United states information technology report q1 2011

Opportunities ƒ Demand for new IT strategies to take advantage of innovations such as virtualisation, data centre consolidation, and cloud computing ƒ As economic woes ease, IT vendors

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INFORMATION TECHNOLOGY REPORT Q1 2011

INCLUDES 5-YEAR FORECASTS TO 2015

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: January 2011

CONTENTS

Executive Summary 5

SWOT Analysis 8

United States IT SWOT 8

United States Political SWOT 8

United States Economic SWOT 9

United States Environment SWOT 9

IT Business Environment Ratings 10

Latin America 10

Table: Regional IT Business Environment Ratings 13

Latin America IT Markets Overview 14

United States Market Overview 21

Government Authorities 21

Overview 22

Hardware 24

Software 28

Services 31

Industry Developments 32

Industry Forecast Scenario 35

Table: US IT Sector Overview, 2007-2015 38

Internet 39

Table: Telecoms Sector – Internet – Historical Data & Forecasts 39

Macroeconomic Forecast 41

Table: United States – Economic Activity 43

Competitive Landscape 44

Hardware 44

Software 46

Company Profiles 52

HP 52

Dell 54

Microsoft 56

IBM 58

Country Snapshot: US Demographic Data 59

Section 1: Population 59

Table: Demographic Indicators, 2005-2030 59

Table: Rural/Urban Breakdown, 2005-2030 60

Section 2: Education And Healthcare 60

Table: Education, 2002-2005 60

Table: Vital Statistics, 2005-2030 60

Section 3: Labour Market And Spending Power 61

Table: Employment Indicators, 2001-2006 61

Table: Consumer Expenditure, 2000-2012 (US$) 61

Table: Average Annual Wages, 2000-2012 (US$) 62

BMI Methodology 63

How We Generate Our Industry Forecasts 63

IT Industry 63

IT Ratings – Methodology 64

Table: IT Business Environment Indicators 65

Weighting 66

Table: Weighting Of Components 66

Sources 66

Executive Summary

Market Overview

ƒ US spending on IT products and services is forecast to reach US$671bn by 2015

US spending on IT products and services is forecast to grow to US$552bn in 2011 and reach US$671bn

by 2015 BMI has downwardly revised its forecast after US PC sales grew slower than expected in Q310, following growth in H110 that was rapid by any standards Growth slowed amid consumer and business concerns about a jobless recovery

A major demand driver will be private and public sector organisations looking for help to utilise

efficiencies from cloud computing models such as Software-as-a-Service (SaaS) and Service (IaaS) 2010 saw a number of government agencies at federal and local level launch cloud

Infrastucture-as-a-strategies and pilot programs

Other key market drivers are expected to include:

ƒ Growing fixed and mobile broadband penetration

ƒ Data centre consolidation and virtualisation

ƒ Product innovation such as tablet notebooks, e-readers and feature-rich netbooks

ƒ Technology innovation such as GPS and services

ƒ Economic recovery

ƒ Industry Developments

ƒ GSA first federal agency to move all email to a cloud-based system

In December 2010, the US General Services Administration (GSA) became the first federal agency to move email to a cloud based system for its entire organisation As the first transition of its kind, the GSA’s move is seen as a landmark that could influence other agencies who have previously held back from similar moves due to security or service concerns

In 2010, budgeted federal IT spending was set to rise to US$78.4bn, from US$74.2bn in 2009.In 2010, the Obama administration called on federal agencies to develop strategies to simplify and where possible combine often sprawling IT operations so as to reduce costs Guidelines published in 2010 by the Office

of Management and Budget called for agencies to initiate data centre consolidation programs to help cut US$3bn from the federal budget

Competitive Landscape

The US PC competitive landscape is dominated by two large domestic vendors, Dell and HP,

which together account for at least 50% of the US market

In 2010, most PC vendors reported renewed growth as businesses proceeded with purchases delayed from

2009 Despite an overall fall in PC shipments in 2009, many vendors leveraged demand for notebooks and netbooks into continued growth Meanwhile, the contest for top spot between HP and Dell continued

HP exemplified the recovery trend experienced by most vendors, with a 12% rise in revenues from its Americas region in Q310 to US$14.2bn

2010 saw increasing competition between vendors for a growing number of public sector cloud contracts The GSA picked web-based Google Apps to replace IBM Lotus Notes as the provider of email and collaboration software for its 17,000 full-time employees and contractors In October 2010, New York City announced an iniative to bring Microsoft’s BPOS (Business Productivity Onine Suite) to around 30,000 city employees

The government remains a key vendor target In May 2010, HP achieved one of its most recent local market succeses with the win of a US$41.6mn contract from the US Department of Homeland

