United states information technology report q1 2013

Commercial and consumer segments were restrained, as aresult of the economic uncertainty, which largely persisted ahead of the elections in November 2012.Meanwhile, federal and state IT

Q1 2013 www.businessmonitor.com

UNITED STATES

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2017

Technology Report Q1 2013

INCLUDES 5-YEAR FORECASTS TO 2017

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: February 2013

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BMI Industry View 7

SWOT 9

Political 10

Economic 11

Business Environment 12

Industry Forecast 13

Broadband 13

Table: Telecoms Sector - Internet - Historical Data & Forecasts 13

Industry Forecast 14

Table: US IT Industry - Historical Data And Forecasts (US$mn unless otherwise stated) 17

Industry Risk Reward Ratings 18

Table: Americas IT Risk/Reward Ratings 20

Market Overview 21

Hardware 21

Software 26

Services 30

Industry Trends And Developments 32

Regulatory Development 34

Table: IT Regulatory Authorities 34

Competitive Landscape 36

Hardware 36

Software 40

IT Services 43

Company Profile 44

Hewlett-Packard 44

Dell 50

Table: Selected Dell Mergers And Acquisitions 53

Microsoft Corporation 56

IBM 61

Regional Overview 67

IT Penetration 67

Market Growth And Drivers 69

Sectors And Verticals 72

Demographic Forecast 76

United States Demographic Data 76

Table: The United States' Population By Age Group, 1990-2020 ('000) 77

Table: The United States' Population By Age Group, 1990-2020 (% of total) 78

Table: The United States' Key Population Ratios, 1990-2020 79

Table: The United States' Rural And Urban Population, 1990-2020 79

Methodology 80

How We Generate Our Industry Forecasts 80

IT Industry 80

IT Ratings - Methodology 81

Table: IT Business Environment Indicators 82

Weighting 83

Table: Weighting Of Components 83

Sources 83

BMI Industry View

BMI View: US IT spending is expected to reach US$586bn in 2013, up 5%, with BMI leaving its 2013-2017

forecast largely unchanged, but extended, this quarter, despite a further contraction in PC sales in Q312 Meanwhile, as political negotiations concerning the 'fiscal cliff' continued in the wake of the November

2012 elections, public IT procurements remained constrained due to the budget constraints faced by many government entities Overall moderate growth in budgets is expected but much depends on the economic situation Despite a drive to cut expenses across government, many public sector organisations have appeared willing to continue to spend on IT, but the government hopes to make savings in its US$80bn IT budget US businesses remain cautious, but there is pent-up demand from projects delayed as a result of the economic situation and cloud computing is expected to be increasingly important.

Headline Expenditure Projections

■ Computer Hardware Sales: US$149bn in 2012 to US$154bn in 2013, +3.4% in US dollar terms.

Forecast in US dollar terms unchanged but Windows 8-based tablets and notebooks could provide growthareas in 2013

■ Software Sales: US$163bn in 2012 to US$172bn in 2013, +5.5% in US dollar terms Forecast in US

dollar terms unchanged, but more investment is expected in utility software and serviced-orientatedarchitectures rather than traditionally packaged PC software

■ IT Services Sales: US$249bn in 2012 to US$2462bn in 2013, +5.2% in US dollar terms Forecast in US

dollar terms unchanged with an increasing share of IT budgets earmarked for newer solutions such asvirtualisation and cloud computing

■ Risk/Reward Ratings: The US's score was 76.3 out of 100.0 The US retains first place in our latest

Americas RRR table, ahead of Canada, as well as Latin American giants such as Brazil and Mexico Thecountry's ranking was secured by its global highest industry rewards score of 82.5, with its rating alsoboosted by a relatively high country rewards score of 90.0

Key Trends & Developments

■ The US federal government's ambitious Cloud First cloud migration strategy has tasked governmentagencies with migrating 80 services to the cloud within 18 months Key government agencies includingNASA and the General Services Administration are already using the cloud to collaborate and deliverapplications The government hopes to eventually realise savings of up to US$12bn per year from themove and will seek further savings by closing 472 federal datacentres by the end of 2012

■ IT vendors will be concerned when it comes to the effect of the ongoing US federal deficit issue and thefailure of politicians to agree a deficit reduction programme to avoid the 'fiscal cliff' If automatic federalspending cuts kick in during the next fiscal year, this could hit IT projects Given continuing split partycontrol of the legislative branch of government, with Republicans continuing to control Congress, whilethe Democrats have the majority in the Senate, the November 2012 elections have failed to resolveuncertainty about the trajectory of future government IT spending

■ US PC sales are forecast to report single-digit growth in 2013, after a further annualised contraction in

Q112-Q113 In 2012, sales of ultrabooks fell far short of Intel's prediction that ultrabooks would

comprise 40% of US notebook sales by the end of 2012 While exact sales figures were hard to arrive at,due to initially high prices, these devices therefore seem unlikely to enjoy hoped-for success, at leastinitially In the United States, in H112 the average market price for an ultrabook was upwards of US$900,compared with an average of around US$500 for a Windows notebook

SWOT Analysis

Strengths ■ The largest IT market in the world, with spending forecast to pass US$700bn by 2017

■ Despite the challenging trading conditions, overall IT spending is still expected toremain in positive growth territory

Weaknesses ■ Due to the recession and subsequent slow economic recovery, customers postponed

IT investments and reduced short-term spending, particularly in areas such asconsulting and software development

■ PC market appears to be in long-term decline due the preference for mobility and thepopularity of alternative connectivity devices such as smartphones

Opportunities ■ As economic woes ease, IT vendors should see more growth from traditional

big-spending sectors such as banks, financial services, retail and manufacturing

■ Cloud computing, with a large number of federal and state cloud computingprogrammes generating opportunities

■ The growing popularity of mobile broadband networks in driving notebook and tabletsales

■ New business models such as SaaS and virtualisation will continue to claim a largeshare of IT budgets

Threats ■ BMI forecasts that economic recovery could remain anaemic in 2013, in which case

spending on technology could have another hard year

■ The large federal budget deficit could lead to pressures on public sector IT spending

Political SWOT Analysis

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

international diplomacy

■ A long-standing democracy with vigorous and open political debate, the UScontinues to attract large numbers of immigrants committed to citizenship and self-advancement

Weaknesses ■ 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 groupsopposed to the current international status quo

