United states information technology report q1 2010

After three quarters of decline as a result of the global economic crisis, the second half of 2009 finally brought a return to growth in US PC shipments and signs of improvement in key I

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Technology Report Q1 2010

Including 5-year industry forecasts by BMI

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Publication date: January 2010

CONTENTS

Executive Summary 5

SWOTS 8

United States IT Sector SWOT 8

United States Political SWOT 8

United States Economic SWOT 9

United States Business Environment SWOT 9

Americas IT Business Environment Ratings 10

Table: Regional IT Business Environment Ratings 12

Market Overview 13

Industry Developments 23

Industry Forecast Scenario 25

Table: USA: IT Sector 27

Internet 28

Table: Telecoms Sector – Internet – Historical Data And Forecasts 28

Competitive Landscape 30

Macroeconomic Forecast 37

Table: United States – GDP By Expenditure 39

Company Profiles 40

HP 40

Dell 42

Microsoft 44

IBM 46

Country Snapshot: United States Demographic Data 47

Section 1: Population 47

Table: Demographic Indicators, 2005-2030 47

Table: Rural/Urban Breakdown, 2005-2030 48

Section 2: Education And Healthcare 48

Table: Education, 2002-2005 48

Table: Vital Statistics, 2005-2030 48

Section 3: Labour Market And Spending Power 49

Table: Employment Indicators, 2001-2006 49

Table: Consumer Expenditure, 2000-2012 (US$) 49

Table: Average Annual Wages, 2000-2012 (US$) 50

BMI Methodology 51

IT Ratings – Methodology 51

Ratings Overview 51

Table: IT Business Environment Indicators 52

Weighting 53

Table: Weighting Of Components 53

How We Generate Our Industry Forecasts 53

IT Industry 54

Sources 54

Executive Summary

Market Overview

ƒ US spending on IT products and services is forecast to grow to US$514.5bn in 2010 and to reach

a level of US$647.7bn by 2014

In BMI’s core forecast scenario, US IT market growth will increase to 5.5% in 2010 and then advance at

a compound annual growth rate (CAGR) of 5.9% over our five-year forecast period After three quarters

of decline as a result of the global economic crisis, the second half of 2009 finally brought a return to growth in US PC shipments and signs of improvement in key IT spending verticals

Going forward, key market drivers are expected to include:

ƒ Growing fixed and mobile broadband penetration

ƒ Product innovation such as feature-rich netbooks

ƒ Technology innovation such as GPS technology and services

ƒ Business model innovations such as virtualisation and software-as-a-service (SaaS)

ƒ Economic recovery

The recession may have had a lasting impact on the IT market by creating the conditions for the

popularity of low-cost netbooks and notebooks and encouraging consideration of new IT delivery models such as SaaS In the light of these and other changes, major vendors have also adjusted their competitive strategies

Industry Developments

ƒ In August 2009 the federal government reported on its 2009 calendar year IT spending

In full-year 2009, total IT spending including all federal IT investment was measured at US$74.2bn, up 1.99% on the previous year’s total of US$72.8bn Looking forward to 2010, budgeted federal IT spending

is set to rise to US$78.4bn

In September 2009, HP’s EDS unit won a US$30mn contract from the US Department of the Treasury’s

Office of the Comptroller of the Currency (OCC) to provide and maintain end-user computing resources and mobility services

laptop at Wal-Mart stores, while a rival Dell product, also produced for Wal-Mart, retailed for US$398

Following the success of its Wal-Mart product, HP continued with its low-price strategy for the school season

back-to-ƒ The launch of Microsoft’s Windows 7 operating system, in October 2009, was the most significant event for Microsoft since the launch of Windows 95

Microsoft has received credit for a much smoother launch of Windows 7 compared with its previous operating system, due in large part to better cooperation with other players in the software value chain, including PC vendors and end-users A wave of new PCs were released in Q409 with the new operating

system, while Acer and Dell said that, as of launch date, there was zero inventory of Vista machines

going into stores

ƒ Consolidation is expected to continue to shape the IT services landscape over BMI’s forecast period

In October 2009, computer hardware giant Dell made a US$3.9bn purchase of Perot Systems, while

Xerox followed later in the month with its US$6.4bn acquisition of Affiliated Computer Services

Meanwhile, HP said that its integration of EDS was ahead of schedule

Notebooks are the fastest growing PC market segment and were on course to account for around 58% of unit sales in 2009, rising to a projected 81% by 2014 Netbooks are forecast to account for around 12% of notebook sales in the US last year However, the netbook growth trajectory should flatten as the price differential with fully featured notebooks becomes less significant

Software

ƒ The US software market is estimated at US$149.2bn in 2010, with single-digit growth from 2009

Software CAGR for 2010-2014 is projected at around 6.8%, as the addressable market grows to around US$194.3bn The launch of Windows 7 is expected to provide a boost to the operating system market in

