Its overall rating increased

by 0.8pps q-o-q to 72.1, driven higher by a 1.7pps improvement to its industry rewards score The industryrewards score continues to be limited by the relatively small size of the market compared to other APACmarkets - however, it improved this quarter due to strong retail sales and Singapore's emerging position as aregional datacentre and cloud services hub The improvement in the industry risks category adds to a strongprofile across the other three categories Singapore's country rewards score of 100 reflects the favourablelogistics of operating in the country, while the high industry risks score reflects the proactive nature of theICT regulator Besides rolling out 4G and fibre broadband networks, the country encourages developmentssuch as creating smart districts and exportable enterprise mobility solutions

South Korea has been demoted to second position in Q4 2013 as its overall score has declined by 1.2pps o-q to 71.0 The decline is a result of a weaker country rewards score; however, its position is maintained byits strong score in the industry rewards category South Korea's score benefits from the advanced

q-development of its LTE market, which is one of the most mature in the world, and the fact the country

houses the two largest consumer electronics firms - Samsung Electronics and LG Electronics These

features of the domestic market ensure that it is at the forefront of developments, for instance South Korea

is one of the first markets globally in which hybrids/convertibles appear to be gaining traction and cloudservice providers are also taking advantage of the advanced network infrastructure

Hong Kong has received an unchanged score this quarter, remaining in third position with an IT rating score

of 68.9 Hong Kong has a large financial sector, which results in large opportunities for software and ITservices firms Most recently this has been in the provision of cloud services, with the financial servicesindustry an early adopter of new services This, along with Hong Kong's proximity to mainland China, ishelping it to challenge Singapore as a regional datacentre and cloud services hub as vendors expand into theAsia Pacific market

Australia sits in fourth position in the Asia Pacific IT ratings with a score of 68.0 Australia has an

ambitious National Broadband Network plan, which will vastly improve broadband coverage and speedsthroughout the country, and thereby provide a boost to the IT sector, for instance cloud computing

However, the project is facing an uncertain future with the federal elections approaching in September 2013

as the opposition government has announced that it will rely on less of fibre and more on the existingcopper networks to save costs and time An additional factor holding back the market is the high price ofretail devices and software in Australia as vendors sought to aggressively maximise profitability, resulting

in pushback from the government

China has received a stronger IT rating in Q4 2013, up 1.3pps to 58.8 However, it remains in fifth position

as its strong industry rewards score, the highest in the region, is offset by weakness in its country rewardsand risks scores The sheer size of the Chinese market supports a high industry rewards score, even thoughthe growth trajectory of the economy is becoming more uncertain While our view for a bounce in theChinese economy has played out, should the new leadership reduce support for loss-making state-

dominated industries, this would mean a much weaker H213 and 2014 We hold to our long-term view thatChina will shift its economy towards consumption, which will provide a boost to an already buoyant ITsector The introduction of next generation broadband technologies will also provide the necessary growthfoundation, making way for new IT services and consumer electronics

Malaysia's IT rating has increased 0.8pps to 57.2 in Q4 2013, but it remains in sixth position just behindChina, while some distance ahead of India Malaysia's IT market has benefited from the government'sEconomic Transformation Programme, which has earmarked areas such as cloud computing as one of itstop 10 strategic technology priorities Meanwhile, the country has also identified business opportunities inareas such as fixed and mobile services as well as semiconductors and industrial electronics In the retailsegment, we expect rising incomes to support higher spending, particularly as a greater choice of lowerpriced devices hit the market, particularly tablets from OEMs in China

India's score has slipped 3pps q-o-q in Q113 to 48.6; however, it maintains seventh position in our Risk/Reward Ratings table A lower industry rewards score is behind the drop in IT market score as we

downgraded our forecast for medium-term growth Although initiatives such as the Akash tablet are

widening access to devices by making them more affordable, we caution that widespread poverty, weakeducation, poor infrastructure and corruption are all barriers to the development of the market Once theseissues are tackled, and some progress is being made for instance in telecoms infrastructure, India haspotential to move rapidly up the ratings tablet due to size of its population and the fact it is home to some of

the world's largest players in the IT services industry such as Wipro, Tata Consultancy and Infosys.