Opportunities ■ The widespread dissatisfaction of the voting public with the performance of Congress

may encourage both major parties to experiment with more consensual approaches

to certain policy areas Though we are not optimistic, the ongoing budget debates willprovide a pertinent test of the degree to which bipartisan cooperation is possible

Threats ■ 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 radicalanti-US groups such as Al Qaeda Partly as a reaction to foreign policy difficulties, USpublic opinion may return to an isolationist and protectionist mode

Business Environment SWOT Analysis

Strengths ■ The US boasts the world's largest single internal consumer market, which presents

tremendous opportunities for businesses of all types and sizes

■ Few countries offer a better environment for entrepreneurial activity, with a highlyflexible labour force, a legal system that is friendly to business, and significant centres

of technological innovation (such as California's Silicon Valley)

Weaknesses ■ Much of the country's physical infrastructure is in need of improvement, with

congested roads and airways

■ US corporate tax is, on average, among the highest in the OECD (though effectivetaxes are much lower)

Opportunities ■ 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 aspossible catalysts

Threats ■ The US's fiscal crisis may force the federal government to find ways to raise effective

corporate tax rates, following a multi-decade downtrend

Business Environment

Economic SWOT Analysis

Strengths ■ 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 internationalcurrency, 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 accountdeficits

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

risk A decision by the Japanese and Chinese central banks to reduce their largerdollar holdings could cause sharp falls in the value of the US currency

■ A low savings rate by US households on a historic basis, although this has begun toreverse

Opportunities ■ 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 ■ 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

Industry Forecast

Broadband

Table: Telecoms Sector - Internet - Historical Data & Forecasts

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

No of internet users ('000) 239,893 255,318 265,851 272,097 276,422 278,769 283,924 292,014

No if internet users/100

f = BMI forecast Source: BMI, FCC

Internet and broadband penetration continues to

grow, as wireless technology becomes more

widespread and more popular among subscribers

The fixed broadband market grew 4.7% y-o-y to

Q312, although the most significant growth is in the

wireless broadband sector

As wireless broadband becomes a more popular way

to connect to the internet, fixed-line numbers will

inevitably fall We have factored this into our

forecasts, and although we have extended our

forecasts through to 2017, we have not changed our

forecast growth rates this quarter, as 9M12 data

support our view of growth We believe that the

market will remain buoyant, and experience strong

growth over our forecast period The overhaul of the

USF (see Broadband section) and replacement with

the CAF will lead to increased focus and attention on promoting broadband connectivity and roll-out

We believe about 81.5% of Americans used the internet by the end of 2011, and there were around 27.1fixed broadband subscribers per 100 inhabitants If we included mobile broadband in our analysis, however,

Industry Trends - Fixed-Line

Sector

2010-2017

f = BMI forecast Source: BMI, FCC

the figure would be much higher: we estimate around 245mn or around 77.9% penetration We continue toexpect steady increases in internet users throughout the period, with total internet users reaching 292.0mn in2017.

High-speed internet is central to the marketing strategies of telecoms operators, with cable companies andmobile operators pursuing the high revenue area At the same time, the sheer popularity of internet-basedservices means that the point is fast approaching when most Americans will view such services as beingessential to their daily lives The Broadband Technologies Opportunities Program backs up this view andefforts to extend broadband services into rural areas will ensure that this trend continues, particularly asservice providers and content developers/vendors grow their product portfolios and become more adept atmarketing and pricing content that appeals to a broad range of consumers Increased revenue derived fromsuch activities will allow operators to expand into new markets and it seems increasingly likely that fixed-line operators will need to become broadband-focused in order to survive

There were 91.5mn fixed broadband connections by the end of Q312, and by December 2012 we believethis will rise to 92.7mn The rise of mobile broadband will slow down fixed broadband growth rates overthe coming years, as these are not recorded in our broadband forecasts Especially with the launch of LTE,

we expect to see a rising popularity of 4G USB modems, which will impact wireline growth However,there is still some real scope for continued growth, with the fixed broadband market expected to reach about108.2mn subscribers by the end of 2017, pushing the penetration rate up to 32.9% by the end of our forecastperiod

Industry Forecast

US spending on IT products and services is forecast to reach US$586bn in 2013 and US$704bn by

2017 Aside from an extension, BMI has left its 2013-2017 forecast largely unchanged this quarter, despite

a disappointing contraction in PC sales in H112 Commercial and consumer segments were restrained, as aresult of the economic uncertainty, which largely persisted ahead of the elections in November 2012.Meanwhile, federal and state IT spending was below expectations in 2012, due to the budget constrainsfaced by many government entities

One growth opportunity 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) The federal government's Cloud First initiative is one of a number of federal and localgovernment agency cloud migrations and pilot programmes

US PC sales recorded disappointing growth again in Q312, after a smaller single-digit annualised decline inH112 The market slowdown was due in part to slower than expected back-to-school sales However, thesurge of demand for tablets also hit sales of traditional PCs, and the much-hyped new category of

ultrabooks failed to provide much relief Another factor was that consumers and businesses were reportedlydelaying purchases until the release of the Windows 8 operating system in October 2012

In 2013 there are expected to be many more contracts for provision of cloud services, with the continuedimplementation of the federal government of its Cloud First cloud migration strategy Departments such asthe US General Services Administration are already making significant use of cloud services, as the

government seeks to make savings in its US$80bn IT budget The recession may have had a lasting impact

on the IT market by encouraging consideration of cloud computing models such as SaaS In light of theseand other changes, major vendors have also adjusted their competitive strategies, with the old desktop-centric model of software delivery appearing increasingly outdated

Overall moderate growth in budgets is expected in 2013, but much depends on the economic situation.Despite a drive to cut expenses across government, many public sector organisations have appeared willing

to continue to spend on IT However, with continuing fiscal retrenchment in the government sector, nowtranslating into cuts in real terms, private sector growth is expected to be stronger

In our core forecast scenario, IT market growth will advance at a CAGR of 4.7% over our five-year forecastperiod Key drivers will include growing mobile and fixed broadband penetration, product innovation andnew form factors such as tablets, technology innovation such as GPS technology and services, and

economic recovery PC vendors will focus on tablet notebooks, which are projected to be a growth area asmore vendors launch rival models and will appeal to consumers who find that smartphones are not

convenient for web surfing or multimedia consumptions

Despite the return of economic growth, US businesses remain cautious There is pent-up demand fromprojects delayed as a result of the economic situation, but some of this may not be realised The growing

market for cloud solutions and virtualisation will constrain demand for on-premises computer networks.Regardless of the exact strength and nature of the recovery, the current economic environment will offersome opportunities to vendors The tough trading conditions for many businesses have strengthened theneed to reduce costs through improved data management and other efficiencies.