Security 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 computing

resources and mobility services

Computer Sales

The US addressable market for PCs and accessories is estimated by BMI at US$129.3bn in 2011, with single-digit growth compared with 2010

US PC sales slowed in Q310 but BMI estimated that the market was on course for full-year total PC sales

of 83mn units In QH10, sales were boosted by a revival of the business PC market, which was expected

to gather pace in the second half of the year

One additional driver of increased sales and lower prices is the move of telecoms operators into the PC

for more than 60% of unit sales in 2010 However, netbooks and notebooks face competition from other formats such as smartphones from Palm, RIM and Apple, as well as tablet notebooks

Software

The US software market is estimated at US$158.8bn in 2011, with single-digit growth from 2009

Software CAGR for 2011-2015 is projected at around 5.9%, as the addressable market grows to around US$199.7bn A combination of enterprise objectives such as cost reduction and greater efficiency should combine to encourage the adoption of cloud services in 2011

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

a recession but better news in a recovery

One opportunity will be organisations looking for help with to utilise efficiencies from cloud computing such as SaaS and IaaS, as organisations look to save money on IT investments National and local

government is one vertical where strong interest in cloud services is being expressed

SWOT Analysis

United States IT SWOT

Strengths ƒ The largest IT market in the world, with spending forecast to pass US$552bn in 2011

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

Weaknesses ƒ During the recession in 2009, customers postponed projects and reduced short-term

spending, particularly in areas such as consulting and software development

Opportunities ƒ Demand for new IT strategies to take advantage of innovations such as virtualisation,

data centre consolidation, and cloud computing

ƒ As economic woes ease, IT vendors should see more growth from traditional spending sectors such as banks, financial services, retail and manufacturing

big-ƒ The growing popularity of mobile broadband networks is driving netbook sales

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

Threats ƒ There is a risk that recovery could be anaemic in 2011, in which case spending on

technology could have another hard year

ƒ A large federal budget deficit could lead to pressures on public sector IT spending

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 a

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 on a historic basis, 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’ 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 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

IT Business Environment Ratings

Latin America

Stock Market Data

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

markets over our forecast period to 2015 The ratings reflect our consideration of political and economic risks, as well as risks associated specifically with IT intellectual property rights protection and the

implementation of government information and communications technology (ICT) projects

In Q111 the US retains its top position in our regional rankings as the largest IT market in the region and the world and accounts for about 25% of global IT spending Despite the challenge from faster-growing

IT markets such as Brazil, the US is forecast to maintain its global IT market leadership position

US PC sales slowed in Q310, amid concerns about the strength of the economic recovery Sales had grown rapidly in the first half of the year, boosted by a revival in the business PC market, but some organisations remained reluctant to launch large projects Across consumer and business segments, US IT spending is expected to be driven by a number of factors, including the growing popularity of mobile broadband networks, product and technology innovation as well as economic recovery

A major demand driver will be private and public sector organisations aiming to use cloud computing services In 2011 there are expected to be many more contracts for provision of cloud services, following

on contracts awarded in 2011 by the cities of New York and Los Angeles, and the General Services Administration (GSA) of the federal government As the US economy recovers, there will be more growth in traditional big-spending IT verticals such as financial services, retail and manufacturing Meanwhile, government remains a key source of projects

The Latin American outlook remains positive in Q111, with BMI retaining its IT business environment

ratings this quarter Low PC penetration means continued growth potential in a region characterised by significant income and geographic 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

Brazilian IT spending is expected to be one of the best performing IT markets over BMI’s five-year

forecast period A National Broadband Plan announced in May 2010, and modernisation ahead of Brazil’s hosting of the 2014 FIFA World Cup and 2016 Summer Olympics, should help to drive demand for IT products and services

In 2011, consumer PC sales are expected to continue to grow, thanks to economic growth and low

unemployment fuelling consumer confidence In the first half of 2010, double-digit PC shipment growth raised vendor hopes of a strong market performance, boosted by major government procurements at national, provincial and municipal levels Meanwhile, a PC penetration rate of less than 25% indicates plenty of room for market growth

Brazil is our second highest ranked market in North America and South America, ahead of Mexico, which retains third position Brazil scores higher than Mexico on market and country structure factors, but both have strong growth drivers Mexican IT spending is expected to grow at a double-digit compound

annual growth rate (CAGR) over BMI’s five-year forecast period However, vendors will have concerns

about an apparent escalation in drug violence, which may affect channel activities in some regions of the country and increase operating costs

