United states information technology report q1 2014

We also expect continued demand growth for tablets in the retail market, however there is downside risk as desktop and notebook sales continue to be squeezed.. Key Trends & Developments

Q1 2014 www.businessmonitor.com

UNITED STATES

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2017

Technology Report Q1 2014

INCLUDES 5-YEAR FORECASTS TO 2017

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: December 2013

Business Monitor International

© 2013 Business Monitor International

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copyrighted in the name of Business Monitor

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DISCLAIMER

BMI Industry View 7

SWOT 9

IT SWOT 9

Wireline SWOT 11

Political 13

Economic 14

Business Environment 15

Industry Forecast 16

Table: US IT Industry - Historical Data And Forecasts (US$mn unless otherwise stated) 16

Broadband 21

Table: Telecoms Sector - Internet - Historical Data & Forecasts 21

Macroeconomic Forecasts 23

Economic Activity 23

Table: US - GDP By Expenditure 30

Industry Risk Reward Ratings 32

Table: Americas IT Risk/Reward Ratings, Q1 2014 34

Market Overview 35

Hardware 35

Software 43

Services 48

Industry Trends And Developments 51

Regulatory Development 55

Table: IT Regulatory Authorities 55

Competitive Landscape 57

Local Companies 57

Table: CA Technologies 57

Table: Splunk 58

Table: Symantec 58

Table: EMC Corporation 59

Company Profile 60

Hewlett-Packard 60

Dell 67

Microsoft Corporation 73

IBM 81

Table: IBM Acquisitions, 2012 (Total Value, US$3.964bn) 83

Regional Overview 88

Demographic Forecast 92

Demographic Outlook 92

Table: The United States' Population By Age Group, 1990-2020 ('000) 93

Table: The United States' Population By Age Group, 1990-2020 (% of total) 94

Table: The United States' Key Population Ratios, 1990-2020 95

Table: The United States' Rural And Urban Population, 1990-2020 95

Methodology 96

Industry Forecast Methodology 96

Sources 97

Risk/Reward Rating Methodology 98

Table: It Risk Reward Rating Indicators 99

Table: Weighting Of Components 100

BMI Industry View

BMI View: The outlook for US IT spending remains strong relative to the majority of developed markets

over the medium term as a result of stronger economic performance and a greater appetite from enterprises for the latest products and solutions Cloud computing, real-time enterprise software, security and Big Data are all areas of spending in which we expect to see rapid growth We also expect continued demand growth for tablets in the retail market, however there is downside risk as desktop and notebook sales continue to be squeezed There is also downside to this outlook from the potential for deeper fiscal retrenchment to hit government IT spending, the NSA PRISM scandal to disrupt the cloud computing market and a downturn in the wider economy Total spending is expected to reach US$588bn in 2013, up 6.6% from 2012, and grow

at a CAGR of 5.1% to 2017.

Headline Expenditure Projections

■ Computer Hardware Sales: US$144bn in 2012 to US$152bn in 2013, an increase of 4.7% Booming

tablet sales are driving growth while desktop and notebook sales are under pressure from cannibalisation

■ Software Sales: US$161bn in 2012 to US$173bn in 2013, an increase of 7.6% Forecast in US dollar

terms unchanged Emerging technologies such as machine-to-machine and Big Data are being adopted byenterprises, while demand for cyber security solutions is also an area of growth

■ IT Services Sales: US$246bn in 2012 to US$263bn in 2013, an increase of 7.2% Cloud computing

adoption is already high in the US but we expect strong growth to continue over the medium term

Key Trends & Developments

The US retail hardware market fared better than other developed markets in 2013 as sales of tablets boomedwhile the squeeze on desktop and notebook sales was less pronounced, particularly compared to Europewhere economic crisis has added to the detrimental impact of tablet cannibalisation Overall tablet salescontinue to drive the hardware market, with the latest data from Pew Research Centre showing penetrationreached 34% of the adult population in May 2013, up from just 14% a year earlier Although tablets offercontinued growth potential as penetration rates rise, we expect growth to slow Vendors will need to offernew features if consumers are to accept short replacement cycles and upgrade devices in quantities

sufficient to offset the slowdown from diminished first-time buyer opportunities

Cloud computing has been a leading theme in the US IT market in recent years as local enterprises haveadopted more complex solutions, however the market is subject to uncertainty as a result of revelationsaround the National Security Agency (NSA) PRISM intelligence gathering programme Surveys in 2013showed that the scandal has hurt the prospects of US cloud providers internationally, most notably in

Europe; however, the domestic market appears to be relatively unscathed Nonetheless, cloud providers areconcerned about the impact of the government's activities on their growth prospects in a rapidly developingmarket.