Indonesia jumped one position to eighth in Q4 despite a 1.2pps decline in its score to 46.3 Often theIndonesian market is highlighted for its size and underlying economic growth story, views we share;however, we also point to advanced technological developments such as progress made in machine-to-

machine communications In February 2013, telecoms operator XL Axiata partnered with Ericsson in an

M2M deal to use its Device Connection Platform, which will give the former the ability to develop M2Mproducts for enterprises on the latter's platform in the first such deal in South East Asia

Thailand also has moved up a position to ninth despite a decline in its IT market score to 46.2 The

government is taking policy measures to promote the IT market including the distribution of tablets toschoolchildren - a process that is well under way with almost 900,000 tablets distributed by January 2013.There have also been improvements in supporting infrastructure such as data networking including thelaunch of 3G services, which will satisfy pent-up demand from consumers and businesses These initiaitives

have in turn attracted investments into the country's IT sector In April 2013, NetApp announced that it is

tripling its investment in the country to capitalise on the rapidly growing datacentre market

The Philippines has dropped two positions this quarter due to a significant downgrade of its score to 45.1.Challenging geography and low incomes limit the IT market's potential, but there are many positive features

of the market It is a well-established player in the business process outsourcing (BPO) industry and thereare signs that the country is trying to move towards high-value services There have also been reports ofincreased interest from Japanese corporate customers that are looking to relocate outsourcing from Chinaand India

At the bottom of the table, Vietnam and Sri Lanka occupy 11th and 12th positions with unchanged scores inQ4 2013 Both countries have strong growth potential, but we favour Vietnam The government there haspledged to invest US$8.5bn in its ICT sector in the next 10 years and is also working to attract US$5bnworth of foreign investments in the IT sector by 2015 Meanwhile, Sri Lanka lags behind its peers, in partdue to the detrimental impact of the country's recent civil war Progress is being made though, with somegrowth momentum building as enterprises invest in ERP and adopt cloud services, while there is also anascent outsourcing industry

Table: Asia Pacific IT Risk/Reward Ratings, Q413

Rewards Risks

Country Industry rewards Country rewards Industry risks Country risks IT rating Rank Previous rank Singapore 56.7 100.0 70.0 74.4 72.1 1 2 South Korea 70.0 75.0 75.0 65.4 71.0 2 1 Hong Kong 55.0 100.0 45.0 77.7 68.9 3 3 Australia 60.0 95.0 45.0 66.9 68.0 4 4 China 76.7 35.0 45.0 55.1 58.8 5 5 Malaysia 60.0 55.0 35.0 67.7 57.2 6 6 India 66.7 15.0 45.0 50.9 48.6 7 7 Indonesia 53.3 35.0 35.0 51.4 46.3 8 9 Thailand 56.7 20.0 35.0 62.9 46.2 9 10 Philippines 51.7 30.0 42.5 50.9 45.1 10 8 Vietnam 51.7 15.0 35.0 53.7 41.1 11 11 Sri Lanka 40.0 15.0 35.0 50.9 35.2 12 12 Average 58.2 49.2 45.2 60.6 54.9 - -

Scores out of 100, with 100 highest The IT Risk/Reward Rating comprises two sub-ratings 'Rewards' and 'Risks' Scores are weighted as follows: 'Rewards': 70%, of which Industry Rewards 65% and Country Rewards 35%; 'Risks': 30%, of which Industry Risks 40% and Country Risks 60% The 'Rewards' rating evaluates the size and growth potential of an IT market in any given state, and country's broader economic/socio-demographic characteristics that impact the industry's development; the 'Risks' rating evaluates industry specific dangers and those emanating from the state's political/

economic profile, based on BMI's proprietary Country Risk Ratings that could affect the realisation of anticipated returns Source: BMI

Market Overview

Hardware

BMI forecasts Australian computer hardware value will increase to a total of AUD11.3bn in 2013, with the

popularity of tablets keeping total PC shipments in positive growth territory by countering the decline indesktop and notebook sales We expect the hardware market to grow at a compound annual growth rate(CAGR) of around 3% 2013 to 2017 and reach a value of AUD13.1bn by 2017, with drivers including newproducts such as hybrid/convertible ultrabooks and tablets Meanwhile, government procurement

programmes and growing broadband penetration will also boost sales

Data for Q113 show the market is performing in line with our expectations Research firm Gartner reported

that desktop shipments declined 20.2% year-on-year (y-o-y) to 393,352 in Q113, while notebook sales weredown 16.8% y-o-y to 724,822 Tablet sales have continued to soar, driven higher by the broader range ofdevices by price and screen size, and compensating for declining unit shipments of desktops and notebooks