Brazil and Mexico account for about 75% of PC sales in Latin America, with economic growth lifting millions into a computer-owning middle class However, Brazil ranks higher than Mexico due to market size and country structure environment At twice the size of Mexico’s market, Brazil is already estimated

to be the fifth largest PC market in the world However, Brazil’s company spending on IT, measured as a percentage of revenues, is understood to lag behind global peers Growing broadband penetration,

including 3G mobile, will drive the PC markets of both countries

In 2011, Mexican PC sales are forecast to remain in positive growth territory, although growth will be lower than in 2010, which was boosted by a low base effect compared with 2009 Going forward,

Mexican government spending should grow as public sector organisations launch e-services and

supporting infrastructure Other market drivers include rising PC penetration and growing PC

affordability, as well as US corporate demand for IT outsourcing Close ties with the US are a long-term driver of Mexican IT opportunities For example, the city of Monterrey is becoming an important

outsourcing hub

Despite business environment improvements, however, 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

Meanwhile, Chile’s fourth place in our table reflects its status as one of the most developed markets in the region Chilean IT spending experienced negative growth in 2009, but is projected to grow at a CAGR of 11% over 2010-2014 A new government digital action plan should help to drive opportunities in the public sector and promote wider utilisation of ICT The recent earthquake may have diverted consumer funds from technology to other priorities, but reconstruction offers opportunities for government agencies

to advance IT modernisation

Chile’s relatively high ranking, ahead of Argentina, is partly because it has the highest country risk rating

of any of the states in our Latin America table However, PC penetration is only 18% in Chile and 22% in Argentina, so there is considerable room for growth in both states In sixth place, Argentina’s IT spending

is projected by BMI to grow at a CAGR of 14% in 2010-2014 Recovery after 2010 will be driven by

rising incomes, expanding retail channels and more flexible terms from retailers

The Argentine market is dominated by the capital Buenos Aires, which accounts for about one-quarter of computer sales Continued growth in PC sales is expected and IT spending is driven by factors such as greater credit availability and growing broadband penetration

Peru and Colombia are in fifth 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 other Peruvian provinces

Colombia’s consumer-driven economic boom of the past few years has faded, but a PC penetration rate of about 10% is one of the lowest in the region and indicates untapped potential Investment in data centres, information management and security solutions are expected to be growth areas in the large company segment Peru and Colombia offer opportunities despite some business environment risks Besides the boost from the US FTA, there are opportunities in Peru in banking and financial services, telecoms, retail, and mining sectors as well as 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 strategic goal of helping reintegrate disaffected groups The

Colombian government’s Vive Digital ICT development plan should help to underpin market expansion over the forecast period

Venezuela’s last place in our rankings reflects our judgement that the economic situation and business environment in the country are unfavourable for IT spending growth, with the consumer-driven growth slowing because of economic uncertainty, the collapse of oil prices and currency devaluation The steep devaluation of the bolívar for non-essential imports such as computers will depress spending, as

consumers grappled with erosion of real wages There will continue to be areas of opportunity, such as

SMEs, but BMI expects another difficult year in 2011

In H110 the growth of Venezuela’s computer shipments lagged behind other countries in the region, but sales should still grow during forecast period, due to the government’s 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 launching e-infrastructure projects Meanwhile,

Table: Regional IT Business Environment Ratings

Limits Of Potential Returns

Risks To Realisation Of

Return

IT Market

Country Structure Limits

Market Risks

Country Risk Risks

IT BE Rating

Regional Ranking

weighting respectively and are based on a subjective evaluation of industry regulatory and IP regulations (Market) and the industry’s broader Country Risk exposure (Country), which is based on BMI’s proprietary Country Risk ratings The ratings structure is aligned across the 14 industries for which BMI provides Business Environment Ratings

methodology and is designed to enable clients to consider each rating individually or as a composite, which the choice depending on their exposure to the industry in each particular state For a list of the data/indicators used, please

consult the appendix at the back of the report Source: BMI

Latin America IT Markets Overview

The fastest growth in internet penetration is expected in Peru, while Brazil and Colombia will also see a solid advance Dial-up technology is still the dominant access method However, the number of

broadband subscribers continues to increase, with progress expected in all markets Brazil’s National Broadband Plan announced in May 2010 should help to drive future growth in demand for IT products and services

Canada was estimated to have the region’s highest broadband penetration in 2010, of 40%, which should rise to 60% by 2015 Broadband penetration in the United States was estimated at 27% in 2010, and is forecast to reach 33% by 2015

Meanwhile, in Latin American markets, broadband penetration is on course to reach as high as 24.2% in Argentina and 18.7% in Mexico, and to pass 10% in Colombia, Chile and Venezuela within our forecast period In Venezuela, the recent government consultation on a new telecoms law to promote competition may be a hopeful augur of progress

Across Latin America, low average incomes and low PC penetration rates restrain information society development, and thousands of towns and villages still lack access to information communication

technology (ICT) While some cities and regions stand out, there is a general pattern of underdeveloped

potential, with IT spending as a percentage of GDP well below 2% in countries covered by BMI

