United states information technology report q1 2012

Computer Sales ƒ The US addressable market for PCs and accessories is estimated by BMI at US$145.8bn in 2012, with single-digit growth compared with 2011.. SWOT Analysis United States

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INFORMATION TECHNOLOGY REPORT Q1 2012

INCLUDES 5-YEAR FORECASTS TO 2016

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: January 2012

CONTENTS

Executive Summary 5

SWOT Analysis 8

United States IT Sector SWOT 8

United States Political SWOT 8

United States Economic SWOT 9

United States Business Environment SWOT 9

IT Business Environment Ratings 10

Table: Regional IT Business Environment Ratings 13

Markets Overview 14

Americas 14

Market Overview – United States 22

Government Authorities 22

Hardware 25

Drivers 26

Tablet Notebooks 28

Software 29

Services 32

Industry Developments 34

Industry Forecast Scenario 37

Market Trends 37

Drivers 38

Table: United States' IT Sector – Historical Data & Forecasts (US$mn Unless Otherwise Stated) 39

Internet 40

Table: Telecoms Sector – Internet – Historical Data & Forecasts 40

Macroeconomic Forecast 42

Table: United States – GDP Contribution To Growth 45

Competitive Landscape 46

Hardware 46

Software 49

Company Profiles 55

HP 55

Dell 57

Microsoft 59

IBM 61

Country Snapshot: US Demographic Data 62

Section 1: Population 62

Table: Demographic Indicators, 2005-2030 62

Table: Rural/Urban Breakdown, 2005-2030 63

Section 2: Education And Healthcare 63

Table: Education, 2002-2005 63

Table: Vital Statistics, 2005-2030 63

Section 3: Labour Market And Spending Power 64

Table: Employment Indicators, 2001-2006 64

Table: Consumer Expenditure, 2000-2012 (US$) 64

Table: Average Annual Wages, 2000-2012 (US$) 65

BMI Methodology 66

How We Generate Our Industry Forecasts 66

Transport Industry 66

Sources 67

Executive Summary

Market Overview

ƒ US spending on IT products and services is forecast to reach US$669bn by 2016

US spending on IT products and services is forecast to reach US$551bn in 2012 BMI has downwardly

revised its forecast after PC sales were flat in Q311, after a sharp annualised contraction in H111 In

2012, IT vendors will be considered when it comes to the effect of the ongoing US federal deficit issue, and the failure of politicians to agree on a deficit reduction programme If automatic federal spending cuts kick in during the next fiscal year, this could hit IT projects

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 and Infrastructure-as-a-Service

2010 saw a number of government agencies at federal and local level launch cloud strategies and pilot programmes

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 tablets, e-readers and feature-rich netbooks

ƒ Technology innovation such as GPS and services

ƒ Economic recovery

Industry Developments

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

The first 2013 federal budget proposals are expected in February 2012 and may provide an indication about how cuts may impact federal IT spending The government has to cut US$1.2trn over ten years from federal spending according to a process called "Sequestration." In 2011, more than 50 tech

companies wrote a letter to the Super Committee urging it to reach a solution and avoid "the sequestration trigger."

Despite a drive to cut expenses across government, in 2011 many public sector organisations appeared willing to continue to spend on IT The Obama administration has 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 programmes to help cut US$3bn from the federal budget

Competitive Landscape

ƒ 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 H111 several vendors suffered from the sharp slowdown in the US market, which was caused

by lacklustre consumer demand Acer, whose traditional strength is in the consumer segment, was hit the hardest by the market contraction HP was another major loser, with negative sales growth in the region

of 10%, but the company's market share grew in Q311 Meanwhile Apple's PC market share of around

11% was driven by the success of its iPad, as tablets took away share of traditional PC sales

Computer Sales

ƒ The US addressable market for PCs and accessories is estimated by BMI at US$145.8bn in