Drivers

Across both consumer and business segments, the US IT market is expected to have a number of drivers.One is the growing popularity of mobile broadband networks in the US and applications such as location-based-services that are based on these These are boosting demand for netbooks and notebooks, which areincreasingly favoured for connectivity

Whereas it was once thought consumers would purchase netbooks or second notebooks as personal mobiledevices, it now appears likely that they will purchase tablets and other alternative mobile devices Tablets,originally seen as primarily for consumers, are also forecast to experience increasing take-up in the businesssegment In the consumer segment, the affordability of netbooks compared with traditional notebookshelped to prevent stagnation in the notebook category during the economic slowdown

Cloud computing models are expected to be increasingly important, with surveys finding high levels ofsatisfaction with cloud services among US CIOs Vendors are now rolling out more customised SaaSsolutions for small and mid-sized businesses The rollout of more service offerings, including from newmarket players, will fuel demand Virtualisation is making headway and will continue to do so, and it isproceeding to more and more parts of the datacentre

The economic downturn may also have accelerated the growth of outsourcing of non-core processes and ashift Already more and more software development has been outsourced to India and other locations, andvendors will be able to make the case that external spending on IT solutions can help the bottom line andadd to efficiency This trend has spread to government where in 2011 more agencies, in search of costsavings, are likely to go down the path of datacentre consolidation The Office of Budget Management in

2010 called for federal agencies to consider such initiatives

Segments

Government remains a key end-user, with federal IT spending having reached a level of around US$80bn asdepartments continue to issue IT tenders, despite a drive to make savings through closing hundreds offederal datacentres in 2012-2015 New government programmes, including the expansion of healthcare,

should generate lucrative new opportunities for IT vendors, although, because of the ever-growing budgetdeficit, there will be increased pressure to reduce costs.

As the recession eases, IT vendors should experience more growth from traditionally big-spending sectorssuch as banking, financial services, retail and manufacturing With mergers and acquisitions expected in thebanking industry among the fallout of the financial crisis, more opportunities should be generated

Small businesses are also a target for vendors There are more than 8mn small businesses in the US, which

is a substantial market However, particularly in a difficult economic climate, there are significant

differences between the needs of businesses in different industries Increasingly, vendors will need tocustomise approaches based on industry-specific needs

Summary

The hardware market is predicted to grow from US$154bn in 2013 to US$172bn in 2017 Software

spending should rise from US$172bn to US$212bn, and IT services from US$262bn to US$320bn, over theforecast period

Table: US IT Industry - Historical Data And Forecasts (US$mn unless otherwise stated)

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

IT market 508,970 529,329 558,356 585,675 615,259 643,760 673,095 704,442

IT market as % GDP 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.6 Hardware (computer

market sales) 137,575 145,195 149,236 153,775 158,632 162,929 167,155 171,584Services 225,066 234,875 248,993 262,482 277,119 291,406 306,209 320,469 Software 145,311 152,976 162,761 172,189 182,424 192,484 202,938 212,389 PCs (including

notebooks) 111,435 117,898 122,374 127,326 131,347 134,905 138,404 142,071Servers 12,382 13,068 13,431 13,840 14,277 14,664 15,044 15,443

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

Industry Risk Reward Ratings

The top and bottom of BMI's Risk/Reward Ratings for the Americas remains unchanged, with the US and

Canada leading the pack It is in the middle that the greatest changes occur, seeing Mexico increase its score

to match Brazil, while Argentina overtook Peru Emerging markets in Latin America are seeing continuedincreases in demand for computer hardware while investment in new products such as cloud computing aregaining momentum, allowing some markets to overtake others Services form the greatest share of the ITmarkets in the US and Canada, while hardware drives growth in Latin America

The US stands out in the region for its large market size, not matched by any others in the Americas Thepresence of some of the world's largest and most important IT companies is a major boon for the market, aswell as a large number of corporations and small and medium-sized enterprises (SMEs), all of which havehigh demands for IT services and software Although ongoing economic issues and record unemployment

put pressure on the market, BMI still believes the US IT market will continue to exhibit strong growth and

be one of the main drivers of global trends and developments Despite the upcoming election, we see littlechance of a major change in policy that would negatively impact IT companies' development

Fellow developed market Canada follows the US, although its markedly lower IT score highlights thedifference in market size With a significantly smaller population, Canada's IT market value is lower thanthe US However, as Canadian consumers exhibit similar demand for new IT hardware, and more

importantly IT services, the market stands above those in Latin America

Chile takes third place in our ratings despite a small decrease in its overall score Chile's total IT marketvalue dropped slightly, as we adjusted our forecasts Although Chile's market size is considerably lowerthan Brazil's, its inhabitants are among the most IT literate in the region, helping drive demand higher for ITservices than for hardware Favourable demographics put Chile at the top of Latin American markets forcountry rewards, shared with Venezuela, and its stronger country risks score reflects a more stable politicaloutlook and welcoming business environment

Mexico and Brazil are Latin America's largest potential IT markets, given their large populations and strongpopulation growth Brazil has usually outperformed Mexico, as the latter has weaker communicationsinfrastructure and lower scores for its economic outlook However, Brazil's economic picture has worsened,

while BMI is more positive on Mexico's outlook than in previous quarters, allowing the two markets to

score the same overall Brazil, as the third largest market in the region, holds a much stronger industryrewards score than Mexico, offering greater upside potential for its position in the ratings While Brazil's

economy begins to show signs of a slowdown and the consumer-driven growth story appears to be coming

to an end, investments over recent years continue to generate new avenues for IT growth Our core viewthat Brazil's structural economic imbalances would begin to unwind will have a strong impact on Brazil's ITmarket growth forecast There is still much to recommend Brazil, with an ever growing telecoms marketincreasing the number of broadband subscriptions available, which in turn is driving demand for computerhardware The upcoming international sporting events in 2014 and 2016 will also prove drivers for ITservice demand