2010 2010 should see a boost from systems upgrades deferred from last year when the economic crisis had an impact across sectors

Drivers of demand for enterprise software include increasing operational efficiency, coordinating global supply chains and modernising logistics and warehouse functions More investment can be expected to be

in utility software and serviced-oriented architectures rather than traditionally packaged PC software

IT Services

ƒ The US IT services market is estimated at US$229bn in 2010 with a sharp deceleration in spending expected compared with 2006-2008

IT services spending is expected to record growth of 5.5% in 2010, after a sharp deceleration last

year Spending on IT services is quite closely correlated with GDP growth – bad news in a recession

In early 2009 many vendors reported that they were not seeing many major blow-offs on existing deals The most severely hit area is likely to be softer project-type spending such as consulting and software development In the near term, budgets had often already been commissioned, and so the effects were more likely to be felt in the second half of 2009 and in 2010

SWOTS

United States IT Sector SWOT

Strengths ƒ The largest IT market in the world with spending forecast to pass US$500bn in 2010

ƒ Despite currently challenging trading conditions, overall IT spending still expected to remain in positive growth territory

Weaknesses ƒ In H109 customers were postponing projects and cut back on short-term spending,

particularly in areas such as consulting and software development

Opportunities ƒ Low base level of sales in H109 should allow for rapid growth at least in the first half of

2010

ƒ As the recession eases, vendors should see more growth in other traditional spending IT verticals such as banks and financial organisations, retail and manufacturing

big-ƒ Growing popularity of mobile broadband networks in the US driving netbook sales

ƒ New business models like SaaS and virtualisation will continue to make progress

Threats ƒ A risk that recovery could be anaemic in 2010, in which case tech spending could

have another hard year

United States Political SWOT

Strengths ƒ The US is an undisputed superpower, and therefore occupies centre-stage in most

international diplomacy Long-standing democracy with vigorous and open political debate; the US continues to attract large numbers of immigrants committed to citizenship and self-advancement

Weaknesses ƒ Political debate between Republicans and Democrats has historically shown

tendency to become more polarised and divisive As today’s superpower, the US attracts the enmity of a wide range of political groups opposed to the current international status quo

Opportunities ƒ The changing political mood (as evidenced by the popularity of unconventional

candidates in the 2008 presidential election, including Obama’s), and the widespread dissatisfaction of the voting public, may encourage both major parties to experiment with more consensual approaches to certain policy areas

Threats ƒ The perception of inflexibility and bias in US foreign policy, particularly in the Middle

East, may stiffen opposition and at worst provide fertile recruiting ground for radical anti-US groups such as Al Qaeda Partly as a reaction to foreign policy difficulties,

US public opinion may return to isolationist and protectionist modes

United States Economic SWOT

Strengths ƒ The world’s largest economy with an impressive record of entrepreneurial dynamism,

innovation, and a high research and development spend Despite some threats to its reserve status, the US dollar is treated as an international currency, meaning that investors around the world are prepared to hold US debt Because of this, the US is uniquely able to run large fiscal and current account deficits

Weaknesses ƒ Despite the dollar’s role as an international currency, excessive US debt levels are a

risk A decision by Japanese and Chinese central banks to reduce their larger dollar holdings could cause sharp falls in the value of the US currency Low savings rate by

US households, although this has begun to reverse

Opportunities ƒ Further liberalisation of international trade through the WTO, coupled with a more

competitive dollar exchange rate, could boost export growth and help restore balance

to the US’s external imbalances

Threats ƒ Intensified competition from China and other low-wage economies could accelerate

the loss of manufacturing jobs Large growth in public spending, coupled with tax cuts, will worsen the fiscal deficit, eventually forcing more restrictive monetary policy and slower growth

United States Business Environment SWOT

Strengths ƒ The US boasts the world’s largest single internal consumer market, which presents

tremendous opportunities for businesses of all types and sizes

ƒ Few countries offer better environments for entrepreneurial activity, with a highly flexible labour force, a legal system that is friendly to business, and significant centres of technological innovation (such as California’s Silicon Valley)

Weaknesses ƒ Much of the country’s physical infrastructure is in need of improvement, with

congested roads and airways

ƒ US corporate tax is, on average, among the highest in the OECD

Opportunities ƒ The Obama administration is committed to improving the nation’s infrastructure, with

stimulus package funds being dedicated to that purpose

ƒ The US has often been the origin of new drivers of economic growth booms, and sectors ranging from biotechnology to alternative energy are being discussed as possible catalysts

Threats ƒ Government intervention in the economy puts the country’s reputation for free

enterprise at risk

Americas IT Business Environment Ratings

BMI’s Americas IT Business Environment Ratings compare the potential of a selection of the region’s

markets over our forecast period, through to 2014 The ratings reflect our consideration of political and economic risks, as well as risks associated specifically with IT intellectual property (IP) rights protection and the implementation of government ICT projects