2012, with single-digit growth compared with 2011

BMI forecasts that the US computer and accessories market value will grow around 2.5% in 2012, with similar

single-digit growth compared with 2011 We downwardly revised our figures after PC sales remained contracted in H111 y-o-y, and remained flat in Q311 The computer hardware market's 2012-2016 CAGR is projected at 3.1% and market value could reach US$165bn by 2016

One additional driver of increased sales and lower prices is the move of telecoms operators into the PC retail space Notebooks are the fastest-growing PC market segment but face competition from other formats such as tablets, which appear to have growing traction in the enterprise segment

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

One opportunity will be organisations looking for help 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

In H111 Microsoft's dominance with its Windows software appeared to be under threat of erosion from the surge in demand for non-Windows tablets Analysts have long worried about Microsoft's potential over-reliance on Windows to drive its revenue, and the vendor's Q111 sales of Windows fell short of expectations However, Microsoft's overall revenue actually rose 13% in Q311, thanks mainly to strong sales of Microsoft Office

SWOT Analysis

United States IT Sector SWOT

Strengths ƒ The largest IT market in the world, with spending forecast to pass US$529bn 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 been 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 President Barack 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

Though we are not optimistic, the ongoing budget debates will provide a pertinent test

of the degree to which bipartisan cooperation is possible

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'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

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 to 2016 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

The US retains its top position in our regional rankings as by far the largest IT market in the region and the world, accounting for about 25% of global IT spending Despite a weak economic recovery and the challenge from faster-growing IT markets such as Brazil, the US is forecast to maintain its global IT market leadership position

However, IT vendors will consider the impact of the failure of politicians to agree a US federal deficit reduction programme If automatic federal spending cuts kick in during the next fiscal year, this could have an effect on IT projects Meanwhile, in the first three quarters of 2011, US PC sales dipped sharply

as a result of the economic uncertainty, which is expected to persist in 2012, an election year These actors have seen the US lose ground in our Q112 ratings, compared with Latin American markets

During the next few years, across consumer and business segments, US IT spending is expected to be driven by a number of factors including product and technology innovation, and investment in fixed and mobile broadband infrastructure as well as economic recovery A major opportunity will be demand from private and public sector organisations aiming to use cloud computing services In 2012 there are

expected to be many more contracts awarded by federal and state and municipal governments for the provision of cloud services However, the rate of growth in traditional big-spending IT verticals such as financial services, retail and manufacturing will depend on confidence in a sustainable economic

recovery

In Q112, Canada maintains its second place in our rankings table, but sees its rating reduced relative to other Americas markets such as Brazil Despite current fiscal constraints, the Canadian government's digital economic strategy provides a framework for IT market growth Cost reviews have been conducted

by Toronto and Ontario, but some recent large tenders point to continued opportunities One key initiative

is Broadband Canada, which has a mandate to expand broadband coverage to underserved areas

Despite Canada being a relatively mature market, there still remains plenty of potential for software vendors in industries such as consumer products, telecommunications, energy, engineering, construction, transport and food and beverage as well as retail Growing interest in cloud computing is expected, with Canada currently lagging the US and some other advanced markets

The Latin American IT market outlook remains positive with most markets receiving a ratings upgrade in Q112 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 There is also a boost from government ICT initiatives and growing regional interest in cloud computing The region has seen strong growth in uptake of services such as software-as-a-service (SaaS), which should continue

Brazil is expected to be one of the best performing regional IT markets over BMI's five-year forecast

period, with double-digit growth The government's US$344mn modernisation strategy, launched in late

2010, should mean enhanced IT spending over the next few years The National Broadband Plan was also announced in 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 2012, Brazilian consumer PC sales are expected to continue to grow, due to economic growth and low unemployment fuelling consumer confidence In 2011, consumer PC sales were up by more than 20%, thanks to economic growth, revived business confidence and low unemployment, which fuelled consumer confidence Meanwhile, a PC penetration rate of less than 25% indicates there is plenty of room for market growth

Brazil is our third highest ranked market in North and South America, ahead of Mexico, which drops back one place into fourth 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