Mexico's improved position is largely the result of upgrades to our outlook for IT market growth While theuncertain outlook for the economy negatively affects the growth prospects for the market, we believe thatinvestments are beginning to drive the market forward Consumer credit is forecast to fade in 2012, throwninto sharper relief by slower growth following the 4.1% increase in minimum wage seen in 2011, whichdrove PC sales in the first half of that year Software and services offer the highest growth - althoughhardware remains the dominant segment of the IT market - and will offer the greatest growth prospects forthe market in future

Argentina overtook Peru for the two countries to rank sixth and seventh respectively Argentina's IT market

is considerably larger than Peru's and its population is closer to Chile's tech-savvy inhabitants However,Peru's smaller market is set to see exceptional growth, with 2012-2016 CAGR of 11.2%, the second fastestrate in the region

Argentina faces a number of economic and political problems, not least of which is rampant inflation Weremain concerned over this and government intervention in the economy, maintaining the country's unstableeconomic trajectory Although consumers are driving the economy, which should bode well for IT marketgrowth, there remain concerns over the overall business environment Argentina's country risks and rewardsscores underpin its position in our ratings and its inability to move above Peru

This leaves Colombia and Venezuela at the bottom of the table Colombia's IT market growth is the highest

in the region, while its market size is higher than both Venezuela and Peru The market ranks closely toArgentina, following an increase to its overall score this quarter Improving infrastructure and a number ofgovernment IT initiatives are helping to drive the market and a positive outlook for broadband in thecountry also offers upside potential to Colombia's IT market forecasts Lower country rewards scores reflectweaker consumer spending and less favourable demographics than other markets in the region, but

improvements here could help boost the market in the long term

Venezuela, meanwhile, remains at the bottom of the table with a difficult political and business environmentreducing opportunities in the market Venezuela's IT market is set to be overtaken by Peru in 2014, assluggish growth sees it fall to the bottom of the region in market size The precarious business environment

is responsible for limiting the amount companies are willing to invest in their IT infrastructure in

Venezuela We see little upside for this market in the short-to-medium term

Table: Americas IT Risk/Reward Ratings

Rewards Risks

Country Industry Rewards Country Rewards Industry Risks Country Risks IT Rating Rank Previous Rank USA 82.5 90.0 50.0 59.2 76.3 1 1 Canada 65.8 90.0 50.0 70.3 70.7 2 2 Chile 54.2 75.0 50.0 73.5 62.2 3 3 Mexico 65.8 60.0 52.5 60.5 61.8 =4 5 Brazil 71.7 65.0 45.0 43.7 61.8 =4 4 Argentina 48.3 70.0 45.0 53.4 54.2 6 7 Peru 53.3 50.0 45.0 67.9 54.1 7 6 Colombia 55.0 50.0 47.5 56.2 53.1 8 8 Venezuela 38.3 75.0 40.0 47.6 49.2 9 9 Average 59.4 69.4 47.2 59.1 60.4

Scores are weighted as follows: 'Rewards': 70%, of which Industry Rewards 65% and Country Rewards 35%; 'Risks': 30%, of which Industry Risks 40% and Country Risks 60% The 'Rewards' rating evaluates the size and growth potential

of a telecoms market in any given state, and country's broader economic/socio-demographic characteristics that impact the industry's development; the 'Risks' rating evaluates industry specific dangers and those emanating from the state's political/economic profile, based on BMI's proprietary Country Risk Ratings that could affect the realisation of anticipated returns Source: BMI

Market Overview

Hardware

BMI forecasts that the US computer and accessories market value will grow about 3.0% in 2013 We have

upwardly revised our figures due to macroeconomic factors and expect solid growth after a disappointingyear for PC sales in 2011 was closed out with negative annualised growth in Q411 The computer

hardware market's 2013-2017 CAGR is projected at 2.8% and the market value could reach US$172bn by2017

Market Trends

Breaking the usual seasonal trend in Q312, PC sales continued to dip downwards Vendors blamed thepopularity of alternative connectivity devices such as smartphones, which have cannibalised sales oftraditional notebooks Retailers also scaled back their orders in response to weak back-to-school demand.Volume sales were estimated to have fallen by a double-digit factor, more than previously forecast

Meanwhile, in H112, US PC shipments dipped by around 5%, due to mixed consumer sentiment as well assupply-side constraints A decline of about 3% in Q112 was followed by a sharper annualised contraction ofaround 7% in the second quarter of the year

The PC market was sluggish in 2012, a situation that may be attributed to a range of factors including thesluggish economic recovery and the growing popularity of smartphones The new category of ultrabooks,

heavily hyped by chip-maker Intel failed to provide much support to sales in H112 The build-up of

inventory exacerbated channel caution, ahead of expected new releases in the autumn Parts shortages,resulting from the floods in Thailand in H211, also contributed to the slow growth early in the year

Retailers also claimed that many businesses and consumers were waiting for the October 2012 release of

Microsoft's new Windows 8 operating system before investing in an upgrade The launch of the new

operating system should provide an end-of-year boost to the PC market, even if its dimensions are

uncertain The release of Windows 8 could also provide a fillip to the ultrabook market as tablet makersleverage its capabilities to offer devices with touchscreens and convertible designs

PC sales had also endured a year of overall stagnation in 2011, although there were growth areas such astablets In Q411 and Q112, vendors reported a further annualised dip in shipments Vendors looked tofactors such as the release of Microsoft's Windows 8 Operating System, and the availability of lower-costultrabooks based on the Sandy Bridge processor, to drive growth amid difficult trading conditions

However, the most likely scenario is for the PC market to continue to struggle in the face of competitionfrom rival connectivity devices, with average prices and margins reporting further decline The professionalsegment remained weak in 2012 as government agencies and educational institutions faced tight budgetconstraints.