In Q110 we include the USA IT market for the first time in an expanded Americas ratings After three quarters of decline, the second half of 2009 brought a return to growth in US PC shipments and signs of improved confidence in key IT spending verticals Across both consumer and business segments, the largest global IT market is expected to have a number of drivers, including the growing popularity of mobile broadband networks

As the recession comes to an end, vendors in the US market should see more growth in traditional spending IT verticals such as banks and financial organisations, retail and manufacturing The economic downturn may have accelerated the growth of outsourcing of non-core processes, and given additional momentum to IT delivery models such as software as a service (SaaS)

big-The Latin American regional economic outlook remains mixed for IT spending, but low PC penetration means continued growth potential in a region characterised by significant income and geographical disparities In many markets, increased penetration of credit cards, and credit availability from stores, as well as a growing organised retail sector, should contribute to growth

Brazil is our second highest-ranked Americas market, ahead of Mexico in third Brazil scores higher than Mexico on both Market and Country Risk factors, but both have strong growth drivers Growing

broadband penetration, including 3G mobile, will drive the PC markets of both countries Meanwhile, Chile’s fourth place reflects its status as one of the most developed markets in the region Chilean IT spending dipped into negative growth territory during 2009 but was expected to bounce back in 2010

In fifth place, Argentine IT spending is projected by BMI to grow at a CAGR of 10% over 2010-2014

Recovery after 2010 will be driven by rising incomes, expanding retail channels and more flexible terms from retailers Peru and Colombia are in sixth and seventh spots, respectively Peru’s free trade agreement (FTA) with the US will boost demand for IT products and services The regional structure of the Peruvian market will evolve, with slower growth likely in Lima, compared with the Peruvian provinces

Meanwhile, Colombia’s consumer-driven economic boom of the past few years has faded, but a PC penetration rate of around 10%, one of the lowest in the region, indicates untapped potential

Venezuela’s last place in our rankings reflects BMI’s judgement that the economic situation and business

environment in the country is unfavourable for IT spending growth, with consumer-driven growth of

recent years cooling due to economic uncertainty, the collapse in oil prices and currency devaluation

There will continue to be areas of opportunity, but BMI anticipates another difficult year in 2010

Brazil and Mexico account for around 75% of PC sales in Latin America, with economic growth lifting millions into a computer-owning middle class However, Brazil currently ranks higher than Mexico on grounds of market size, as well as country risk environment At twice the size of Mexico’s market, Brazil

is already estimated to be the fifth largest PC market in the world

Mexico’s IT spending market continued to be affected by the US slowdown in 2009, but close ties with the US are also a long-term driver of IT opportunities; for example, the city of Monterrey is developing as

an important outsourcing hub Despite business environment improvements, there are structural inhibitors

in Mexico and Brazil In Brazil these include a significant digital divide and bureaucracy Mexico has a heavily regulated labour market, while another negative factor is the government’s austerity drive

Chile’s fourth-place ranking ahead of Argentina is partly earned by having the highest Country Risk rankings of any of the states in our Latin America table However, with PC penetration of only 18% in Chile and 22% in Argentina, there is considerable room for growth in both states Continued PC sales growth is expected in Argentina, where IT spending is being driven by factors such as greater credit availability and growing broadband penetration In both Chile and Argentina, government ICT policies support market growth

Both Peru and Colombia offer opportunities despite some business environment risks Peru’s market will receive a boost from the FTA with the US There are opportunities in sectors such as banking and

financial services, telecoms, retail, mining and small and medium-sized enterprises (SMEs) Government programmes are also a factor, particularly PCs for schools In Colombia, the government regards ICT as a means to advance its central strategic goal of helping to reintegrate disaffected groups The Ministry of Communications (Minicomunicaciones) assigned a COP1.5bn budget for its National ICT Plan for the 2008-2010 period

Investment in Venezuela is likely to remain relatively low, given the political environment, which is increasingly adverse for private investment However, computer shipments should still grow, thanks to government affordable computer programmes and more local production of computers The government’s 2007-2012 Economic Plan has a key role for technology in development, and various public bodies are rolling out e-infrastructure projects Concerns remain about import restrictions, and government policies

on issue like open source software will require investor caution

Table: Regional IT Business Environment Ratings

Limits Of Potential Returns Risks To Realisation Of Returns

IT Market

Country Structure Limits

Market Risks

Country Risk Risks

IT BE Rating

Regional Ranking United States 83 90 85 50 80 68 80 1

Source: BMI Scores out of 100, with 100 highest The IT BE Rating is the principal rating It comprises two

sub-ratings ‘Limits Of Potential Returns’ and ‘Risks To Realisation Of Returns’, which have a 70% and 30% weighting, respectively In turn, the ‘Limits’ Rating comprises IT Market and Country Structure, which have a 70% and 30%