However, government initiatives and growing PC affordability are now driving improvements on many ICT indicators

Growing affluence has brought computers within the reach of a greater proportion of the population PC penetration is below 25% in Brazil, but is set to rise to above 32% by 2014, while Argentina is forecast to progress from a current rate of 24% to at least 28% in 2014 A similar situation prevails in Chile and Mexico, where PC penetration is estimated to be less than 20% and 25% respectively Colombia’s PC penetration reached 12.8% as of mid-2009, surpassing the government’s previous 2010 target of 10.8%

BMI estimates PC penetration in Peru could reach 25% within the forecast period, from less than 20%

currently

ICT initiatives are central to the development plans of many regional governments In April 2010 the Argentine government was preparing to launch a tender to provide 3mn PCs to public schools nationwide

In Brazil, thousands of rural schools have received computers, while the government also has an

ambitious agenda to spend US$23bn on science and technology programmes as part of the country’s Growth Acceleration Plan (PAC) Meanwhile, Colombia’s Zona Clic programme is expected to involve the requisition of as many as 90,000 computers over the next few years

Most governments also have a particular focus on promoting IT use by small and medium-sized

enterprises (SMEs), as Latin American SMEs typically invest less in IT than comparable companies elsewhere A recent study by the Getulio Vargas Foundation found that Brazilian companies on average spent around 5.5% of revenues on IT investments, compared with 7% globally Studies in Chile have shown that around a quarter of companies have no computers

Chile’s state development agency, the Corporación de Fomento de la Producción de Chile (CORFO), has launched a programme to provide funding for projects that implement ICT for local SMEs, and similar initiatives have been seen in Mexico and elsewhere

Market Growth And Drivers

Across the Americas, vendors reported that

demand was up in the enterprise segment in

2010, reinforcing relatively robust consumer

demand in many markets Both North American

and Latin American IT markets were affected by

the global economic slowdown in 2009, as

tighter credit conditions led to deferred IT

spending by consumers and businesses

In the US and Canada, 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 Key IT market drivers 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 In Canada the consumer segment should remain a bright spot, with a steadily improving unemployment situation supportive of consumer confidence

2010 IT Market Sizes

US$mn*

* estimate Source: BMI

Lower prices, a greater range of financing options for consumers and more flexible terms from retailers are the main growth drivers for PC sales in Latin American markets The fundamentals of growing affordability and rising PC penetration should help keep regional markets in positive territory during the forecast period

Government programmes to deepen and broaden ICT access will drive IT spending growth in some markets, while others face a climate of fiscal austerity In some countries such as Colombia, government programmes and growing computer affordability will support more spending on IT products and services However, given the uncertain economic environment and large deficits faced by the Ontario government, among others, vendors will need to provide public sector clients with ways to reduce costs by driving efficiencies

In 2010 PC vendors across the region will focus on new form factors, such as smaller notebooks that blur

the distinction between a notebook and a netbook Following the launch of Apple’s iPad, tablet

notebooks are also projected to be a growth area in 2010-2011 and will appeal to consumers who find that smartphones are not convenient for web surfing or multimedia consumptions Businesses will remain cautious in 2010, but there should be a ramp-up in spending However, there remains a possibility that the economic recovery in some countries could be anaemic, or even that there could be a ‘double-dip’

recession, in which case tech spending could be in for another hard year

Some structural risks pertain to our forecast scenario Many Latin American markets, from Argentina to Mexico, are characterised by significant income and geographical disparities Mexico’s underpenetrated

south east and Pacific regions are expected to offer growth opportunities over BMI’s five-year forecast

period, particularly in the south east The Argentine market is dominated by the capital Buenos Aires, which has higher per capita income and education levels compared with the rest of the country Brazil’s

IT market also has a distinct regional structure, with most spending accounted for by the south east region, which includes São Paulo as well as Rio de Janeiro São Paulo alone accounts for around 35% of spending and Rio de Janeiro, Espírito Santo and Minas Gerais for 25%

The impact of the global economic slowdown varied from country to country Brazil remains on course to become one of the top four computer markets as an expanding economy lifts millions into a middle class

IT spending slowed in 2009 as the global credit crunch, and the more expensive US dollar, had an impact, but the fundamentals of low computer penetration and growing affordability should keep the market on an upward path

Colombia’s IT market continued to grow in

2009 as government programmes and growing

computer affordability help to sustain

spending on IT products and services

Evaluations of virtualisation are currently

being conducted in areas such as education

and healthcare where there is particular

potential, but this is very much an emerging

sector

Meanwhile, Chile retains some strong IT

market fundamentals including consumer affluence and a relatively favourable business environment There are expected to be areas of opportunities in 2010 in the government sector, with a stream of tenders delayed from 2009 In the current global economic climate, Mexico’s close economic ties to the US represent vulnerability as well as opportunity There should be opportunities in key IT verticals such as financial services, telecoms and government, with other growth sectors in 2010 set to include healthcare, utilities and SMEs