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

Public sector projects will be an opportunity for vendors due to a substantial information society budget and the rollout of national and local projects that were previously delayed Public sector organisations are launching 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 Business IT investment is also expected to trend upwards particularly in the large and medium company sectors

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 However, 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, and some vendors also

regions of the country and increase operating costs In 2012, growth will likely be lower than in 2011, which was boosted by a 4.1% increase in the minimum wage, the first above-inflation increase for five years

Meanwhile, Chile's fifth place in our table reflects its status as one of the most developed markets in the region Chilean IT spending is projected to grow at a CAGR of 8% over 2012-2016 A wide-ranging plan

to increase ICT utilisation in government and other sectors such as healthcare and education will

encourage IT investment The Chilean government's commitment to high growth should continue to keep

IT spending on an upwards trajectory, with BMI envisaging that Chilean GDP per capita will double in

US dollar terms by 2019

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 below 20% in Chile and 25% in Argentina, so there is considerable room for growth in both countries

In seventh place, Argentina's IT spending is projected to be driven by rising incomes, expanding retail channels, and a high tech-focused national development plan 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

Government tenders are expected to remain a major driver of projects in 2012, following an expected slow period after the elections of October, 2011 The Ministry of Justice was among the federal bodies to announce ambitious IT plans Educational tenders will be a particular area of opportunity for the

Argentine market, with a tender to deliver 3mn PCs to public schools, due to enter its third year in 2012 Another driver will be the introduction of new regulatory compliance laws for electronic invoicing

Peru and Colombia are in sixth and eighth positions 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 In 2012, Peru's household PC segment will remain the main PC market driver, as Peruvian consumers become

increasingly affluent, and lower unemployment helps confidence

Colombia's consumer-driven economic boom of the past few years has faded, but a PC penetration rate of about 10%, one of the lowest in the region, indicates untapped potential Investment in datacentres, 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 across the banking and financial services,

telecoms, retail and mining sectors as well as SMEs

Government programmes are also a factor, particularly PCs for schools In Colombia, the government regards ICT as a way to advance its strategic goal of helping reintegrate disaffected groups The

government's new Vive Digital programme offers a potential boost to the IT market, with a pledge to eliminate import tariffs on connectivity devices and take measures to enhance credit availability for such devices

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 The consumer-driven growth is also 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 grapple with the erosion of real wages

BMI expects flat or negative IT market growth in US dollar terms over our five-year forecast period, but

there will be areas of opportunity The Venezuelan government's 2007-2012 economic plan has a key role for technology in development, and various public bodies are launching e-infrastructure projects

Meanwhile, the government's affordable computer programmes have encouraged more local production

of computers

Table: Regional IT Business Environment Ratings

IT Rating

Limits of potential returns IT Market

Country Structure

Risks to realisation

of potential returns Market Risks

Country Risk

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

Markets Overview

Americas

IT Penetration

A mixed regional picture is found with

relation to internet penetration In the US

and Canada, internet penetration in 2011

was estimated at 83.4% and 85.5%

respectively In Latin America, the

highest rate in 2011 was in Colombia

(53.2%), having experienced solid recent

progress on this indicator One feature of

Latin America is that a large amount

of internet access occurs outside the

home For example, data suggest 68% of

Mexican internet users go online from

places such as schools, workplaces and

internet cafés Recent data from Peru

suggest nearly 75% of internet users use a

public access point

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 2011, of

42.8%, which should rise to 58.5% by

2015 Broadband penetration in the United States was estimated at 28.1% in 2010, and is forecast to reach 32.5% by 2015

Narrowband Internet Penetration

Meanwhile, in Latin American markets, broadband penetration is on course to reach as high as 23.1% in Argentina and 18.7% in Mexico, and to pass 10% in Brazil, Chile, Colombia and Venezuela within our forecast period However, much broadband penetration growth is now being driven by mobile broadband users, thanks to the continued expansion of 3G mobile services across the region