weighting, respectively, and are based upon growth/size/maturity/govt policy of the IT industry (Market) and the

broader economic/socio-demographic environment (Country) The ‘Risks’ rating comprises Market Risks and Country Risk, which have a 40% and 60% weighting, respectively, and are based on a subjective evaluation of industry

regulatory and IP regulations (Market) and the industry’s broader Country Risk exposure (Country), which is based on BMI’s proprietary Country Risk Ratings The ratings structure is aligned across the 14 Industries for which BMI

provides Business Environment Ratings methodology and is designed to enable clients to consider each rating

individually or as a composite, which the choice depending on their exposure to the industry in each particular state For a list of the data/indicators used, please consult the appendix at the back of the report

The Department of Commerce (DoC) regulates various information technology industry-related areas The DoC is host to several agencies including the National Telecommunications and Information

Administration (NTIA), which advises the president on telecommunications and information-related issues

NTIA itself has several sub-bodies including:

ƒ The Office of International Affairs, which helps to foster the ability of US IT companies to compete abroad

ƒ The Office of Policy Analysis and Development

ƒ The Office of Telecommunications and Information Appliances (OTIA)

Major programmes run by the OTIA include:

ƒ The US$4.7bn Broadband Technology Opportunities Program to develop broadband services to underserved areas

ƒ A programme to drive the transition to digital television

The Department of Commerce also hosts the National Institute of Standards and Technology, which is a non-regulatory agency that promotes US innovation and standards

Various other federal government ministries are also relevant to IT vendors

ƒ Several departments including the Department of Defense, Homeland Security, Health and Human Services, and the Department of Commerce itself are major purchasers of IT products and services

ƒ The US Treasury is in charge of tax issues affecting the US industry, including such issues as R&D tax subsidies

ƒ The Office of E-Government and Information Technology within the Office of Budget Management

is responsible for monitoring federal IT spending across federal departments

Overview

The US accounts for around 25% of

global IT spending in terms of both size

and value

Despite the current recession, and the

faster growing IT markets of countries

such as China and India, the US is

forecast to maintain its global IT market

leadership position for some time

BMI estimated US IT spending at around

US$490bn in 2009 As a mature market,

BMI assumes that IT services accounts

for around 44% of US IT spending, compared with 27% for hardware and 29% for software

Each segment is comprised of several

sub-segments In the hardware segment,

notebook computers now account for

around 58% of sales, and this share is

expected to rise to 81% by 2014, pushing

desktops down to less than one-fifth of

unit sales A major driver will be sales of

netbooks, which now account for around

12% of sales, although the netbook

growth trajectory will flatten as the price

differential with fully featured notebooks

becomes less significant

Software also comprises several

segments The business software market

(packaged software), including enterprise

resource management, customer

relationship management, human

resources management, financial

applications and so on, as well as

business intelligence and other

information-enabling applications, is

estimated to account for around one-third

of revenues Middleware, including

systems management and database

management software, accounts for

between 15-20% of spending Operating

systems of PCs, servers, and mainframes, as well as storage systems, account for around 20% of

spending Internally developed software accounts for a declining share of the market The software market is being transformed with the rise of the SaaS delivery model

The main segments in IT services include implementation, systems integration (SI), maintenance and service, as well as higher value services such as consulting and software development, and managed services/outsourcing

BMI counts most custom-developed

software in IT services

Custom-developed software has declined in

importance as packaged software has

become more specialised and customised

to particular industries, and it may now

account for around 10% of commercial

software value

The two largest IT spending verticals are

discrete manufacturing and government,

which have typically accounted for

around 10% of total IT spending each

Banking has traditionally also accounted

for a similar amount although it remains to be seen what will happen to bank IT spending in the wake of the financial crisis Other significant IT spending verticals include retail, wholesale, telecoms and

US consumers are sophisticated and enthusiastic consumers of consumer electronics products including computers According to the Consumer Electronics Association, the average US household spent

US$1,405 on consumer electronics products during the period March 2007-March 2008 Meanwhile,

BMI estimated IT spend/capita at just below US$1,600 in 2009 However, a mature market with high

penetration rates requires product and technology innovation to drive continued growth: the average US household has 2.5 PCs

Hardware

BMI projects that the US computer and accessories market will return to low single-digit positive growth

in 2010 and have a CAGR of 4% over the 2010-2014 period PC market value could reach the US$136bn mark by 2014

Impact of Economic Slowdown and 2010 Outlook

The US addressable market for PCs and accessories is estimated by BMI at US$116.1bn in 2010, with

low single-digit growth compared with 2009 In H209, the US PC market finally showed signs of

recovery, with positive growth of nearly 4% in Q309, following three consecutive quarters of shipments decline In H109 PC shipments were down between 1-2%, compared with the same period of the previous year Sales contracted around 1% in Q109 and 2% in 2009