A number of factors dragged down the US PC market in 2011, including the sluggish economic recoveryand competition from other form factors, particularly tablets Vendors also pointed to a lack of promotionsand compelling reasons for customers to upgrade On the positive side, however, the slow growth was partlyaccounted for by base effects, compared with the market rebound in 2010 US sales did at least managepositive growth in Q311 in contrast to negative growth in Canada, but the first increase for three quarterswas followed by two negative quarters in Q411 and Q112

For much of 2011, demand was restrained in consumer and commercial segments The drop in sales can bepartly 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 tabletscontributed to restrained growth for traditional notebooks

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

to negative sentiment about the economic recovery The growing interest in cost-savings from IT solutionsbased on the cloud and virtualisation will restrain demand for on-premises computer hardware

In 2012, BMI expected single-digit overall PC market growth There was a pick-up in H212, supported by

base effects, and driven by new product releases and back-to-school and final quarter holiday seasonpromotions There will be continued restraint in the consumer segment, due to intensifying competition forPCs from tablets and smartphones, and a fall-off in netbook demand

The sluggish economic situation has created significant downwards pressure on prices, with consumersunwilling to pay big money and looking for 'good enough' solutions to their computing needs Lower priceshave 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 ofnotebooks into the under US$500 range Average PC selling prices were estimated to have fallen by around20% between 2008 and H109 However, prices were more stable in 2010

Total PC sales are estimated at around 85mn units in 2011 One additional driver of increased sales andlower prices is the move of telecoms operators into the PC retail space With increasing mobile and fixedbroadband penetration, notebooks and netbooks have become popular wireless connectivity options forconsumers As in other markets, telecoms operators have emerged as significant distribution channels fornetbooks, 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

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

Notebook sales were estimated at around 53mn units in 2010 and could pass 90mn by 2017 The popularity

of netbooks was a big factor keeping notebook sales in positive territory during the recession in 2008-2009and accounted for about 80% of notebook segment growth

However, the netbook growth trajectory flattened in 2010 as the price differential with fully featurednotebooks became less significant Meanwhile, enhanced versions of netbooks with features such as largerscreens 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 tohave accounted for about 12% of notebook sales in the US in 2009, with estimated unit sales of more than6mn However, following the emergence of tablets, the negative netbook trend now seems irreversible In

H112, former netbook leader Toshiba announced that it was following Dell and Lenovo in withdrawing

from the segment in the United States HP and Asus are still competing in the netbook segment, but Asian giants Sony and Samsung have not released new models in the US market in 2012.

Moreover, 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

Desktop sales in consumer and commercial segments are expected to comprise around one-quarter of the

PC market by 2016

Tablets

2010 saw the emergence of a new generation of tablet PCs, spearheaded by Apple's iPad Initial sales of theiPad, which launched worldwide in March 2010, were strong, with around 2mn units sold worldwide withinthe first two months Other vendors are expected to follow Apple in releasing net tablet devices that have aform factor between the size of a smartphone and a netbook US sales of tablet notebooks were projected topass 3mn units in 2010

Tablets were designed to appeal to consumers who find a smartphone inconvenient for watching videos orusing the internet, but for whom a netbook is still too big or heavy Other vendors soon followed Apple inreleasing net tablet devices, which have a form factor between the size of a smartphone and a netbook Thearrival of Android-based tablets such as the Samsung Galaxy Tab have found a market among those whowish 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 orthird computers as personal mobile devices, it now appears likely that they will purchase tablets and othermobile 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 2011 found that some

51% of CIOs expected to buy tablets for their employee, while 16% said that they would allow employees

to use their personal mobile devices to access corporate data Some analysts forecast that tablet sales couldovertake sales of netbooks within the next two to three years and be well ahead of desktops

It was projected that tablet sales were equivalent to around 20% of the PC market in 2011 Moreover, PCsface a growing challenge, not only from tablets, but also other devices such as smartphones, which arebeing 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 Someanalysts forecast that tablet sales could overtake sales of netbooks within the next two to three years and bewell ahead of desktops

Ultrabooks

Ultrabooks, higher-performance notebooks designed as a response to Apple's increasingly popular

MacBooks, are an emerging product category that Intel and certain vendors backed heavily However, inH112, sales of the devices fell far short of Intel's prediction that ultrabooks would comprise 40% of USnotebook sales by the end of 2012 While exact sales figures were hard to arrive at, as vendors do not yet

typically break out ultrabooks as a separate category of notebook sales, Gartner's recent estimate of global

ultrabook sales in the region of half a million units in H112 would represent about 0.5% to total notebooksales in that period There is some suggestion that ultrabooks has taken a niche share of the high-end

Windows notebook segment A report by research firm NPD suggested that ultrabooks accounted for 11%

of sales of Windows notebooks priced at US$700 or more in the US market from January to May

2012 However, the overall market for Windows notebooks was shrinking during that period

Due to initially high prices, these devices therefore seem unlikely to enjoy the hoped-for success, at leastinitially In the United States, in H112 the average market price for an ultrabook was upwards of US$900,compared with an average of around US$500 for a Windows notebook In contrast to netbooks, whichprospered against the backdrop of the global financial crisis in 2008/2009, the relatively higher-pricedcategory of ultrabooks appears ill-timed given the current global economic malaise Vendors appear to haverealised this and are moving ahead with plans to supply low-end ultrabooks Intel reportedly has resistedlowering Ivy Bridge CPU prices, but manufacturers are attempting to reduce costs by using cheaper SandyBridge CPUs and cheap batteries The final products are likely to reduce the price gap between netbooksand currently available ultrabooks but it may still be questioned whether this will be enough to ensure thetake-off of this category Average ultrabook prices had already dropped to around US$850 by mid-2012,and were expected to dip further to around US$750 for the back-to-school season Meanwhile, the release ofWindows 8 in October 2012 could provide a boost to adoption of ultrabooks as consumers and businessesupgrade to the new operating system

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 todrop 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

Software

Software CAGR for 2013-2017 is projected at around 5.4%, as the addressable market reaches around US

$212bn in 2017 Overall moderate growth in budgets was expected in 2012, with the market stabilising, butremaining vulnerable, particularly in an election year, to economic and political uncertainties In thisclimate, business software vendors will aim to pitch efficiency gains, as companies focus on reducing costs

At the same time, the software market is being influenced by the continued move towards distributedcomputing, SaaS and service-oriented architectures Moreover, as internet use and e-commerce continues toboom and data flow increases, US enterprises appear to be willing to spend on technology, even in theuncertain economic climate

Market Trends

It is forecast that the US software market will be worth US$172bn in 2013, with single-digit growth from

2012 The economic headwinds have led to clients focusing on a clear RoI from software investments andhas also given additional momentum to the adoption of cloud computing In H112, the market outlook forsoftware and IT services appeared to be brighter than that for computer hardware Many US softwarecompanies reported positive revenue growth as US companies invested more in utility software and service-orientated architectures, rather than traditionally packaged software