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 In Brazil, 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 ICT utilisation

Growing affluence has brought computers within the reach of a greater proportion of the population PC penetration is around 30% in Brazil, but is set to rise to above 40% by 2015, while Argentina is forecast

to progress from a current rate of 25% to at least 32% in 2015 A similar situation prevails in Chile and Mexico, where PC penetration is estimated to be below 25% 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 2010, the

Argentine government launched a tender to provide 3mn PCs to public schools nationwide In Brazil, thousands of rural schools have received computers and in December 2010, Brazilian states and

municipalities began to receive funds awarded under the 'computer for every student' programme In Chile in 2010, the government launched a programme called 'Yo Eiljo mi PC' ('I choose my PC')

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, in 2011, a greater

range of financing options for consumers

and more flexible terms from retailers

will be the main drivers of consumer IT

spending growth Key IT market drivers

will include growing mobile and fixed

broadband penetration, product

innovation such as feature-rich netbooks,

technology innovation such as 3G

technology and services, and economic

recovery However, in Canada and the

United States consumers remain in a

phase of retrenchment thanks to the often

stretched state of household balance

sheets

Businesses are expected to increase their

IT investments in 2011 thanks to a

general economic recovery and improved

credit availability There will be a boost

from tenders previously delayed as a

result of the economic situation

Meanwhile, improved bank profitability

should support more demand from this

key IT-spending vertical Migrations to

Microsoft's Windows 7 operating

system, and new Intel core technology,

should help to trigger new cycles of

hardware upgrades, but in the US and

Canada, some of this pent-up demand

may not be realised in 2011 due to

doubts about the strength of the economic recovery Across the region, small and medium-sized

enterprises (SMEs) have great potential to drive enterprise application spending over the next few years Brazil still has an estimated 400,000 small businesses that do not have more than a very basic IT system

In the US market, too, in early 2011, there were indications of improved SME confidence

In some countries such as Colombia, government programmes and growing computer affordability will support more spending on IT products and services In Argentina in 2011, a number of IT tenders at both

federal and provincial levels were expected to be bid on ahead of October's presidential elections The Brazilian government's US$344mn modernisation strategy should mean enhanced IT spending in 2011 and over the next few years

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% Brazil remains on course to

become one of the top four computer

markets as an expanding economy lifts

millions into a middle class The

fundamentals of rising computer

penetration and growing affordability

should keep the market on an upward path

Colombia's IT market continued to grow during the global economic slowdown as government

programmes and growing computer affordability help to sustain spending on IT products and services Meanwhile, Chile retains some strong IT market fundamentals including consumer affluence and a relatively favourable business environment Mexico's close economic ties to the US represent

vulnerability as well as opportunity There are opportunities in key IT verticals such as financial services, telecoms and government, with other growth sectors including 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

IT Markets Compound Growth

2011e-2015f (%)

e/f = estimate/forecast Source: BMI

inflation and the attendant erosion of real wages Meanwhile, following the Chilean earthquake,

rebuilding began apace in H210

The largest IT market in the region is, vastly, the United States, with spending estimated at US$529.3bn

in 2011, while Canada is a distant second with US$44.7bn Brazil is estimated at US$27.8bn in 2011, 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 2011 of US$14.4bn Argentina and Brazil are set to be the fastest-growing markets with projected 2011-2015 compound growth of 78% and 66% respectively This compares with a compound growth rate for the United States over the same period of 22% The slowest growing market is forecast to be Venezuela, with a -3% growth rate in US dollar terms

Sectors And Verticals

Hardware accounts for less than one-third of IT spending in the United States (27%) In contrast, Latin American IT markets remain hardware centric, with hardware accounting for between 43% (in Brazil) and 67% (in Venezuela) of the total spending in these markets

Sales of computer hardware are projected to report solid growth in 2011, consolidating a strong PC market rebound in 2010.However, in all markets spending on software and services is projected to

increase its share of the IT spend by 2015

Notebook sales are growing much faster than the PC market as a whole, but there will be intensifying competition for PCs from tablets and smartphones, and a fall-off in netbook demand The PC market