The credit crunch and consumer and business retrenchment contributed to the slowdown, which started in Q408, after demand had remained fairly robust through the first three quarters of the year According to the United States Information Technology Industry Statistics service, the replacement rate for desktop PCs had stretched from four years to five years, and for notebooks to around three years, due to the economic uncertainty

Annual computer sales are estimated at 69mn units this year, up from around 66mn in 2009 Shipments are projected to reach 84mn by 2014 Despite the challenging trading conditions, vendor reports indicated that many segments of the US computer market have proved surprisingly resilient in 2009 The market has outperformed, not only analyst expectations, but also some emerging markets

However, the downside to this was significant downwards pressure on prices, with consumers unwilling

to pay big bucks, and looking for good enough solutions to their computing needs Lower prices were also driven from the supply side, with vendors competing fiercely due to the market slowdown, and the disruptive popularity of low-priced netbooks

The strong response by consumers in this environment to netbooks and ultra-slim laptops ended up pushing prices of notebooks into the sub-US$500 range Average PC selling prices were estimated to

have fallen by around 20% as between 2008 and the first half of 2009 However, BMI believes that prices

will remain relatively stable in 2010

In 2010, the release of Microsoft’s new Windows 7 operating system has the potential to help trigger a

new cycle of hardware upgrades, although much will depend on business and consumer confidence The launch of Windows 7, in October 2009, reportedly saw closer collaboration between Microsoft

and leading PC vendors like HP, Acer and Dell Both Acer and Dell said that, as of launch day, there was

to be zero inventory of Vista-based machines going into stores However, Windows 7 requires less power than its predecessor, Vista, and so there is a possibility that some consumers may simply decide to

upgrade their existing machine rather than buy a new one

Businesses are expected to maintain a cautious attitude to IT investments due to uncertainty about a sustainable global economic recovery, but there could be a boost, particularly in the second half of the year, from computer hardware tenders delayed from 2009

Prior to the global economic crisis, PC sales growth peaked in Q308, but then fell off as the effects of the crisis started to impact consumer confidence The two leading PC vendors HP and Dell saw sales decline

by around 4% and 16% respectively in that period Dell was harder hit because of its relatively greater reliance on desktops and the enterprise segment There were reports of some companies deferring

spending as tighter margins and flagging export sales increased a focus on the bottom line

Segments

Notebooks are the fastest-growing PC market segment and were on course to account for around 58% of unit sales in 2009, rising to a projected 81% by 2014 Netbooks are forecast to account for around 12% of notebook sales in the US last year Some evidence from Q209 suggested that the ratio could be even higher, perhaps even above 20%

The netbook growth trajectory is expected to flatten as the price differential with fully featured notebooks becomes less significant Meanwhile, enhanced versions of netbooks with features like larger screens and more powerful processors should further blur the line between the two categories

The popularity of netbooks in H109 drove a big increase in shipments for the notebook category as a whole, accounting for around 80% of notebook segment growth Meanwhile, in H109, commercial sales

of desktops and notebooks fell by a double-digit factor, and commercial desktop purchases were also down Desktop sales declined in both consumer and commercial segments and are expected to

comprise less than one-quarter of the PC market by 2014

Drivers

Back-to-school sales were an important driver of the recovery in PC shipments in Q309 Even in H109 the consumer channel was the main growth area, with consumers continuing to spend on notebooks, despite the recession Consumer spending was stronger than anticipated and should continue to drive

opportunities going forward Lower prices and product innovation apparently offset some of the effects of falling consumer confidence

One additional driver both of increased sales and of lower prices is the move of telecoms operators into the PC retail space With increasing mobile and fixed broadband penetration, notebooks and netbooks have become popular wireless connectivity options for consumers As in other markets, telecoms

operators have emerged as significant distribution channels for netbooks, which are offered to subscribers

bundled with broadband service packages AT&T and Verizon have moved quickly to offer these to

subscribers for subsidised prices of as low as US$50

The continuing build-out of Wi-Fi networks in major cities is also an important driver of demand for netbooks Studies have suggested a relatively greater demand in cities such as New York, San Francisco and Boston, where Wi-Fi is relatively ubiquitous

Netbooks

While the popularity of netbooks was

well timed to help offset PC market

stagnation during the global economic

slowdown, some vendors expressed

concern that the cheaper portable

computers would erode margins for the

industry The recession has boosted the

fortunes of lower priced Taiwanese

vendor Acer in the United States this

year, while traditionally higher end

vendors like Apple have suffered

Notebook prices in the US$500-600

range are already common Intense

competition in the current economic

climate and a reduction in component prices and manufacturing costs are among other drivers of

low prices

A future industry trend is likely to be vendor concentration on ultra-thin notebooks, or power-saving notebooks computers, which can potentially bridge the divide between netbooks and fully fledged

notebooks Netbooks are also likely to be enhanced, with larger screen and hard-drive sizes