Aside from regional trends, particular factors are forecast to market demand in individual markets Infrastructure investments following 2009’s award of the 2016 Olympic Games to Rio de Janeiro is expected to drive new Brazilian market spending on IT systems and solutions, as happened in South Africa when it hosted the 2010 FIFA World Cup In Venezuela the steep devaluation of the bolívar for non-essential imports such as computers will depress spending as consumers grapple with runaway inflation and the attendant erosion of real wages Meanwhile, it is still too early to assess how the Chilean earthquake and subsequent reconstruction efforts will impact on the local IT sector, but rebuilding is expected to begin apace in H210

The largest IT market in the region is, vastly, the United States, with spending estimated at US$526.0bn

in 2010, while Canada is a distant second with US$41.4bn Brazil, estimated at US$21.9bn in 2008, making it the largest IT market in the Latin American region, and a major global market in its own right Mexico is the second largest Latin American market with an estimated value in 2010 of US$12.2bn Argentina and Peru are set to be the fastest-growing markets with each projected to have 2010-2014 compound growth of 71% The slowest growing market is forecast to be Canada, with total growth of just 17% over the five-year forecast period through to end-2014, compared with a projected 28.6% in the United States

Sectors And Verticals

Hardware accounts for less than one-third of IT spending in both the United States (27%) and Canada

IT Market Sizes As % Of National GDPs

2010-2014

e/f = estimate/forecast Source: BMI

(34%) In contrast, Latin American IT markets remain hardware centric, with hardware accounting for between 46% (in Brazil) and 68% (in Venezuela) of the total spending in these markets

However, in all markets spending on software and services is projected to increase its share of the IT spend in most markets by 2014 Notebook sales are growing much faster than the PC market as a whole, with growth driven by falling prices, more features and their general popularity, while volume CAGRs of 20-30% are expected for notebooks in most markets

In 2010, regional businesses are expected to

increase their IT investments in 2010,

despite uncertainty about a sustainable global

economic recovery There could be a boost,

particularly in the second half of the year,

from computer hardware tenders delayed from

2009 Sales of the Windows 7 operating

system, and new Intel core technology, have

the potential to help trigger a new cycle of

hardware upgrades, although much will

depend on business and consumer confidence

Stronger corporate demand should fuel a

revival in desktop sales in 2010

Even PC markets such as Venezuela’s, which is being buffeted by strong economic headwinds, should continue to perform reasonably well, with one factor in Venezuela’s case being more local production of affordable computers There is a sizable grey regional market, although evidence suggests that its size has been diminishing in many places Investment in call centres is currently driving spending on hardware

One additional pan-regional driver both of increased notebook 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 Netbooks and

notebooks face competition from other form factors such as smartphones from Palm, RIM, Apple and

other vendors, and tablet notebooks, spearheaded by Apple’s iPad

Software is estimated to account for 12-19% of IT spending in Latin American markets covered by BMI,

compared with 29% in the United States Despite the economic downturn, there are expected to be opportunities for software vendors in most markets The economic situation is likely to lead to further consideration of open source solutions in some sectors

IT Markets Compound Growth,

2010e-2014f, %

e/f = estimate/forecast Source: BMI

Some markets, particularly Venezuela, will be influenced by their governments’ drives to promote open source software Following criticism of the initial programme, the second phase of Argentina’s Mi PC was widened to offer consumers the option of purchasing PCs with Linux operating systems In the US the 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

In general, enterprise resource planning (ERP) and other e-business products still dominate the Latin American enterprise software market, but vendors are also looking to other areas, such as customer relationship management (CRM) and business intelligence, where faster growth is possible

SaaS has enjoyed steady growth in most markets, and improved broadband infrastructure will assist the popularisation of the rented software model Brazil is thought to be one of the most promising regional markets for the SaaS model, with growing demand in sectors such as retail, finance and healthcare The market in most countries remains relatively small, with a 2008 survey finding that only 20% of Canadian firms were considering this business model

The IT services segment accounts for 15% to 40% of spending in the Latin American markets covered by

BMI, compared with above 40% in both the United States and Canada The global economic crisis had an

impact on projects in some verticals and led to negative spending growth in some markets such as

Mexico Much will depend on the speed of the US and global recovery, with the likelihood of budget cuts increasing the longer the slowdown lasts