■ PC shipments have held up better than in other developed markets in 2012 and 2013.

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

■ Desktop and notebook sales appear to be in long-term decline due to longerreplacement cycles and the preference for mobile devices including tablets,smartphones and convertibles/hybrids

Opportunities ■ Technologically savvy local population willing to spend on premium devices, with the

US a particularly strong market for Apple's iPad and MacBooks

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

big-■ Potential for growth in the hardware market through form factor evolution ie ultra-thinnotebooks, hybrids/convertibles and tablets

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

■ New business models such as software as a service and virtualisation will continue toclaim a large share of IT budgets

SWOT Analysis - Continued

■ Growth from emerging technologies such as Big Data and machine-to-machinecommunications will drive innovation and spending

Threats ■ Enterprise and consumer concerns around data security and privacy could prove a

drag on adoption of cloud services and big data solutions

■ Privacy became a more pressing issue with the PRISM spying revelations, which isexpected to damage US cloud computing providers

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

Wireline SWOT

United States Wireline SWOT Analysis

Strengths ■ A large proportion of households continue to have a fixed-line connection

■ Broadband growth remains robust despite a declining fixed-line market andfluctuating pay-TV subscriptions

■ Demand for faster speeds is leading to new technologies being introduced byoperators

■ Connect America Fund is seeking to expand coverage

Weaknesses ■ Fixed-line decline has been happening for over a decade In 2013 it has been faster

than anticipated and no real respite is expected

■ Even in cases of fixed-line subscriber growth, revenue and minutes of use are bothdown

■ Sluggish growth in broadband penetration despite high levels of public sectorinvestment

■ Despite Obama's US$7.2bn investment in improving broadband connectivity,deployment has been slow and a significant proportion of the population remainsunderserved

■ New technologies such as WiMAX and LTE will cannibalise fixed broadband market

Opportunities ■ Wireline broadband continues to offer faster download speeds than wireless options,

making it more attractive prospect for many clients

■ Broadband growth remains steady, if unspectacular, and the relatively lowpenetration rate means it should continue in this vein

■ IPTV growth highlights opportunities for operators to bring subscribers over a singlenetwork offering considerable cost savings

United States Wireline SWOT Analysis - Continued

Threats ■ Problems in US economy are driving subscribers to mobile substitution faster than

ever, leading to a faster decline as subscribers look to reduce their outgoings

■ LTE means the fixed broadband market will become increasingly redundant

■ Weaker dollar has made the cost of contracts higher from external vendors

■ Consolidation is likely to occur as Charter Communications aggressively reviewstakeover targets

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

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

Economic SWOT Analysis

Strengths ■ The world's largest economy, with an impressive record of entrepreneurial dynamism

and innovation, and high research and development spending

■ Despite some threats to its reserve status, the US dollar is treated as an internationalcurrency, meaning 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 ■ 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

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 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 chronic fiscal deficits may force the federal government to find ways to raise

effective corporate tax rates, following a multi-decade downtrend

Industry Forecast

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

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

IT Market Value 508,970 529,329 551,031 587,620 622,113 654,649 681,490 705,410 o/w Hardware 139,610 141,478 144,679 151,506 157,450 162,574 165,993 168,459

- PC 113,084 114,880 118,636 125,447 130,369 134,611 137,442 139,484

- Servers 12,565 12,733 13,021 13,636 14,171 14,632 14,939 15,161 o/w Software 145,311 152,976 160,626 172,760 184,456 195,740 205,469 214,445 o/w Services 224,049 234,875 245,727 263,353 280,206 296,335 310,028 322,506

IT Market, % of GDP 3.5 3.5 3.5 3.5 3.6 3.6 3.6 3.5

f = BMI forecast Source: BMI

BMI forecasts US spending on IT products and services will reach US$587.6bn in 2013, an increase of

6.6% over 2012, and then reach US$705.4bn by 2017 Despite the maturity of the IT market in the US, weidentify medium-term growth potential in sales of tablets, ultra-thin notebooks and hybrids/convertibles, aswell as adoption of cloud computing, big data and machine-to-machine (M2M) communications in theenterprise market These growth trends will support a CAGR of 5.1% from 2013-2017 However, there isdownside risk to our core scenario as a result of global economic headwinds

2013 Outlook

The IT market in the US is highly developed, meaning growth will be slower than the fast-growing

emerging markets However, when compared with its developed market peers, the US market is expected toperform well Although the economic environment remains weak in 2013, it is nonetheless performing

better than Western European economies BMI forecasts real-term private final consumption growth

of 2.2% in 2013, which is a positive for the retail hardware market as rising incomes and progress made byconsumers in deleveraging boosts confidence