Netbook prices were expected to stabilise at around the US$350-400 level during the 2009 back-to-school

season Meanwhile, in Q409 the launch of a new version of Intel’s Atom chip, code-named ‘Pine Trail’,

Netbooks Share Of Total Notebook

Shipments

Oct 2008 April 2009

Source: The NPD Group (2009)

was scheduled with the new chip billed as a cheaper, and more efficient, version than the current Atom, which helped to drive the netbook explosion

Software

Software CAGR for 2010-2014 is projected at around 6.8%, as the addressable market grows to around US$194.3bn In the current economic climate, business software vendors will look to pitch efficiency gains, as declining margins encourage companies to focus on reducing costs

2010 Outlook

The US software market is estimated at US$149.2bn in 2010, with single-digit growth from 2009 The launch of Windows 7 is expected to provide a boost to the operating system market in 2010 2010 should see a boost from systems upgrades deferred from last year when the economic crisis had an impact across sectors Strong economic headwinds led some companies to review IT budgets or look to defer systems updates and may have given additional momentum to alternative software models such as SaaS and cloud computing

Piracy

Despite being an advanced market, it is still estimated that around 20% of software used in the United States in 2008 was illegal or pirated According to lobbying group the Business Software Association, total losses from illegal software in the US market were around US$9bn in that year The industry

continues to push for stiffer penalties Legal history was made in H109 when a 39-year-old woman received a six-month jail sentence in federal prison for selling illegal software

Operating Systems

BMI estimates that operating systems and storage software account for around 10% of the US software

market Growing PC sales have driven the share up from around 5% a few years ago PCs account for about 40% of the operating system segment, with servers, mainframes and storage devices making up the rest

The launch of Microsoft’s Windows 7 operating system in October 2009 was the most significant event for Microsoft since the launch of Windows 95 Windows Vista ran into problems when business users found that many of their business applications could not run on the Vista operating system There were also complaints from both business and household users about performance defects, generally due to the large amount of processing power and memory required by Vista By all accounts, the Windows 7 launch went much more smoothly, thanks to closer cooperation in the pre-launch period between Microsoft and other players in the software value chain, including PC vendors and end-users

Microsoft has a lot riding on the new release, given the continuing challenge from open source The company has taken a couple of steps to fix perceived problems with Vista On the compatibility problem,

Microsoft has tackled this with a free extension to Windows 7 called XP Mode This allows users to run Windows XP applications on Windows 7 According to estimates, as many as one in five Vista users had found that they could not run XP applications on the new operating system Secondly Windows 7 will use less processing power and memory than Windows Vista

BMI projects that Windows 7 will provide a boost to the operating system software market in 2010 The

new system will attract more support from businesses than Windows Vista did, largely because Windows

XP is now getting old Businesses that declined to upgrade from XP to Vista, due to reported problems with the latter, will now go straight to Windows 7 Microsoft will still offer reduced support for XP until

2015, but many hardware manufacturers will start to wind down their support from about 2012 This, as much as the lack of support from Microsoft, will be the factor that drives business upgrades to Windows

7 Microsoft also argues that Windows 7 can help businesses to save costs, enabling IT departments to be run more efficiently

Windows 7 is better suited to virtualisation than either Windows XP or Windows Vista Virtualisation looks set to become an important trend in IT in the net few years and allows businesses to simplify the management of desktop PCs by running desktop applications and storing user data within the data centre Given the current economic climate, however, IT directors will need to justify any upgrade in terms of cost savings

Open Source

The economic downturn was projected to add to the trends that are driving adoption of open source software The desire to make savings has led some businesses and customers to look more closely at open source software However, many customers have by now made a realistic assessment of the advantages and disadvantages of open source and have adopted a practical approach

A key issue and precondition for the more widespread adoption of open source will be the development of

a support infrastructure Customers are increasingly looking to vendors to offer support for open source

software BMI expects this trend to continue with the development of more support infrastructure for the

most important open source applications

Most netbook computers originally came with open source Linux operating systems due to the heavy systems requirement of Windows Vista Netbooks were therefore seen as a threat to Microsoft’s revenues However, Microsoft has fought back by allowing netbooks to ship Windows XP, bringing its market share back up

Business Software

Business software is estimated to account for around 50% of total US software revenues Spending on applications such as enterprise resource planning (ERP), customer relationship management (CRM),

financial management systems and information software is perhaps around 60% of the sub-category total Middleware, such as database management systems and systems management tools, accounts for

Software is often seen as an investment that helps to save costs and that will make an impact on the

bottom line However, over BMI’s five-year forecast period, more investment can be expected to be in

utility software and serviced-oriented architectures rather than traditionally packaged PC software Major application areas such as ERP, CRM and business intelligence, security and supply chain management are increasingly being delivered this way