2011 growth rate will suffer from base effects compared with 2010, when the market bounced back thanks to pent-up demand in the wake of the global economic crisis However, commercial updates, expected to gather pace in the second half of the year, should help to keep overall growth on track

Tablets will be a growth area across the region in 2011, with robust sales of the first generation iPad in

2010 followed by strong early interest in the iPad2 ahead of its April 2011 launch In the US market, a

Morgan Stanley report in H111 found that some 51% of CIOs expected to buy tablets for their

employees in 2011 However, tablets, at prices of US$400-800, are expensive relative to average salaries

in most Latin Americas countries The Latin American tablet market should receive a boost in 2011 from expanding locally based production of tablets, in Argentina, Brazil and elsewhere In Brazil, the

Communications Ministry has suggested the inclusion of tablets in digital inclusion programmes

With the rise of tablets, the netbook surge may have reached a plateau in most markets, with some

vendors reporting a sharp drop in 2010 In 2010, Canadian netbook sales were down by around 25% compared with the previous year 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

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 Across the region, companies are investing

to improve decision making and optimise performance Mobility, smart devices, broadband and cloud services are among the trends encouraging more software spending by Mexican SMEs, which have to deal with increasing data flow Migrations to Microsoft's Windows 7 operating system will continue to drive revenue in 2011 As of July 2010, around 500,000 Windows 7 licences were estimated to have sold

in the Argentine market

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 where faster growth is possible In Argentina, ERP solutions are estimated to represent more than 80% of the enterprise software total Customer relationship management (CRM), the next largest category, is still less than 10% of the total Demand for ERP solutions will remain robust in the near term due to the large potential market represented by SMEs in many parts of the country

Vendors will increasingly look, however, to applications such as CRM and business intelligence, where faster growth is projected The business intelligence segment is another strong performer, with sales of databases growing steadily High single-digit growth is forecast in 2011, as data proliferation continues to

be a priority issue for chief technology officers, fuelled by an uptick in merger and acquisition (M&A) activity and new regulations Looking ahead, security software also should provide opportunities, with some demand for more sophisticated security solutions

Software-as-a-service (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 There are estimates that around 50% of Mexico's large companies have conducted cloud pilots In Chile, too, vendors have reported that large companies have been the most enthusiastic early adopters of cloud solutions

Usage of the cloud for information storage appears relatively low in the US and Canada compared with some other mature markets However, 2010 saw a number of US government agencies at federal and local level launch cloud strategies and pilot programs A combination of enterprise objectives such as cost reduction and greater efficiency should combine to drive more adoption of cloud services in 2011

Verticals such as financial services, government, and telecoms are emerging as strong adopters of hosted software However, SaaS has also won more acceptance from smaller businesses as they have

increasingly had to meet performance, visibility and compliance standards previously expected more of larger companies

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 In the US 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

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 By some estimates, outsourcing may be equivalent to as much as 30% of IT spending in Brazil, with demand growing around 10% each year 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 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

Market Structure (% Of Total IT Market)

e/f = estimate/forecast Source: BMI

Market Overview – United States

Government Authorities

Government Authority

National Telecommunications and Information Administration (NTIA), Department of Commerce

Assistant Secretary for Communications and

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 TV

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

ƒ 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 shipments 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 around

US$529bin 2011 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 2016, pushing desktops

PC Spending – Segments

2009

However, rival and even more portable form factors such as tablets are expected to restrain growth of traditional notebooks

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 revenue 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 construction

US consumers are sophisticated and enthusiastic consumers of consumer electronics products including

computers BMI estimates IT spend/capita was US$1,641 in 2010 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