However, government expenditure is forecast to contract by 1.5% in real terms in 2013, illustrating thedifficulties vendors will face in boosting sales to the public sector Uncertainty continues to be generated bythe political tensions around the issue of the US federal deficit Automatic federal spending cuts known assequestration commenced on March 1 2013, and this could potentially hit IT projects Given the continuedsplit of party control of the legislature, the November 2012 elections have not made much progress inaddressing the trajectory of future government IT spending

One area of public sector spending that will continue to grow is cloud services, for which there are expected

to be many more contracts with the continued implementation of the federal government of its Cloud Firstcloud migration strategy Departments such as the US General Services Administration are already makingsignificant use of cloud services, as the government seeks to make savings in its US$80bn IT budget Therecession may have had a lasting impact on the IT market by encouraging consideration of cloud computingmodels such as software-as-a-service (SaaS)

There is a mixed outlook for the hardware market in 2013 Tablet sales are booming in 2013 despite risingpenetration as consumers seem willing to accept much shorter replacement cycles compared with traditionalform factors Meanwhile, desktop and notebook shipments are declining PC shipments (excluding tablets)declined by around 10% year-on-year (y-o-y) to Q113 as consumers continue to exhibited a preference fortablets There was however a slower rate of decline y-o-y to Q213 of 1.5-2%, in part because of weakperformance in Q212 distorting the trend but also a symptom of hardware vendors cutting prices of

hardware There had been some hope on the part of vendors that the release of Microsoft's Windows 8 OS

in October 2012 would lead to increased sales of desktops and notebooks; however, the boost has not lived

up to vendors hopes However, there is potential for innovative hybrid/convertible designs to experience

growth, particularly following the release of Intel's new Haswell chipsets in June 2013, which enable longer battery life, higher performance and slimmer notebooks BMI believes hybrids/convertibles and ultra-thin

touch-screen notebooks have the potential to experience rapid growth, but with momentum only beginning

to build in 2013, the impact will be felt more strongly later in our forecast period

Enterprise spending on IT will experience only moderate growth in 2013 as confidence remains fragile.While there is pent-up demand from projects delayed as a result of the economic situation, some of this maynot 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 currenteconomic environment will offer some opportunities to vendors

BMI has a bright outlook for the M2M market, or Internet of Things, which is a medium-term opportunity

for IT software and service providers to partner with telecoms operators In 2013, leading software and

services firms, including SAP and Wipro, have partnered with M2M communications providers to tap

growth in the nascent market US mobile operators are among the global leaders in the deployment of M2Mservices, with verticals such as utilities, security, asset tracking, vehicle infotainment and other smartservices targets for growth We believe software and services firms will benefit either though partnershipswith operators or by selling to them direct

Another area of growth is the cloud computing market, with surveys showing high levels of satisfactionwith cloud services among US CIOs Vendors are now rolling out more customised SaaS solutions forSMEs The roll-out of more service offerings, including from new market players, will fuel demand.Virtualisation is making headway and will continue to do so, and it is proceeding to more and more parts ofthe datacentre Another growth opportunity will be private and public sector organisations looking for help

to utilise efficiencies from cloud computing models such as SaaS and Infrastructure-as-a-Service (IaaS).The federal government's Cloud First initiative is one of a number of federal and local government agencycloud migrations and pilot programmes

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, and

vendors 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

The government remains a key end-user despite pressure on fiscal expenditure Federal IT spending reached

a level of around US$80bn as departments continue to issue IT tenders despite a drive to make savingsthrough closing hundreds of federal datacentres in 2012-2015 New government programmes, including theexpansion of healthcare, should generate lucrative new opportunities for IT vendors, although because ofthe ever-growing budget deficit, there will be increased pressure to reduce costs

As the recession eases, IT vendors should experience more growth from traditionally big-spending sectors

such as banking, financial services, retail and manufacturing BMI expects financial services will be a key

spending vertical as new regulations require increased investment, and in addition, the cyber security threatfacing them will require investment in services and solutions The advent of mobile payment systems will

be an additional source of spending growth

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

The hardware market is predicted to grow from US$152bn in 2013 to US$168bn in 2017 Software

spending should rise from US$173bn to US$214bn, and IT services from US$263bn to US$323bn, over theforecast period