In 2013 BMI expects the PC market is projected to report low single-digit growth

Additional factors in Australia are the cooling of economic growth, as well as budgetary pressures, meaningbusinesses will remain cautious about IT investments This helps explain why the Australian hardwaremarket saw a steeper decline in desktops and notebooks than some other developed markets

While tablet sales are booming, there is a fightback under way from Microsoft's partner vendors The

launch of touch-integrated Windows 8 operating system, a new wave of lower-cost ultrabooks, and the

release of Intel's new Haswell chipset architecture should stimulate new cycles of hardware upgrades, and

also blur device categories by enabling ultrabooks and convertibles/hybrids to offer the mobility benefits oftablets and the productivity benefits of notebooks

In 2012 business demand was hit by concerns about the economic situation in Europe and the US, as well asdomestic issues such as the proposed carbon tax Meanwhile, Q112 there was a shortage in the supply ofhard-disk drives (HDDs) resulting from the floods in Thailand, although this was not as severe as expected.Large Australian retailers were given priority by regional suppliers, but the expectation of shortages meant acurtailment of seasonal promotions, and was a drag on the market Against a backdrop of economic

headwinds, promotions and discounting by retailers (such as Harvey Norman with its two-for-one offer)

and sales of tablets have generally helped to shore up volume sales

Despite the recent discounting, prices remain on average higher in Australia compared with many otherdevelopment country markets, a fact that triggered a parliamentary enquiry The Parliamentary Committeelooking into IT said in 2012 that the enquiry had struck a chord with the public, resulting in a high level ofsubmissions from consumers Consumer groups have blamed differential pricing by multinationals forprices, 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 notIT-specific They pointed to higher wages and distribution costs, and high prices charged by Australianchannel agents

Government programmes are significant factors in the PC market Government subsidies of computers ineducation provide support for the market National and state governments have continued to roll out newinitiatives, with the Victoria government investing more than US$150mn in IT in schools Large educationprogrammes were rolled out in Queensland and New South Wales in 2012

The government's ambitious broadband plans will also drive expansion The National Broadband Network(NBN) plan should further the development of Australia's digital economy and services such as onlinebanking and shopping Converged multimedia services such as internet protocol television (IPTV) will alsofeed 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.

Desktops And Notebooks

Single-digit growth in PC shipments is forecast in 2013, as the market is affected by weaker consumerconfidence There is also a shift under way from desktops and notebooks to tablets, hybrids/convertibles andultrabooks Device categories will become less significant in coming years, as tablets become higher

powered, and hybrids/convertibles gain ground, but BMI forecasts continued declines in conventional

desktops and notebooks

Household PC penetration is high We estimate it crossed the 90% threshold in early 2013 This means there

is a limited first-time buyer market, with vendors instead focusing on the upgrade/replacement market when

it comes to conventional desktops and notebooks Upgrades are estimated to account for at least 80% ofbusiness purchases, and more than 50% in the case of households However, we believe this figure isbeginning to erode, with the lifecycle of desktops especially lengthened as consumers maintain devices andinstead purchase mobile computing devices

The enterprise market is a stalwart for desktop sales, but PC penetration is high among Australian

businesses, with around 95% of small businesses and 100% of medium-sized and large businesses havingcomputers Small business comprises more than 99% of all Australian businesses and slightly more than50% of business PC sales

In the notebook market, sales of netbooks have declined since 2010, due in large part to the popularity oftablets, as well as a blurring of the netbook and notebook categories Netbooks were the fastest growingsegment during the economic downturn and reached nearly 15% of notebook sales in Q209, with more than90,000 units sold However, the popularity of netbooks added to the downward pressure on average salesprices as consumers preferred lower-priced models Netbooks were never as popular in Australia as in someother 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

Tablets

BMI estimates tablet sales of 2.1mn in 2012 in Australia, just behind total notebook sales of 2.29mn