The IT services has become one of the most dynamic drivers of IT sector spending in the region, and this has attracted greater investment from international vendors The increasing number of multinational corporations operating in markets such as Mexico, Chile and Brazil is in itself an important driver for spending, while local companies are trying to use computing resources more effectively and integrate investments made in hardware and software

In more developed markets such as the US and Canada, a major demand driver going forward will be organisations looking for help to utilise efficiencies from cloud computing models such as SaaS and infrastructure-as-a-service

Outsourcing is also becoming an important spur to growth for the IT services sector, as several Latin American markets try to consolidate their reputations as regional offshoring hubs One driver for many markets will be ambitions to develop capabilities in the business process outsourcing (BPO) area and capture a larger global market share Brazil, for example, has an ambitious plan to become one of the world’s top IT outsourcing destinations by 2010 Chile’s development as an offshoring location will

attract more investment in IT services, with sectors such as retail, distribution, financial services,

telecoms and healthcare all offering opportunities

United States Market Overview

Government Authorities

(NTIA), Department of Commerce

Assistant Secretary for

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:

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

• The Office of Policy Analysis and Development

• The Office of Telecommunications and Information Appliances (OTIA)

• Major programmes run by the OTIA include:

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

• 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

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

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

subsidies

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

IT Spending – 2009e IT Segments

(US$bn) 2009e

The US accounts for around 25% of global IT spending in terms of both size and value

Despite continued economic uncertainty, 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 just over

US$487bn 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 comprises 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 a 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

PC Spending – Segments

2009

Source: BMI

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 construction

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 estimates IT spend/capita was 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 forecasts that the US computer and accessories market will decelerate to single-digit growth in

2011 We have downwardly revised our projection after a PC sales grew by less than expected in Q310, following a recovery in H110 that was strong by any standards The PC market’s 2011-2015 CAGR is now projected at 3.2% and value could reach US$172.2bn by 2015

Market Trends

US PC sales growth slowed significantly in Q310, a period when consumer sales are usually strong and boosted by back-to-school sales The market appeared to be affected by uncertainty about job growth and the economic recovery, which led consumers to delay purchases Meanwhile, publicity about new model releases and form factors, such as tablets, may also have contributed to a ‘wait and see’ mentality

Annualised shipments growth dropped to mid single-digits, compared with the double-digit rates seen earlier in the year

PC sales had bounced back stongly in H110, but unit sales were estimated by BMI at around 17mn units

Software Spending – Segments

2009

Source: BMI

softening of consumer demand BMI still estimated that the market was on course for full-year total PC

sales of around 83mn units, up from around 69mn in 2009 Shipments are projected to reach 124mn by

2015

The US addressable market for PCs and accessories is estimated by BMI at US$129.3bn in 2011, with

low single-digit growth compared with 2010 In H110, sales were boosted by a revival of the business PC market, which was expected to gather pace in the second half of 2010 Business demand remained

sluggish going into 2010, due to uncertainty about the economic recovery, but there was a boost from computer hardware tenders delayed from 2009 Migrations to Windows 7 was less of a driver of PC sales

in H110 than had been hoped.

Following the impact of the recession, the US PC market had finally shown signs of recovery in H209, with low single-digit growth in Q309, following three consecutive quarters of shipments decline Sales leapt forward in Q409, due to stronger than expected holiday sales, and were up by at least 25% y-o-y

according to market research firms Gartner and IDC The recovery was based, however, mainly on

consumer purchases of notebooks, while the corporate PC segment remained sluggish Low priced notebook and netbooks were the main drivers, along with the launch of Windows 7, and vendor and retailer promotions Vendors targeted consumers with aggressive marketing and price points which eroded profitability

The downside to this was significant downwards pressure on prices, with consumers unwilling to pay big money 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 under US$500 range Average PC selling prices were estimated to have fallen by around 20% between 2008 and H109 However, prices were more stable in 2010

Prior to the global economic crisis, PC sales growth peaked in Q308 but fell as the effects of the crisis

started to affect consumer confidence The two leading PC vendors, HP and Dell, reported sales declining

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

Drivers

One additional driver of increased sales and 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

Migrations to Microsoft’s new Windows 7 operating system and new Intel Core technology have the

potential to help sustain the current cycle of business hardware upgrades Windows 7-driven PC upgrades were slower than hoped for in H110, but are expected to gather strength in the second half of the year Much though will depend on business confidence in a continued economic recovery

The continuing build-out of Wi-Fi networks in major cities is 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

Segments

Desktop shipments were estimated at around 27mn units in 2010 and could rise to 30mn by 2015 In 2010 commercial sales of desktops and notebooks were stronger after falling by a double-digit factor in 2009 due to the econoimc slowdown Commercial desktop purchases were also down, before stablising in the second half of the year Desktop sales in both consumer and commercial segments and are expected to comprise less than one-quarter of the PC market by 2015