Industry Trends - IT Market

2010-2017

f = BMI forecast Source: BMI

Table: Telecoms Sector - Internet - Historical Data & Forecasts

2010 2011 2012 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 of internet users/100

f = BMI forecast Source: BMI, FCC

New data from the FCC imply that there were

91.668mn fixed broadband subscribers in the US at

the end of 2012, alongside 170.076mn mobile

broadband subscribers The FCC's definition of

broadband uses data transfer rate benchmarking that

is not wholly consistent with that employed

elsewhere in the world Nevertheless, it is clear from

the FCC's data that the most significant growth in

broadband is in the wireless arena and that, as has

been seen in other mature markets worldwide, the

greater flexibility of mobile relative to fixed

connections is causing some xDSL customers to 'cut

the cord'

The fixed broadband market remains buoyant mainly

due to cable and fixed wireless usage, which remains

strong, as well as to a small but growing base of

fibre accesses BMI forecasts the number of fixed

broadband connections to reach 97.038mn by the end of 2013, rising to 107.021mn by 2017

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-based

Industry Trends - Fixed-Line

Sector

2009-2017

f = BMI forecast Source: BMI, FCC

services 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 Similarly, the FCC's NationalBroadband Plan aims to ensure universal access, competition and the efficient allocation of spectrum tobenefit the broadband sector Increased revenue derived from such activities will allow operators to expandinto new markets and it seems increasingly likely that fixed-line operators will need to become broadband-focused in order to survive.

Macroeconomic Forecasts

Economic Activity

Macro Outlook: We remain positive on the growth trajectory for the US economy over the next several

years, as we believe that many structural factors are aligning for a period of sustained growth, underpinningour forecast for real GDP growth to average 2.4% per year from 2013-2018, up from 0.8% per year from2008-2012 The labour market recovery, while well under way, has further to go, meaning that modestincreases in job creation will prove to be a boon to spending over the medium term Consumer deleveragingcontinues, meaning that a future upswing in credit will also accelerate private consumption Furthermore,the cyclical components of GDP remain quite low as a share of the economy but have begun to turn higher,and improving trade dynamics will help reduce the drag of net exports on growth A marked uptick in thePMI manufacturing index starting in summer 2013 confirmed many of these trends had begun to take hold

(see 'PMI & Employment Data Point To Further Strength', August 5).

Stronger Growth Ahead

US - Real GDP Growth, %

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013f 2014f 2015f -3

-2 -1 0 1 2 3 4 5 6

Note: f=BMI forecast; Source: BEA

That said, there are growing political risks that could weigh on growth in the final quarter of the year andinto 2014, posing downside risks to our 2013 and 2014 real GDP forecasts of 1.8% and 2.8% respectively.The failure of the US Congress to pass spending bills resulted in a government shutdown that startedOctober 1, a development that could cause significant disruption to both consumer behaviour and business

spending (see 'Shutdown Illustrates Political Risks To Economy & Markets', October 1) Furthermore, while

we maintain our view that a deal will be reached relatively quickly and the government will reopen,

political divisions about spending policy are likely to remain quite deep for the foreseeable future, meaningthat further spending battles could keep real GDP growth from hitting our forecasts

Expenditure Breakdown

Private Consumption: While real personal consumption expenditure (PCE) growth averaged 2.0% growth

in the first half of 2013, we maintain our forecast for 2.2% growth this year, as nominal personal spendinggrowth ticked up in the third quarter in year-on-year terms Additionally, we saw a substantial drop in initialunemployment claims in September that suggests the weak real PCE growth number of 1.8% in Q213 willlikely be the low for the year

Spending Uptick Points To Higher Private Consumption In Q3

US - Personal Spending, % chg y-o-y & Real PCE Growth, % SAAR

Source: BMI, FRED

A steady improvement in consumer confidence during the first nine months of 2013 also reinforces ourview that private consumption will remain relatively robust this year and accelerate in 2014 As confidenceimproves, we expect consumers to be relatively more willing to spend on big-ticket items and shift

relatively more income away from savings and toward spending

Rising Confidence And Less Saving Will Boost Consumption

US - University Of Michigan Consumer Sentiment Index & Personal Savings Rate, %

Source: BMI, FRED

However, we do note that that University of Michigan Consumer Sentiment Index declined in September to77.5 from 82.1 in August and 85.1 in July, a potentially troubling development that suggests spending maysoften a bit in the fourth quarter of the year A number of things could have weighed on consumers, fromthe prospect of military intervention in Syria to the shutdown in Washington Furthermore, if the

government shutdown lasts any longer than a few days, the two million federal workers not receiving paychecks as usual would likely drag on the real PCE growth figures for Q413