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 A wide range

of US private and public sector organisations announced cloud computing strategies and launched pilotprojects 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 illegalsoftware 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 infederal 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 about40% of the operating system segment, with servers, mainframes and storage devices making up the rest

2013 should see continued opportunities in enterprise demand for software as the market stabilises

following the global economic crisis In some cases there will be a boost from system upgrades deferred as

a result of the economic situation, which led to a suspension or delay of procurements in many

organisations The launch of Microsoft's Windows 8 operating system, in H212, should provide a boost,despite a relatively low-key launch for the operating system compared to that for its predecessor Windows

7 Migrations to Windows 7 boosted software revenue, despite business caution Touchscreen capabilities,and improved support for virtualisation, will be among the enhancements of Windows 8 for which

companies may wish to upgrade In late 2012, a new generation of Windows 8 notebooks and tablets wereappearing on the market

Businesses that declined to upgrade from XP to Vista or Windows 7, due perhaps to the economic situation,now have the opportunity to go straight to Windows 8 Microsoft will still offer reduced support for XPuntil 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 toWindows 7 Microsoft also argued 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 desktopPCs by running desktop applications and storing user data within the datacentre 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 atopen 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 An increasing number of government IT managersand service providers are looking at open-source software stacks as part of a drive to consolidate datacentres 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 deployedacross government

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

Business Software

Business software is estimated to account for around 50% of total US software revenue Spending onapplications 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 around40%

The majority of enterprise software demand, in functional terms, is currently for ERP and supply chainmanagement 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 andmodernising 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 areassuch as ERP, CRM and business intelligence, security and supply chain management are increasingly beingdelivered 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 party consulting

third-Cloud Computing And SaaS

The US is a key hub of the emerging market for cloud solutions, which is set to transform the way ITproducts 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 tocloud computing business models where applications are hosted on a centralised server and accessed

remotely Research firm IDC forecast that, by the end of 2012, 80% of new commercial enterprise

applications would have been deployed on cloud platforms Meanwhile, a survey in 2012 by North Bridge Venture Partners of 785 IT decision-makers reported that 50% of users expressed complete confidence in

the cloud

In 2011, the federal government launched its Cloud First cloud migration strategy 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 Somevendors are now promoting the idea of Cloud 2, to reference integration of cloud computing with devicessuch as the iPad, iPhone, BlackBerry and smartphones

However, a combination of enterprise objectives such as cost reduction and greater efficiency shouldcombine 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 acrosseconomic 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 increasinglyhad 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 wereplanning 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 thefirst federal agency to move email to a cloud-based system for its entire organisation

Services

IT services spending is expected to grow about 5.4% in 2013, with an upwards revision in our forecast due

to an improved economic outlook Spending on IT services is closely correlated with GDP growth, which isbad news in a recession, but better news in a recovery However, the ongoing debt crisis and politicalstalemate about how to deal with this issue will have a negative impact on public sector IT demand ITcontractors will be worried that automatic federal spending cuts could kick in, with an effect on techinvestment

Market Trends

It is estimated that the US IT services market will be worth US$249bn in 2013 A major demand driver will

be organisations looking for help to utilise efficiencies from cloud computing services such as SaaS andIaaS, 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 inthose fields look to save money on hardware investments

Segments

In 2012, vendors reported that a large portion of US IT budgets were being earmarked for newer IT

solutions such as virtualisation and cloud computing The most severely hit area during the economicslowdown was softer project-type spending such as consulting and software development, and it is projectspending, which should show the strongest rebound during the recovery Contractors were cut and hiringfrozen during the economic slowdown as customers cut back on short-term spending particularly in areassuch as consulting and software development These therefore were always likely to bounce back strongest

The economic situation meant reduced spending in some key IT services verticals that had driven ITspending 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 In H112, the federal government released guidelines and security requirements for contractorsthat wish to sell their cloud solutions to the US government The programme is designed to stimulate thefederal government's use of cloud computing, with a target of reducing overall government IT spending by

as much as US$80bn 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 ITservices 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-typesolutions, some of which may even be hosted by commercial organisations external to the governmentagency in question However, such arrangements are most likely to apply in the case on 'less securitysensitive' information related to healthcare provision and recruitment activities

Outsourcing, which is to some extent countercyclical, was less affected by the downturn, even if the viewthat recession actually acts as a driver for outsourcing spending does not necessarily hold up As companiescome 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 themain 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 pastdecade

Industry Trends And Developments

Government Cloud Strategies

The US federal government has launched two initiatives that have had a significant impact on the

development of the public cloud Firstly, former US Chief Information Officer Vivek Kundra introduced theambitious Cloud First cloud migration strategy, which tasked government agencies with migrating 80services to the cloud within 18 months Key government agencies including NASA and the General

Services Administration are already using the cloud to collaborate and deliver applications The governmenthopes to eventually realise savings of up to US$12bn per year from the move The government planned toseek further savings to its US$80bn IT budget by closing 472 federal datacentres by the end of 2012, andnearly 500 more by 2015

Meanwhile, starting in June 2012, the Federal Office of Management and Budget has officially launched aprogramme that enables contractors to sell cloud solutions to the federal government The governmentestablished procedures and security requirements that all participating contractors will have to meet, as well

as an assessment process for authorising these services The Federal Risk and Authorisation Programme(FedRAMP) will be the body for monitoring the procurement of commercial and non-commercial cloudservices for government departments and agencies Meanwhile, a joint authorisation board of the Defenseand Homeland Security departments and the General Services Administration will define and update thesecurity authorisation requirements on an ongoing basis

The government hopes that the programmes will spur wider adoption of cloud computing within

government, resulting in cost savings of US$80bn in federal IT spending FedRAMP is expected to helpdeliver 30-40% savings in the process of sourcing cloud solutions, as well as realising more operationalefficiency through the elimination of legacy systems 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 was seen as a landmark decision that could influence other agencies that havepreviously held back from similar moves due to security or service concerns

An increasing number of government organisations at federal and state level are rolling out or, at least,

studying cloud strategies In October 2010, New York City announced an initiative to bring Microsoft's