(according to Gartner data) We expect the growing popularity of tablets to continue through 2013, withshipments reaching around 3mn units However, it should be noted that hybrids/convertibles will

increasingly blur the distinction between tablets and notebooks

By the end of 2012 it had been forecast that as many as 40% of Australians would be using a tablet PC, withpopulation penetration at around 20% On this forecast, the diffusion curve of tablets would be steeper thanfor almost any other consumer electronics product of recent years According to an estimate by market

research firm Telesyte, by the end of September 2010 around 300,000 tablets had been sold in Australia, of

which the large majority were understood to be iPads Telesyte estimates tablet sales reached 2.4mn in

2012, with Apple again leading the market BMI estimates a lower sales figure for 2012 compared to

Telesyte However, we share their assessment of Apple dominating the market This is unsurprising giventhe high incomes of Australian consumers, meaning they have the disposable income to pay a premium forthe cachet of owning Apple devices

Data from Statcounter support our view that it dominates the tablet market The data show that Apple's

iOS, run on its tablets, accounted for 10.0% of Australian PC browsing traffic in August 2013, a figure that

was up by 3.9 percentage points (pps) y-o-y Google's Android OS, which is used on Samsung, Asus and

Google's own Nexus range, accounted for just 1.3% of PC browsing traffic (up 0.8pps y-o-y) Android has

had relatively little success in the higher income Australian market compared to in Europe, where Androiddevices have made serious inroads into Apple's dominance.

Despite a longer relatively unchallenged reign at the top of the market, BMI expects Android will have an

impact in Australia, with a range of high-quality devices running the OS now available and offering serious

competition to Apple The release of popular tablets such as the Kindle Fire from Amazon, the Nexus 7 and

10 and Samsung's Galaxy Tab range represented a turning point globally, and we believe this dynamic will

affect Australia as well in 2013 and 2014

The success of Android vendors came only after the release of lower cost tablets and were mainly thesmaller 7" form factor This contrasted with Apple's larger and more expensive iPad, and the popularity ofthe smaller, cheaper devices, catalysed the development of Apple's own iPad Mini Apple is set to facecompetition throughout 2013 from rival Android vendors that will offer consumers a greater choice in terms

of price and size, as well as specifications and features

It is also important to note the gap between the strategies of some of the leading players Apple and

Samsung are hardware vendors and look to profit from the sale of devices, while Google and Amazon are

services firms and offer tablets almost at cost The strategies of services firms (combined with low costOEM tablets from China) will likely put pressure on the margins of hardware-centric vendors

Another development that will affect both the tablet and notebook markets is the arrival of Windows 8 InOctober 2012, with the launch of the new OS, Windows vendors were able to introduce touch devices, with

a number of tablets released The addition of more vendors and another touch OS will add to competition inthe market

Hybrids And Ultrabooks

The more significant development derived from Windows 8, and the arrival of more energy-efficientHaswell chipsets, is the medium-term impact on innovation and form factors Windows has a traditionalstrength in productivity use cases and software, with the OS being central to the enterprise market andMicrosoft's Office Suite ubiquitous There is an opportunity for vendors to leverage this strength over rivaliOS and Android devices by designing tablets with strong productivity functionality alongside the passivemedia consumption features Early examples have been hybrid devices such as Microsoft's own Surface

(RT & Pro), Hewlett-Packard (HP)'s Envy and Lenovo's Yoga and Helix Although design innovation has

some way to go, and prices of hybrids will need to decline, the multi-use device has scope to capture a share

of the tablet market by offering a stronger value proposition to consumers while not compromising userexperience.

Some vendors have heavily promoted the concept of ultrabooks, which are being touted as premium, morefully featured notebooks, and a reaction to the previous market dominance of netbooks Ultrabooks, higherperformance notebooks designed as a response to Apple's increasingly popular MacBooks, are an emergingproduct category that Intel and certain vendors backed heavily However, sales fell short of Intel's

projections due to initially high prices

Vendors appear to have realised that high prices stunted adoption of ultrabooks and are moving ahead withplans to supply low-end ultrabooks Intel reportedly has resisted lowering Ivy Bridge CPU prices, butmanufacturers are attempting to reduce costs by using cheaper Sandy Bridge CPUs and cheap batteries Thearrival of Haswell chipsets in June 2013 will enable a new generation of higher powered, slimline and longbattery life devices, as well as presaging cheaper Ivy Bridge prices This should deepen the ultrabook and

hybrid/convertible market, which BMI believes will drive sales higher in H213 and 2014.