Notebooks are the fastest-growing PC market segment and accounted for an estimated 67% of unit sales

in 2010 Notebook sales were estimated at around 63mn units in 2010 and could pass 94mn by 2015 The popularity of netbooks was a big factor keeping notebook sales in positive territory during the recession

in 2008-2009 and accounted for about 80% of notebook segment growth

Netbooks are estimated to have accounted for about 12% of notebook sales in the US in 2009, with estimated unit sales of more than 6mn 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 such as larger screens and more powerful processors should further blur the line between the two categories

Netbooks

While the popularity of netbooks was well timed to help offset PC market stagnation during the global economic slowdown, some vendors expressed concerns that the cheaper portable computers would erode

margins for the industry The recession boosted the fortunes of lower priced Taiwanese vendor Acer in

the US, while traditionally higher end vendors suffered Notebook prices in the US$500-600 range are already common, with intense competition and a reduction in component prices and manufacturing costs among the drivers of low prices

A future industry trend is likely to be vendor concentration on ultra-thin or power-saving notebooks, 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

However, netbooks and notebooks face competition from other form factors Smartphones from the likes

of Palm, RIM, Apple and other vendors are being offered by vendors as alternative connectivity

solutions and often include a Wi-FI option

Meanwhile, 2010 brought the emergence of tablet notebooks, spearheaded by Apple’s iPad There was some evidence in H210 that the popularity of tablets had started to eat into netbook sales Some analysts have forecast that within the next couple of years tablet notebooks could start to outsell netbooks

Tablet Notebooks

Initial sales of the iPad, which launched worldwide in March 2010, were strong, with around 2mn units sold worldwide within the first two months Other vendors are expected to follow Apple in releasing net tablet devices that have a form factor between the size of a smartphone and a netbook US sales of tablet notebooks could pass 3mn units in 2010 An estimate by market research firm IDC put Apple’s share of the US PC market at above 10% in Q310, based largely on iPad sales

In 2010 many other vendors such as Dell, HP, Samsung and Lenovo announced or presented some type

of tablet computer Tablets are being designed to appeal to consumers who find a smartphone

inconvenient for watching videos or using the internet, but for whom a netbook is still too big or heavy

Within BMI’s forecast period, it is projected that tablet notebooks could reach the point of accounting for

above 20% of PC sales The introduction of tablets, such as Samsung’s Galaxy Tab, that are based on the Android operating system should provide additional impetus to sales in 2011.

Most tablets are expected to be significantly more expensive than smartphones, however, at between US$400-800 On launch, unlocked Wi-Fi-only models of the iPad cost US$499 fo a 16GB version and up

to US$599 fo 64GB Despite a previously mixed track record, this format is seen as a growth area in

2011 Some analysts forecast that tablet sales could overtake sales of netbooks within the next two to three years and be well ahead of desktops

E-Readers

One product segment challenged by tablet notebooks is the e-reader market currently dominated by

Amazon’s Kindle There are around 450,000 book titles on the Kindle store, compared with around

60,000 on the iBookstore The Kindle is also cheaper than the iPad, at around US$259 (and this price is likely to drop further), and its battery life is around two weeks, compared with about 10 hours for the iPad However, the layout and user-friendliness are both areas where the iPad outscores rival products

It is forecast the US software market will be worth US$158.8bn in 2011, with single-digit growth from

2010 2010 saw private and public sector organisations announce cloud computing strategies and launch pilot projects The recent recession led some companies to review IT budgets or look to defer systems updates and may have given additional momentum to the adoption of cloud computing

Over BMI’s five-year forecast period, the number of cloud computing contracts open to vendors is likely

to dramatically incease, presenting a challenge to traditional desktop-centric software models

Piracy

Despite being an advanced market, it is still estimated that around 20% of software used in the US in

2008 was illegal or pirated According to the lobbying group the Business Software Association, total losses from illegal software in the US market totalled about US$9bn 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

Migrations to Microsoft’s Windows 7 operating system was the most significant event for Microsoft since the launch of Windows 95, and should continue to support software sales in 2011 Microsoft’s previous operating system 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 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 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

The new system has attracted 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 XP or Vista Virtualisation looks set to become an important trend in IT in the next 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

Interest in open source is growing in the public sector In 2010, an increasing number of government IT managers and service providers were looking at open source software stacks as part of a drive to

consolidate data centres Virtualisation has become a major trend in the data centre, and open source virtual machine products are becoming popular Meanwhile, a number of open source tools are already widely deployed across government

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, and in Q410 the company was preparing to release a Windows 7-based tablet