BPOS (Business Productivity Online Suite) to around 30,000 city employees, while the city of Los Angeles

reached a similar agreement with Google regarding cloud-based apps Also 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 late 2012, IT vendors and contractors will be concerned about the possibility that the failure of Congress

to reach a US deficit reduction agreement will lead to automatic federal spending cuts beginning in the nextfiscal year The government has to cut US$1.2trn over 10 years from federal spending under a processcalled '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' The government has already outlined plans to closeabout 962 of around 2,800 datacentres by 2015 Any IT facility of more than 100 sq ft in dimension isconsidered to be a datacentre

The public sector debt crisis and the associated political fallout have had a constraining effect on IT

demand However, despite a drive to cut expenses across government, many public sector organisationshave appeared willing to continue to spend on IT The government considered this as a way to achieveefficiency Therefore, despite the adverse fiscal environment, it is possible that federal IT spending couldactually rise by 1-2% in the next fiscal year

In 2010, the Obama administration called on federal agencies to develop strategies to simplify and wherepossible combine often sprawling IT operations so as to reduce costs Guidelines published in 2010 by theOffice of Management and Budget asked agencies to initiate datacentre consolidation programmes to helpcut US$3bn from the federal budget The move was also regarded as a way to reduce the government's realestate holdings, which includes 2,000 federal datacentres

Regulatory Development

Table: IT Regulatory Authorities

Government Authority

National Telecommunications and Information

Administration (NTIA), Department of Commerce

Assistant Secretary for Communications and Information Lawrence E Strickling

BMI

The Department of Commerce (DoC) regulates various information technology industry-related areas TheDoC 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 competeabroad

■ 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 TV

The Department of Commerce also hosts the National Institute of Standards and Technology, which is anon-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 HumanServices, 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 Researchand Development (R&D) tax subsidies

The Office of E-Government and Information Technology within the Office of Budget Management isresponsible for monitoring federal IT spending across federal departments.

Competitive Landscape

Hardware

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

together account for at least 50% of the US market The top-five leading vendors have over two-thirds of

the PC market in terms of volume, with Apple and the Asian challengers Acer and Toshiba completing the

list

In H112, most PC vendors were hit hard by the sluggish market, with single-digit annualised declines insales in both Q1 and Q2 Apple was the only top-five vendor not to lose ground In Q212, Acer and HP eachreported a double-digit decline in their US shipments, of 14.1% and 12.7% respectively, according to an

estimate by market research firm Gartner Japanese vendor Toshiba saw its shipments decline by around

20%, while Dell's sales were down by 9.5%

In Q112, HP again led in the US PC market and succeeded in bucking an overall negative shipments trend,

with 6.6% growth according to an estimate by IDC Dell, in second place, saw its sales dip by 3.6%.

However, Apple, riding a wave of popularity for its MacBook range as well as iPads, also saw growth, ofaround 3.8% The most dramatic contractions were experienced by Asian giant Acer, which reported aquarterly decline of -19.1%, according to IDC

Vendors have suffered from a sluggish PC market In Q312, Dell said that it expected its sales to fall from

between 2% and 5% This was despite placing third in sales, behind Lenovo and HP, with a 10.8% share of

the market according to vendor data Despite a push into the consumer segment in the last two years, Dellstill has a heavy reliance on commercial users The company will be hoping for one more massive refreshcycle before the bring your own device to work (BYOD) trend becomes hegemonic The company has saidthat it will focus on core client groups such as companies with more than 500 employees, federal and stategovernments, and education

In FY11 several vendors suffered from the sharp US PC market slowdown, which was caused by lacklustreconsumer demand HP remained the market leader, but the company was hit, not only by the economicsituation, but also uncertainty about the future of its PC division The company's former CEO, Leo

Apotheker, had previously floated the idea of a spin-off or sale of its US$41bn computer business,

prompting some potential customers to defer purchases of the brand The new CEO, Meg Whitman, laterwalked back the idea

Meanwhile, despite the hype around the new product category of ultrabooks, which were intended largely as

a challenge to the strength of Apple's MacBook Pro in the high-end notebook category, Apple continued to

profit at the expense of the number one and two PC vendors In Q212, Apple was the only major vendor toreport growth in its US market shipments, of 4.3% according to Gartner.

Apple continues to dominate sales of notebooks priced at US$1,000 or higher Meanwhile, Apple's

MacBook even enjoys a price advantage over high-end ultrabooks The MacBook Air starts at US$1,000,while in H112 many high-end ultrabooks retailed at around the US$1,400 mark Apple reported US growth

of around 18% in Q411, building on a strong performance earlier in 2011 The company's growth of nearly10% in Q111 increased to over 14% in the second quarter of the year In Q311, Apple reported a US PCmarket share of 11.3%, up from 10.5% in Q310 Apple's growth was driven by the success of its MacBookAir and of the iPad, as tablets ate into the share of traditional PC sales

Meanwhile, as the netbook and consumer notebook market has slowed, Acer America has signalled its

intention to take on market leaders such as Dell and HP in the server and storage solutions segment AcerAmerica has unveiled a portfolio of applications designed for end-users ranging from SMEs to governmentinstallations and datacentres, including advanced cloud computing facilities

Tablets

Initial sales of the iPad, which launched worldwide in March 2010, were strong, with around 2mn units soldworldwide within the first two months On launch, unlocked Wi-Fi-only models of the iPad cost US$499for a 16GB version and up to US$599 for 64GB US sales of tablet notebooks were estimated to pass 3mn

units in 2010 and could reach 20% of US PC sales within BMI's five-year forecast period.