Vendor Performance

Multinational brands dominate the Australian PC

market The major players include HP, Apple, Dell,

Lenovo and Acer The share of unbranded 'white

box' products in Australia has dropped to less than

20% HP has around a 19% share of the brand PC

market, ahead of nearest rival Apple with around

17%, and Dell has a share of around 14% The top

five vendors, including Acer and Dell, together

account for more than 70% 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 Australia 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 Australia, with the Apple iPad 2 featuring new cameras and an 8.8mm slim body

Australia's PC Browsing Traffic By

OS (% and percentage point

change y-o-y)

May 2013

Source: Statcounter

The iPad has received a boost in Australia by 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 wasestimated that around 250,000 iPads had been sold in Australia, although firm sales figures had not beenconfirmed by Apple 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, 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.Samsung has enjoyed success with its Galaxy Tab, which was available from all of Australia's majortelecoms carriers for a price of AUD999 However, the device's progress in Australia was stalled by a patentinjunction brought by Apple against it In December 2011 a court overturned a sales ban that had preventedSamsung from marketing or selling the Galaxy 10.1 However, the injunction was subsequently extended,disrupting Samsung's bid for the Christmas holiday market

Competition for government tenders continues to be a significant part of the market, particularly in

connection with the computers in education programme Chinese vendor Lenovo has won a number oftenders to provide computers to New South Wales schools These have included a three-year contract inpartnership with an IT deployment company to roll out 10,000 netbooks to Victoria public schools over2009-2012 The project will provide Lenovo and Acer netbooks to students in years five through to eight

More recently, in June 2013, Lenovo and Dell became the first two technology companies to sign up to theNew South Wales government's IT hardware panel The panel, worth US$85.68mn, will provide IT

hardware for the whole of government as part of the NSW government's IT policy reforms It will initiallycover desktops, laptops and tablets but will be extended to servers, storage, imaging devices and

virtualisation Both companies will be on the panel until April 30 2015, with three 12-month extensionoffers

Lenovo remains a relatively small player in Australia and spends little in the country on mass mediaadvertising Lenovo's brand is hardly a presence in major consumer electronics retail chains such as Harvey

Norman and JBN HiFi Instead the company relies on smaller independent retailers However, it still has some large organisation clients inherited from IBM, including several banks It also has an ongoing

relationship with several government departments, with the New South Wales Education department beingone major client

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

called PowerBuy that aimed to use the combined buying power of small businesses in negotiations with IT

suppliers

Vndors in Australia 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 itstarted to sell its range of desktops and notebooks through 104 Officeworks stores The move marked adramatic shift after 10 years in the country, but was in line with its new global strategy Dell has expanded

this new strategy through an arrangement with the Good Guys discount chain.

Software

Despite high penetration rates of enterprise software, BMI believes there is potential for further investment.

Labour costs are very high, so any automation software that can provide a cost basis for implementation islikely to find a receptive market Software is expected to account for about 16% of the Australian IT market

in 2013, with forecast spending of AUD4.3bn As the focus moves from hardware to services and solutions,the share of the market accounted for by software is forecast to rise by 2017, with businesses seekinggreater leverage from their investments Software sales are forecast to have a CAGR of 4.8%, rising toAUD5.2bn by 2017

Cost-saving software including enterprise resource planning (ERP), customer relationship management(CRM) and other e-business products will be increasingly popular in the small and medium-sized enterprise(SME) market, as companies try to enhance productivity through automating essential functions and easethe pressure of high labour costs As evidence of the importance of this segment to vendors, Microsoftrecently teamed up with Telstra to offer a suite of enterprise software products to SMEs The public andfinancial sectors, healthcare, telecoms, utilities and SMEs are among the verticals vendors believe have themost growth potential

Meanwhile, in terms of operating systems, migration to the Windows 8 operating system retained thepotential to have a positive impact on sales in 2012 However, due to global economic uncertainties, somecompanies, particularly in the export segment, will continue to experience a difficult trading environment,leading to caution about IT investments

Business intelligence demand has grown at a double-digit rate for the past few years and accounts foraround 5% of the total software market Australia will remain a major market for business intelligence