Fixed Investment: As mentioned above, we forecast fixed investment is set to expand at a relatively robust

pace over the next few years, as the cyclical components of the economy - residential construction, business

investment, and consumer durables purchases - remain at a historically low level relative to the size of the

economy (see chart, below) Our infrastructure team forecasts another year of growth in residential

construction, and we believe that stronger personal consumption, relatively low interest rates, and recordprofits will, over the medium term, support greater business investment and capacity expansion Weforecast real fixed investment will come in at 5.9%, as base effects from 8.3% growth last year slow the rate

of expansion somewhat, before accelerating to 7.1% in 2014

Cyclical Components Suggest Sustained Fixed Investment Growth Ahead

US - Residential Construction, Business Investment & Durable Goods Purchases, % of GDP

Note: recessions shaded; Source: BMI, BEA

The latest data from the National Federation of Independent Businesses (NFIB) survey show that businessoptimism is at post-financial crisis highs, reinforcing our view that an improving economy will supportfixed investment growth However, we note that previous political crises in Washington, particularly in thesummer of 2011, have weighed heavily on business optimism, and believe that the October 2013 shutdowncould delay investment plans slightly

Small Business Optimism Should Support Sustained Investment Growth

US - NFIB Confidence Index

Source: BMI, Bloomberg

Net Exports: We believe secular improvements in the US external account picture will contribute to the

stronger real GDP growth that we forecast over the medium term As US domestic energy production hasincreased rapidly in the last few years, imports of oil and petroleum products have trended lower, a dynamicthat will help narrow the country's substantial energy trade deficit and reduce a long-running drag on netexports Our Oil & Gas team forecasts that domestic oil production will average 3.8% growth per year overthe next five years and net oil imports will contract by an average of 6.5% per year over the same period

Domestic Energy Production Will Limit Need For Imports

US - Oil Imports & Domestic Oil Production, '000bbl/day

Source: BMI, EIA

Additionally, we believe economic improvement in the eurozone and the UK in 2014, key trade partners forthe US, will help bolster US exports We have already seen a rise in new export orders in the third quarter of

2013 (see chart, below), a trend we believe will continue to play out in 2014 and 2015, when we forecast

real exports of goods and services to grow by 5.2% and 5.1% respectively

New Orders Uptick Shows Recovery In US Trade Partners

US - Export Growth (3-Month MA) & New Export Orders (3-Month Lag, 3-Month MA)

Source: BMI, FRED, Bloomberg

Government Consumption & Fixed Investment: We expect the contribution of government consumption

and investment to real GDP growth will be negative again in 2013, as the effect of austerity measures at thefederal, state and local level continue to take their toll The federal government budget sequester, whichwent into effect in early 2013, resulted in real government spending contracting at a seasonally adjustedannualised rate of 4.2% in Q113 and 0.4% in Q213 We forecast a contraction of 1.5% in 2013 and zerogrowth in 2014, but acknowledge that political dynamics in Washington present downside risk to thesefigures

Government Continuing To Weigh On Growth

US - Real Government Consumption & Fixed Investment Growth, % SAAR

Source: BMI, FRED

Risks To Outlook:

As noted above, political tensions in Washington present substantial downside risks to our 2013 and 2014forecasts Furthermore, as we expect these dynamics will persist for the foreseeable future, we expectgovernment policy to remain a persistent downside risk, more likely to hurt than help growth over the nextseveral years That said, many indicators suggest that our growth forecasts may be somewhat conservative.For 2014 in particular we could see stronger growth than the 2.8% we forecast, especially if growth fallsbelow our expectations in 2013 due to political risk

Table: US - GDP By Expenditure

2010 2011 2012 2013f 2014f 2015f 2016f 2017f 2018f

Real GDP growth, %

change y-o-y 1 2.5 1.8 2.8 1.8 2.8 2.6 2.4 2.4 2.4Private final

consumption, USDbn 1 10,201.9 10,711.8 11,149.6 11,800.7 12,337.7 12,861.3 13,380.9 13,921.4 14,483.9

US - GDP By Expenditure - Continued

2010 2011 2012 2013f 2014f 2015f 2016f 2017f 2018f

Private final

consumption, US$bn 1 10,201.9 10,711.8 11,149.6 11,800.7 12,337.7 12,861.3 13,380.9 13,921.4 14,483.9Private final

consumption, US$bn 1 3,174.0 3,158.7 3,167.0 3,284.0 3,395.6 3,528.8 3,659.9 3,795.9 3,937.0Government final