Apple hopes that new versions of the iPad will help it to maintain that market share against growing

competition from largely Android-based competitors Many other vendors such as Dell, HP, Samsung and

Lenovo have announced or presented some type of tablet computer The introduction of tablets, such asSamsung's Galaxy Tab, which are based on the Android operating system, provided an additional impetus

to sales among those who wish to share their Wi-Fi connection with other devices, something not permitted

by the iPad

However, rival vendors have still struggled to compete with the all conquering iPad Rivals have raisedquestions about actual sales of Samsung's high-profile Galaxy Tab, with claims that actual sales fell farshort of reported shipments of 1mn units Meanwhile, HP cancelled its short-lived TouchPad tablet in thewake of disappointing sales

Strategy Adjustments

Chinese PC vendor Lenovo is forecast to overtake HP as the world's number one PC vendor by volume.Lenovo is also making gains in the U.S market The company has adopted a more aggressive approach tochallenging its rivals in the US market and has extended its channel reach In Q212, the company reportedsales growth of around 6% in the US market, in a context of an overall market decline in sales Lenovo isalso targeting Dell's share of the government and education segment, where the US vendor has long enjoyed

a strong position

Meanwhile, in 2013, the vendor plans to starts its first US manufacturing operations, a sign of its growingambitions in the US market The US$2mn production line will manufacture the vendor's Think brandnotebooks, desktops and media tablets In 2008, Lenovo built a US$10mn fulfilment centre to processorders in the US, and this facility will now be extended to add the production line

Taiwanese vendor Acer faces a challenge, due to the slowdown in consumer spending, which has been themain driver of the PC market for the past two years With economic recovery, more growth is likely to bedriven by commercial refreshes, rather than consumer, which is traditionally Acer's strong point Acer alsofaces a threat to its rise from HP's decision to compete directly in the low-end market HP has prepared forthis shift by making changes to its design, parts procurement and shipment processes, which have enabled it

to reduce contract manufacturing costs

The global slowdown encouraged other vendors to adjust their strategies Globally, Dell has suffered in the

US downturn from the deep cuts in corporate spending, as well as the transition away from desktops Thesetrends prompted the company's largely successful global transition towards a more retail-focused approach.However, the professional segment remains Dell's strong point, with high penetration of K-12, local, stateand federal level segments

Dell has mounted a strong global comeback in the past couple of years by moving aggressively into theretail segment, and away from its traditional 'direct Dell' strategy of selling direct to customers In the US

the company has done this by developing partnerships with leading retailers such as Best Buy This strategy

has provided it with a fresh source of growth during a slowing market, enabling it to recover some of themarket share that it had lost to HP, as well as Asian challengers such as Acer, Lenovo and Toshiba

Apple has a strong claim to be considered a top-five PC vendor, due to the success of its iPad, which hasaccounted for above 80% of tablet sales Prior to the economic slowdown, Apple had ascended the PC

rankings in the last couple of years with its premium line of computers recording triple-digit growth.However, there were signs in 2009 that Apple had suffered from its high-end brand image in a recessionmarket focused on value The company's cheapest notebook retails for around US$999, above the mid-market range of US$700-800 In good economic times, Apple was able to leverage the favourable brandrecognition that it earned from consumer electronics products such as the iPhone and iPod Apple also

arguably benefited from some perceived problems with Microsoft's Windows Vista operating system.

Netbooks

In H112, the decline of the netbook product category continued Former category leader Toshiba announced

it would cease to compete in this market segment in the US, joining other major vendors such as Dell and

Lenovo, which had already pulled out HP and Asus are still competing in the segment, but Asian giants Sony and Samsung had not released any new netbook models in the US market by mid-2012 Netbooks

promised to shake up the competitive landscape of the PC market as vendors rolled out new waves ofproduct launches Asian vendors such as Asus, Acer and Samsung were all able to leverage the rapidlygrowth of the market for netbooks to increase their sales in the US market Meanwhile, other vendors such

as Japanese giants Toshiba and Fujitsu also entered the US market with products in this segment In June

2009 Toshiba launched three new netbook computer models on the market and announced an aim ofeventually capturing 15-20% of the market for this product

Netbooks were generally seen as second computers, particularly for children and students In May 2009Dell rolled out its first mini-laptop designed for young students The netbook was made from easy-to-griprubber and had various easy-to-use features, including a light that shines when the computer is connected tothe internet The 10-inch screen computer was aimed at students from kindergarten through 8th grade, andretailed at a price of US$369 According to IDC, Dell has around 36% of the US' PCs-for-schools market,from kindergarten through to 12th grade, and 43% of the college market

However, netbook sales growth slackened in 2010 and the trend continued in 2011 Whereas previously itwas understood that notebook sales would be sustained by consumers purchasing netbooks as second orthird computers, it now appears more likely that they will purchase tablets and other mobile devices asalternatives This posed a challenge to vendors with a particular strength in netbooks, such as Acer

and Asus, to adjust their strategies.

Operating Systems

Microsoft is dominant in the operating system segment and, with US$70bn in annual revenue, has 11products that each earn it more than US$1bn a year However, the company's revenues for the period endingSeptember 30 2012 were down to US$16bn, from US$17.37bn in the same period of the previous year Netincome was also down to US$4.47bn, from US$5.57bn in the equivalent quarter of 2011 In October 2012,the vendor launched its new Windows 8 operating system, which PC vendors hope will provide a much-needed boost to the PC market However, pre-launch publicity around the new operating system was low-key compared with that for its predecessor Windows 7, as Microsoft tries to lower expectations The factthat many enterprises have recently implemented relatively costly migrations to Windows 7 may mean thatfurther upgrades to Windows 8 will be a gradual process

Meanwhile, the company's dominance with its Windows software has faced the threat of erosion from thesurge in demand for non-Windows tablets Analysts have long worried about Microsoft's potential over-reliance on Windows to drive its revenue Microsoft had a lot riding on its Windows 7 software, givenperceived problems with its previous operating system Windows Vista and also because of the continuingglobal challenge from open source

Many businesses that declined to upgrade from XP to Vista or Windows 7, due to the economic situation,may now go straight to Windows 8 Microsoft will still offer reduced support for XP until 2015, but

hardware manufacturers will start to wind down their support from about 2012 This could be one key factorthat should drive business upgrades to Windows 8

Microsoft has touted the flexibility and tablet-friendly touchscreen capabilities of Windows 8, which hasspawned a new generation of Windows 8-based devices Windows 7 was better suited to virtualisation thaneither XP or Vista and virtualisation looks set to become an important trend in IT spending in the next fewyears, as it allows businesses to simplify the management of desktop PCs by running desktop applicationsand storing user data within the datacentre Meanwhile, Windows 8 is expected to offer vendors the

opportunity to promote tablets with touchscreens and flexible designs

However, interest in open source is growing in the public sector During the recession, an increasingnumber of government IT managers and service providers were looking at open source software stacks aspart of a drive to consolidate datacentres Virtualisation has become a major trend in the datacentre, andopen source virtual machine products are becoming popular Meanwhile, open source tools such as theLAMP stack, which consists of Linux, Apache Web server, MySQL database and Perl/PHP/Python, arebeing used in government