Software Spending – Segments

2010

Source: BMI

Hardware

BMI forecasts that the US computer and accessories market value will grow about 2.5% in 2012, with

similar single-digit growth compared with 2011 We have revised our figures downwards after PC

sales continued to contract in H111 y-o-y, and remained flat in Q311 The computer hardware market's 2012-2016 CAGR is projected at 3.1% and the market value could reach US$165bn by 2016

Market Trends

US PC sales reported flat annualised volume growth of less than 1% in Q311, after contracting sharply in H111 A number of factors dragged down the US PC market in Q311, including the sluggish economic recovery and competition from other form factors, particularly tablets Vendors also pointed to a lack of promotions and compelling reasons for customers to upgrade On the positive side however, the slow growth was partly accounted for by base effects, compared with the market rebound in 2010 US sales did

at least manage positive growth in contrast to negative growth in Canada

Demand was restrained in consumer and commercial segments Sales had dipped sharply in Q111, after having entered negative growth territory in the final quarter of 2010 Shipments were down by around 8% compared with the same period of the previous year The weak performance was in contrast to the

momentum shown during the market recovery of the three quarters of 2010

The contraction continued in Q211, with a mid single-digit annualised decline The drop in sales can be partly explained by base effects, compared with the strong growth in the same quarter of the previous year However, long-term IT market trends seemed to be at work The marked slowdown was

largely driven by disappointing sales in the consumer segment, particularly of notebooks The surge in demand for tablets contributed to restrained growth for traditional notebooks

Public sector spending was also weaker than usual, due to the current fiscal constraints In contrast, business segment demand continued to grow across all segments, although it there is underlying

vulnerability to negative sentiment about the economic recovery SMB hardware replacement sales were

on a wave in H111 However, the growing interest in cost-savings from IT solutions based on the cloud and virtualisation will restrain demand for on-premises computer hardware

In 2011, BMI still expects single-digit overall PC market growth in FY11 There should be a pick-up in

H211, supported by base effects, and driven by new product releases and back-to-school and final

quarter holiday season promotions There will be continued restraint in the consumer segment, due to intensifying competition for PCs from tablets and smartphones, and a fall-off in netbook demand

The PC market contraction in Q410 had dragged down the previously robust growth rate for the year as a whole The commercial refresh segment showed signs of vitality, with steady growth in replacement purchases, but consumers were spending less Shipments were down by around 5% compared with the

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

PC sales had rebounded strongly in H110, but unit sales were estimated by BMI at around 17mn units in

the third quarter, with limited growth compared with the same period of 2009 The main factor was a

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$122.5bn in 2011,

with mid single-digit growth compared with 2010 In 2010, sales were boosted by a revival of the

business PC market, which is expected to gather pace in 2011 with signs of an improvement in SME confidence 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

The PC market 2011 growth rate will suffer from base effects compared with 2010, when the market bounced back thanks to pent up demand in the wake of the global economic crisis However, commercial updates, expected to gather pace in the second half of the year, should help to keep overall growth on track Overall modest growth in budgets is expected in 2011, with the private sector stronger than the public sector, where national and local government spending is subject to fiscal retrenchment

The sluggish economic situation has created significant downwards pressure on prices, with consumers unwilling to pay big money and looking for 'good enough' solutions to their computing needs Lower prices have also been driven from the supply side, with vendors competing fiercely due to the market slowdown, and the disruptive popularity of low-priced netbooks During the recession in 2008-2009 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

Drivers

Total PC sales are estimated at around 85mn units in 2011 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 26mn units in 2010 and could rise to 28mn by 2015 In 2010 commercial sales of desktops and notebooks were stronger after falling by a double-digit factor in 2009 due to the economic slowdown Commercial desktop purchases were also down, before stabilising in the second half of the year Desktop sales in 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 53mn units in 2010 and could pass 88mn 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

However, the netbook growth trajectory flattened in 2010 as the price differential with fully featured notebooks became 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 The emergence of tablets has also undermined demand for netbooks At their peak, 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