Surveys indicate that an average ERP implementation for manufacturing and distribution companies takes

around 19 to 20 months, with an average sales cycle of around four months A survey by Panorama

Consulting Group found that average total cost of ownership was in the region of US$8.6mn

Companies spent around 23% of the total implementation budget on business implementation costs, including third-party consulting

Software As A Service (SaaS)

The economic crisis may have given lasting additional momentum to the SaaS business model, with sales

in this segment by vendors such as Google and Salesforce.com continuing to grow during the downturn

SaaS has grown as smaller businesses have increasingly had to meet performance, visibility and

compliance standards previously expected more of larger companies SaaS potentially enables these smaller companies to meet these needs cost-effectively, enabling them to compete and offer

better service

However, larger companies, particularly in the technology sector, are also now experimenting with an

on-demand software model Leading sector company Salesforce.com counts Cisco and Dell among its

accounts, with around 30,000 and 40,000 subscribers at each company respectively as of mid-2009

Services

IT services spending is expected to record growth of 5.5% in 2010, after a sharp deceleration last

year Spending on IT services is quite closely correlated with GDP growth – bad news in a recession

2010 Outlook

The US IT services market is estimated at US$229bn in 2010 with a sharp deceleration in spending

expected compared with 2006-2008 Many vendors reported falling revenues in Q408 and Q109 Infosys and IBM both cut 2009 projections However, the most pain is likely to be felt by vendors that are more

exposed to the crisis-hit financial sector

In early 2009 many vendors reported that they were not seeing many major blow-offs on existing deals However, there were reports of IT managers in various sectors reviewing spending In the near term, budgets had often already been commissioned, and so the effects were more likely to be felt in the second half of 2009 and in 2010

Verticals

The economic situation was expected to mean reduced spending in some key IT services verticals that have driven IT spending Vendors exposed to the financial sector, particularly major Indian financial

services vendors like Wipro, etc, were vulnerable, given the financial crisis In 2009 many vendors were

responding by trying to diversify away from financial services to other verticals and by targeting

resources at markets outside the US

Early signs, however, were that many large companies in key IT verticals such as finance had maintained previously budgeted spending A Society For Information Management (SIM) survey at the end of 2008 found that around 80% of IT officers expected IT budgets to increase or remain the same in 2009 Much will depend, however, on the strength and timing of US and global economic recovery, which remains a subject of debate among economists The likelihood of IT budgets being cut will increase the longer the slowdown lasts

Segments

The most severely hit area is likely to be softer project-type spending such as consulting and software development Contractors are being cut and hiring frozen as customers postpone projects and cut back on short-term spending particularly in areas such as consulting and software development

Outsourcing, which is to some extent countercyclical, is likely to be less affected, even if the view that recession actually acts as a driver for outsourcing spending does not necessarily hold up As companies come under cost pressures, some may use outsourcing as a way to reduce costs However, the main beneficiaries are likely to be service providers in major global destinations such as India and the

Philippines The same goes for offshore software development

Custom software development has been moving to lower cost countries for many years India remains the main destination but faces competition from other suppliers such as Eastern European countries, Ireland, Israel, Russia and China Spending on application development tools has grown substantially in the past decade

Industry Developments

2009 Federal IT Spending

In August 2009 the federal government

reported on 2009 calendar year IT

spending In full-year 2009, total IT

spending including all federal IT

investment was measured at US$74.2bn,

up 1.99% on the previous year’s total of

US$72.8bn A total of 7,409 investments

were made Seven hundred and

eighty-one investments made by federal

agencies were classified as ‘major’

These major investments accounted for

US$38.6bn of the total

The Department of Defense was the largest spending department again, with US$33.0bn spent, down from US$37.0 the previous year The Ministry of Homeland Security ranked second with US$6.2bn, up from US$5.3bn the previous year Health and Human Services spent US$5.9bn up from US$5.6bn

Looking forward to 2010, budgeted

federal IT spending is set to rise to

US$78.4bn The biggest spending agency

is once again projected to be the

Department of Defense, with budgeted

spending of US$33.4bn However, the

largest budgeted increase is for the

Department of Commerce, where IT

spending is set to increase from

US$3.6bn to US$6.4bn next year

Accountability

The government has rolled out a new

feature, ‘IT Dashboard’ to monitor IT

Federal IT Spending (US$bn)

2009-2010

US Office of E-Government and Information Technology

US IT Spending By Federal Agency

2009

US Office of E-Government and Information Technology

government, as a result of the difficult financial climate, rising deficit and ambitious social programmes

of the Obama administration The programme is intended to help provide information to improve decision making related to IT projects, from accountability to personnel and contracting The information will be used to decide which projects should be cancelled