US$bn 1 2,039.3 2,195.6 2,409.1 2,578.8 2,790.7 2,968.0 3,156.5 3,357.1 3,570.3Fixed capital formation,

real growth % y-o-y 1 1.5 6.2 8.3 5.9 7.1 5.3 5.3 5.3 5.3Exports of goods and

services, USDbn 1 1,843.5 2,101.2 2,195.9 2,272.9 2,466.1 2,649.5 2,846.7 3,058.6 3,286.5Exports of goods and

services, US$bn 1 1,843.5 2,101.2 2,195.9 2,272.9 2,466.1 2,649.5 2,846.7 3,058.6 3,286.5Exports of goods and

services, real growth %

y-o-y 1

11.5 7.1 3.5 2.5 5.2 5.1 5 5 5

Imports of goods and

services, USDbn 1 2,362.0 2,669.9 2,743.1 2,765.7 2,961.5 3,151.1 3,353.1 3,568.3 3,797.6Imports of goods and

services, US$bn 1 2,362.0 2,669.9 2,743.1 2,765.7 2,961.5 3,151.1 3,353.1 3,568.3 3,797.6Imports of goods and

services, real growth %

y-o-y 1

12.8 4.9 2.2 3.3 5.1 4.2 4 4 4

Net exports of goods &

services, USDbn 1 -518.5 -568.7 -547.2 -492.8 -495.4 -501.6 -506.4 -509.7 -511.1Net exports of goods &

services, US$bn 1 -518.5 -568.7 -547.2 -492.8 -495.4 -501.6 -506.4 -509.7 -511.1Net exports of goods &

services, real growth %

y-o-y 1

18 -3.6 -3.4 6.9 4.7 0.3 -0.6 -0.8 -1.1

Notes: f BMI forecasts Sources: 1 BEA/BMI.

Industry Risk Reward Ratings

BMI's latest industry Risk/Reward Ratings for the Americas saw only one change in position as Mexico

moved above Argentina to fifth in the table as the latter's score declined due to forecasts for weaker

consumer demand While there were no other positional changes in the table in the Q114 update, theaverage score for the region declined q-o-q, on the back of downward revisions for IT hardware sales inmost markets This trend is partly the result of a mixed income growth and consumer confidence outlook forthe Americas, but also a consequence of the shift in the composition of sales from notebooks to low-costAndroid tablets Demand for tablets is maintaining unit growth in most markets, but the declining cost ofdevices is squeezing increases in market value

The US continues to occupy top position in our Americas Risk/Reward Ratings, with an unchanged score inQ114 The US dominates the global IT market so its high position above regional peers is to be expected

US IT firms continue to be global leaders with rapid innovation, while enterprises generally have highlevels of adoption of emerging technologies such as big data analytics and complex cloud deployments.This sustains buoyant IT software and services markets, even as on-premises IT spending is declining The

hardware market continues to expand, sustained by strong demand for premium tablets, particularly Apple's

in 2014 in the wake of the NSA PRISM revelations Canadian enterprises have largely relied on US cloudproviders However, surveys in 2013 showed enterprises are reconsidering their exposure to an uncertainregulatory environment through US providers If Canadian firms do look to switch to domestic providersthere could be a slowdown in cloud adoption in the short term as data centre capacity in Canada would have

to be increased

Chile is in third place as the leading emerging market in the region, with high incomes and penetration of ITsoftware and services among enterprises helping to offset the small size of the market due to its populationbeing far smaller than that of the leading Latin American markets IT is more widely used among Chileanconsumers and businesses than in many of its peer markets, so the market is relatively large as a share of

GDP Another feature of Chile's market, as is the case with most developed markets, is the greater

weighting of IT services However, it remains far behind the US and Canada in terms of adoption ofemerging technologies

Brazil has the second highest industry rewards in the region in Q114, supported by the large population.However, it scores below the regional average in the other three categories Economic growth has been

strong over the past few years but BMI believes the consumer story has weakened, leading us to revise our

forecasts for hardware, software and services spending This revision pulled down the industry rewardsscore by 1.2pps q-o-q Like most of the Latin American markets, hardware spending growth is also beinglimited by the availability of discretionary spending and consumer preference for low-cost Android tablets

as substitutes for more expensive notebooks

While the Brazilian market presents significant challenges its high position reflects the strong prospects asthe region's largest market Low PC penetration and rising incomes will support hardware market

expansion, while the modernisation of enterprises will provide opportunities for software and servicesvendors Finally, as Brazil looks forward to hosting the FIFA 2014 World Cup and 2016 Olympics

Games, it will need to update infrastructure and services, providing a boom for vendors

Mexico leapfrogged Argentina in the Q114 update despite receiving an unchanged score Mexico has arelatively strong consumer outlook, with rising incomes and a large population There is considerable scopefor hardware sales growth due to a supportive macroeconomic environment combined with low PC

penetration Enterprise spending continues to benefit from modernisation initiatives, with spending onsoftware suites, including enterprise resource planning and consumer relationship management, areas ofgrowth