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

Tablet Notebooks

2010 saw the emergence of a new generation of tablet PCs, spearheaded by Apple's iPad 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 were projected to 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 The much-hyped iPad2 was due to be released in March 2011.Other vendors have followed Apple in releasing net tablet devices, which have a form factor between the size of a smartphone and a netbook

The arrival of Android-based tablets like the Samsung Galaxy Tab should find a market among those

who wish to share their Wi-Fi connection with other devices, something not permitted by the iPad

Whereas it was once believed that notebook growth would be sustained by consumers purchasing second

or third computers as personal mobile devices, it now appears likely that they will purchase tablets and other mobile devices as alternatives Tablets, originally seen as primarily for consumers, are also forecast

to experience increasing take-up in the business segment A Morgan Stanley report in H111 found that some 51% of CIOs expected to buy tablets for their employees this year, while 16% said that they would allow employees to use their personal mobile devices to access corporate data Some analysts forecast that tablet sales could overtake sales of netbooks within the next two to three years and be well ahead of desktops

As of the end of 2010, analysts had different views about whether tablets had significantly impacted on the US PC market However, it is projected that tablet sales could be equivalent to around 20% of the PC market in 2011 Moreover, PCs face a growing challenge not only from tablets, but also other devices such as smartphones, which are being offered by vendors as alternative connectivity solutions and often include a Wi-Fi option

Most tablets are expected to be significantly more expensive than smartphones, at between US$400-800 Since the launch, unlocked Wi-Fi-only models of the iPad cost US$499 for a 16GB version and up to US$599 of 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

Market Trends

It is forecast that the US software market will be worth US$159.9bn in 2012, with single-digit growth from 2011 The bad economy has led some companies to review IT budgets or look to defer systems updates, and has given additional momentum to the adoption of cloud computing In 2011 more private

and public sector organisations announced cloud computing strategies and launched pilot projects.Over BMI's five-year forecast period, the number of cloud computing contracts open to vendors is likely to

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

organisations migrating to new cloud solutions have included government departments and companies

such as office supply retail group Staples

Despite being an advanced market, it is still estimated that around 20% of software used in the US is 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 in 2008 The industry continues to push for stiffer penalties Legal history was made in 2009 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 were the most significant event for Microsoft since the launch of Windows 95, and should continue to support software sales Microsoft's previous

business applications could not run on the Vista operating system There were also complaints from 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

Windows 7 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, has been among the factors driving 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 revenue 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 revenue 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 US is a key hub of the emerging market for cloud solutions, which is set to transform the way IT products and services and sold and procured Research indicates that the US will account for around half

of global public cloud spending over BMI's forecast period, with around two-thirds of public cloud

computing spending being software-oriented 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

Software-as-a-Service (SaaS) is expected to comprise above 70% of public cloud services over BMI's

forecast period Most cloud computing currently comprises consumer applications such as webmail, social networking and ecommerce applications Indeed, some vendors are now promoting the idea of Cloud 2, to reference integration of cloud computing with devices such as the iPad, iPhone,

However, a combination of enterprise objectives such as cost reduction and greater efficiency should combine to drive adoption of cloud services in 2012 The biggest software opportunities will be in non-critical file storage, or customer-facing applications such as CRM Opportunities should occur across economic sectors as awareness of cloud computing grows In June 2010, a survey by industry

association CompTia found that 14% of law firms planned to invest in cloud computing over the next 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

Services

IT services spending is expected to grow about 2% in 2012, with the bad economic climate restraining public and private sector investment Spending on IT services is closely correlated with GDP growth, which is bad news in a recession, but better news in a recovery However, the ongoing debt crisis and political stalemate about how to deal with this issue will have a negative impact on public sector IT demand IT contractors will be worried that automatic federal spending cuts could kick in, with an effect

on tech investment

Market Trends

It is estimated that the US IT services market will be worth US$225bn in 2012 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

The economic situation meant reduced spending in some key IT services verticals that had 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 among verticals where strong 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 Education and Healthcare are among areas with tremendous potential at local level

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