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 around 40%

The majority of enterprise software demand, in functional terms, is currently for ERP and supply chain management Despite a relatively mature market, there still remains plenty of potential for ERP

implementations in industries such as consumer products, telecommunications, energy, engineering, construction, transportation, food & beverage, retail and metal working

ERP demand drivers include increasing operational efficiency, coordinating global supply chains and modernising logistics and warehouse functions Meanwhile, business intelligence and other information-enabling software will continue to be one of the fastest-growing product areas

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 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 19-20 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

Cloud Computing And SaaS

The economic crisis may have given lasting additional momentum to cloud computing business models where applications are hosted on a centralised server and accessed remotely Most cloud computing currently comprises consumer applications such as webmail, social networking and ecommerce

applications

However, a combination of enterprise objectives such as cost reduction and greater efficiency should combine to drive adoption of cloud services in 2011 The biggest software opportunities will be in non-critical file storage, or customer-facing applications such as CRM Opportunities should occur across

year At the same time, the survey found that only 30% of attorneys had any awareness of cloud

computing, indicating potential for further penetration as awareness increases

Sales in the business SaaS segment by vendors such as Google and Salesforce.com continued to grow during the economic downturn SaaS has become more accepted 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 BMI estimates that spending on SaaS applications by

smaller companies could make up around 2% of US software spending by 2014

A survey by market research firm Gartner found that 95% of companies that use SaaS applications were planning to expand their use in 2010 Larger companies, particularly in the technology sector, are also

now experimenting with an on-demand software model Salesforce.com counts Cisco and Dell among its

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

Meanwhile, an increasing number of government organisations at both federal and state level are rolling out or at least studying cloud strategies In December 2010, the US General Services Administration became the first federal agency to move email to a cloud-based system for its entire organisation

It is estimated that the US IT services market will be worth US$241.5bn in 2011, consolidating a market

stabilisation after a sharp deceleration in 2009 (compared with 2006-2008) Infosys and IBM both cut

their revenues projections in 2009 However, the most pain was felt by vendors that were more exposed to the crisis-hit financial sector

A major demand driver going forward will be organisations looking for help to utilise efficiencies from cloud computing services such as SaaS and IaaS, Platform-as-a-Service (PaaS) and Communications-as-a-Service (CaaS.) Particular areas of opportunity for cloud computing include banking and retailing and government agencies as organisations in those fields look to save money on hardware investments

Segments

The most severely hit area during the economic slowdown was softer project-type spending such as

consulting and software development Contractors were cut and hiring frozen as customers postpone projects and cut back on short-term spending particularly in areas such as consulting and software

development These therefore were always likely to bounce back strongest in 2010-2011

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 such as Wipro were vulnerable, given the financial crisis Many vendors responded by trying to diversify away from financial services to other verticals and by targeting resources at markets outside the US

Federal and local governments are another vertical where stong interest in cloud services is being

expressed Market research firm INPUT has forecast that the state and local government market for vendor-supplied IT systems could grow to US$60.1bn by 2014, equivalent to around 30% of the IT Services market Software products account for around 15% of this projected spend

Even departments such as the Department of Defense have a long-standing interest in private cloud-type solutions, some of which may even be hosted by commercial organisations external to the government agency in question However, such arrangements are most likely to apply in the case on ‘less security sensitive’ information related to healthcare provision and recruitment activities

Outsourcing, which is to some extent countercyclical, was less affected by the downturn, 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

Government Cloud Strategies

In December 2010, the US General Services Administration (GSA) became the first federal agency to move email to a cloud-based system for its entire organisation The GSA picked web-based Google Apps

to replace IBM Lotus Notes as the provider of email and collaboration software for its 17,000 full-time employees and contractors As the first transition of its kind, the GSA’s move is seen as a landmark that

could influence other agencies who have previously held back from similar moves due to security or

service concerns

Indeed, an increasing number of government organisations at both federal and state level are rolling out or

at least studying cloud strategies In October 2010, New York City announced an iniative to bring

Microsoft’s BPOS (Business Productivity Onine Suite) to around 30,000 city employees, while the City

of Los Angeles reached a similar agreement with Google regarding cloud-based apps In 2010 the City of

Minneapolis signed an expansion of its IT outsourcing contract with Unisys to cover cloud-based email

management

Federal IT Spending

In 2010, the Obama adminstration was calling on federal agencies to develop strategies to simplify and

where possible combine often sprawling IT operations so as to reduce costs Guidelines published in 2010

by the Office of Management and Budget called for agencies to initiate data centre consolidation

programs to help cut US$3bn from the federal budget The move was also seen as a way to reduce the

government’s real estate holdings, which includes 2,000 federal data centres

Federal IT Spending (US$bn) IT Spending By Federal Agencies

2009-2010 2009

Source: US Office of E-Government and Information Technology Source: US Office of E-Government and Information Technology