Argentina received a lower score as a result of the weak macroeconomic environment, pushing it one placedown the table to sixth We highlight ongoing risks to the county's outlook, particularly in light of currencydepreciation, which have negatively impacted the industry rewards score Although an increasing share ofdevices is produced domestically, as a large number of components are imported, price pressures will hitvendors operating in the country Government initiatives to promote the domestic ICT sector will offset

some of the squeeze from a weak macroeconomic environment, but nonetheless BMI forecasts it will be the

underperformer from the large Latin American markets

Peru was the only country to receive a higher IT Risk/Reward Rating score q-o-q in Q114, but it remainsbehind the larger markets in the region Demand for commodities has boosted the domestic economy andtranslated into retail, enterprise and public sector spending on IT products and services We expect this

trend will continue, although there is downside risk arising from a potential slowdown in demand fromChina IT market growth is closely linked to the fortunes of Peru's commodities sector, as is the economy as

a whole, and therefore any drop in demand from China would have significant impact

The bottom two markets in the Americas Risk/Reward Ratings continue to be Colombia and Venezuela ineight and ninth position Both markets received lower scores in Q114, with their respective industry rewardsscores down by 1.7pps q-o-q This is partly due to challenging economic conditions, particularly in

Venezuela uncertainty around the currency and fiscal position is high There is also an additional challengeposed by imports of low-cost Android based tablets which could cannibalise sales of higher priced

notebooks Colombia and Venezuela are characterised by high levels of economic and political uncertainty,

with both scoring below the regional average in every category, and BMI does not foresee them moving up

the table, at least in the short term

Table: Americas IT Risk/Reward Ratings, Q1 2014

Country Industry Rewards Country Rewards Industry Risks Country Risks IT Rating Rank Previous Rank

US 82.5 90.0 55.0 66.8 78.2 1 1 Canada 62.5 90.0 65.0 66.7 70.3 2 2 Chile 52.5 70.0 50.0 68.2 59.3 3 3 Brazil 65.0 60.0 45.0 50.8 58.8 4 4 Mexico 60.8 60.0 52.5 48.1 57.3 5 6 Argentina 53.3 75.0 40.0 52.1 56.8 6 5 Peru 56.7 55.0 45.0 55.1 54.6 7 7 Colombia 53.3 55.0 47.5 46.8 51.9 8 8 Venezuela 40.0 70.0 35.0 34.6 45.8 9 9

-Scores are weighted as follows: 'Rewards' at 70%, of which Industry Rewards, 65%, and Country Rewards, 35%; 'Risks'

at 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 a 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

The US hardware market remains in good health compared with other developed markets where the decline

in desktop and notebook sales has been significantly steeper One factor is the relatively lower PC

penetration rate in the US, but the stronger economic backdrop is a more significant factor BMI forecasts

that the US computer and accessories market value will grow by 4.7% to US$152bn in 2013 Decliningsales of desktops and notebooks are a drag on growth, but booming sales of tablets will offset this trend As

a result, growth of PC shipments has been maintained overall Meanwhile, datacentre construction ishelping to boost server sales The computer hardware market's 2013-2017 compound annual growth rate(CAGR) is projected at 3.1% and the market value should reach US$168bn by 2017

Market Trends

Although PC sales held up better in the US than in

Europe, the desktop and notebook markets still

declined as consumers opted for tablets Despite the

decline, the market still remains huge, with around

65mn units shipped in 2012 (excluding tablets)

Although vendors of traditional form factors are

undoubtedly under pressure, the new category of

ultrabooks, as well as ultra-thin notebooks and

hybrids/convertibles, offer an avenue for growth

As well as cannibalisation by tablets, retailers

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; however, adoption has thus far been

sluggish Analyst firm IDC reported in Q113 that the

PC industry had banked on Windows 8 and less

expensive ultrathin notebooks to boost PC sales However, a lack of touch screen components for ultrathinnotebooks led to a lack of Windows 8 computers Performance in terms of shipments improved in Q213according to IDC and Gartner data, with shipments down 1.5-2% year-on-year (y-o-y) More Windows 8touch notebooks were available; however, the improved performance may have as much to do with cuts to

Hardware Market (US$mn)

2010-2017

f = BMI forecast Source: BMI

prices by vendors and retailers willing to sacrifice margins in order to sustain volumes The release ofWindows 8 still has potential to boost PC sales as the market adjusts to delayed hardware upgrades, andcould also provide a fillip to the ultrabook market as tablet makers leverage its capabilities to offer deviceswith touchscreens and convertible designs.