In Q309 the Department of Veterans Affairs announced that it would temporarily halt 45 IT projects that were either behind schedule or over budget and work to determine whether the projects should be

continued The total value of the projects was approximately US$200mn The worst offender was 110% over budget and 17 months behind schedule The move is part of the administration’s drive to make the federal government more transparent, accountable and efficient

Industry Forecast Scenario

US spending on IT products and services is forecast to grow to US$515bn in 2010 and to reach a level of US$648bn by 2014 After three quarters of decline as a result of the global economic crisis, the second half of 2009 brought a return to growth in US PC shipments and signs of improved confidence in key IT spending verticals

However, the recession may have had a lasting impact on the IT market by creating the conditions for the popularity of low-cost netbooks and notebooks, and encouraging consideration of new IT delivery models such as SaaS In light of these and other changes, major vendors have also adjusted their

competitive strategies

2010 Outlook

In our core forecast scenario, IT market growth will increase to 5.5% in 2010 and then advance at a CAGR of 5.9% over our five-year forecast period Key drivers going forward will include growing mobile and fixed broadband penetration, product innovation such as feature-rich netbooks, technology innovation such as GPS technology and services, and economic recovery

There could be a boost, particularly in the second half of this year, from computer hardware tenders delayed from 2009 The launch of the Windows 7 operating system, in October 2009, has the potential to help trigger a new cycle of hardware upgrades, although much will depend on business and

consumer confidence

The US IT market already showed signs of recovery in H209 from the effects in H109 of the economic and financial crisis sparked by the sub-prime lending market crisis PC shipments were up by nearly 4%

in Q309, but revenues were hit by continued downwards pressure on prices However, BMI expects

prices to remain relatively stable in 2010

The crisis brought an end to the economic bubble characterised by high levels of consumer spending Many companies reacted to fears of restricted credit by cutting back on capital spending, including tech investments

In H109 PC shipments were down by around 2%, falling by around 1% in Q109 and 2% in Q209,

compared with the similar period of the previous year There were reports of some companies deferring spending as tighter margins and flagging export sales increased a focus on the bottom line

Recovery

The low base level of sales in H109 should allow for rapid growth at least in the first half of 2010 BMI

has reached its trough Investment plans could be dusted off and resumed However, there remains a possibility that the economic recovery could be anaemic in 2010, or even that there could be a ‘double-dip’ recession, in which case tech spending could have another hard year

Regardless of the exact strength and timing of the recovery, the current economic environment will offer some opportunities to vendors The tough trading conditions for many businesses have strengthened the end to reduce costs through improved data management and other efficiencies

Drivers

Across both consumer and business

segments, the US IT market is expected

to have a number of drivers One is the

growing popularity of mobile broadband

networks in the US and applications such

as location-based-services that are based

on these These are boosting demand for

netbooks and notebooks, which are

increasingly favoured for connectivity

In the consumer segment, the

affordability of netbooks compared with

traditional notebooks has helped to

prevent stagnation in the notebook category Telecoms carriers such as AT&T have played a part in this

by bundling subsidised netbooks with service contracts for as little as US$50 Notebooks meet consumer demand, not only for mobile connectivity and work productivity, but also entertainment

SaaS, the rented software model, is expected to be increasingly important Vendors are now rolling out more customised SaaS solutions for small and mid-sized businesses Virtualisation is making headway and will continue to do so, and virtualisation is proceeding to more and more parts of the data centre

The current economic downturn may also have accelerated the growth of outsourcing of non-core

processes and a shift Already more and more software development has been outsourced to India and other locations, and vendors will be able to make the case that external spending on IT solutions can help the bottom line and add to efficiency

Segments

Government remains a key end-user, with federal IT spending budgeted to increase to US$78.4bn in 2009

as governments at federal state and local levels continue to issue IT tenders New government

IT Spending (Segments)

2007-2013 (US$bn)

Source: BMI

programmes, including the possibility of an expansion of healthcare, will generate lucrative new

opportunities for IT vendors

As the recession eases, vendors should see more growth in other traditional big-spending IT verticals such

as banks and financial organisations, retail and manufacturing With a wave of mergers and acquisitions expected in the banking industry in the wake of the fallout of the financial crisis, more opportunities should be generated

Small businesses represent a particular vendor target There are more than 8mn small businesses in the United States, which represents a substantial market However, particularly in the current economic climate, there are significant differences between the needs of businesses in different industries

Increasingly, vendors will need a customised approach based on industry-specific needs, such as has long been offered to larger companies

Summary

The hardware market is predicted to grow from US$136.6bn in 2010 to US$159.7bn in 2014 Software spending should rise from US$149.2bn to US$194.3bn, and IT services from US$228.6bn to US$293.6bn over the forecast period

Table: USA: IT Sector

notebooks) (US$mn) 107,956 114,421 112,580 116,149 120,929 126,452 131,805 135,777

f = forecast Source: BMI ITU (Internet and broadband penetration)