PC sales had also endured a year of overall stagnation in 2011, although there were growth areas such astablets A number of factors dragged down the US PC market in 2011, including the sluggish economicrecovery and competition from other form factors, particularly tablets The marked slowdown was largelydriven by disappointing sales in the consumer segment, particularly of notebooks The surge in demand fortablets contributed to restrained growth for traditional notebooks Vendors also pointed to a lack of

promotions and compelling reasons for customers to upgrade On the positive side, however, the slowgrowth was partly accounted for by base effects, compared with the market rebound in 2010

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 there is underlying vulnerability tonegative 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

BMI expects the desktop and notebook market will continue to struggle in the face of competition from

tablets, with average prices and margins declining further to fight off cannibalisation The sluggish

economic situation has created significant downwards pressure on prices, with consumers unwilling to paybig money and looking for 'good enough' solutions to their computing needs The professional segmentremained weak in 2012 as government agencies and educational institutions faced tight budget constraints

Servers

There continues to be significant investment in datacentres in the US to meet growing demand for consumerand enterprise cloud services and storage solutions This has attracted the attention of vendors including the

May 2013 announcement that Lenovo will release a rebranded version of its LenovoEMC storage solutions

in North America The EZ Media and ix Series Desktop line now carry the Lenovo Iomega brand, and the

px Series Desktop and ox Series rack mount families are now branded as LenovoEMC products

In June 2013, it was reported that Microsoft was set to invest US$678mn to expand its datacentre in Iowa.The project was awarded tax benefits and aims to create 29 jobs, according to the board of the Iowa

Economic Development Authority Microsoft will be eligible to receive up to US$20mn in tax credits for

the project, which will house servers, networking equipment and office space to operate the company'scloud services.

In April 2013, it was reported that Facebook was set to construct a US$1.5bn datacentre in Iowa, but the

company has not yet made a public statement The datacentre, which is being described as 'the most

technologically advanced datacentre in the world', will be reportedly built in two US$500mn phases on a1.4mn square foot site The datacentre will be Facebook's fourth as it already has datacentres in Oregon,North Carolina, US, and one under construction in Lulea, Sweden

Desktops And Notebooks

The US PC market is mature, with a household PC penetration rate of 77% in 2010; however, this is stillsome way off the levels of PC penetration in European markets with comparable income levels There islimited scope for sales to first time buyers, meaning the market is predominantly based on personal devicesand upgrades/replacement purchases As a result, there is a heavy bias towards mobile PCs, which hadbenefited notebook/netbook vendors prior to the arrival of tablets which have virtually eliminated netbooks

as a device category Notebook sales have also been hit by a shift to tablets, while desktops are increasinglybeing run as utility machines and being overlooked for upgrades as households opt for mobile devices

Pew Research Centre data, supplemented with BMI estimates, supports the growth of notebook sales The

ownership of desktops in the adult population has been declining slowly since 2006; however, the rate of

notebook ownership has continued to increase steadily, reaching 61% by mid-2012 BMI estimates this

figure increased to around 65% by mid-2013, even as competition from tablets has limited growth

The popularity of netbooks largely kept notebook sales in positive territory during the recession in

2008-2009 and accounted for about 80% of notebook segment growth However, the netbook growthtrajectory flattened in 2010 as the price differential with fully-featured notebooks became less significant

We also expect enhanced versions of netbooks with features such as larger screens and more powerfulprocessors to 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% ofnotebook sales in the US in 2009, with unit sales of more than 6mn

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 US HP and Asus continued to compete in the netbook segment, but Asian giants Sony and

Samsung did not release new models in the US market in 2012, and all vendors were focused elsewhere by

2013

Tablets

The US has been one of the fastest tablet adopting nations, trailing only high income markets such as Hong

Kong, Norway and Singapore The tablet market is built on Apple's iPad, but 2013 has seen a deeper market with competition from vendors producing devices running Google's Android OS and Microsoft's

Windows 8 Research by the Pew Research Centre indicates that the deepening of the tablet market, with avariety of models available at different price points, has helped to drive penetration rates higher It reportedsignificant increases in penetration of tablets among US adults, with growth accelerating from mid-2012 ascheaper Android devices, and Apple's own iPad Mini, hit the market Pew Research found that more thanone-third of adults owned a tablet by May 2013, but as penetration rises, it is expected that tablet sales willslow The uncertainty arises from the fact that consumers in the US have so far exhibited a willingness toupgrade devices with a short replacement cycle, a trend that will become harder to sustain as innovationslows

As is the case globally, the US tablet market has been dominated by Apple; however, its position didweaken in 2012 and it faces much stronger competition in 2013 Data from Statcounter show that Apple'siOS, run on its tablets, accounted for 6.2% of US PC browsing traffic in August 2013 - a figure that was up

by 1.7 percentage points (pp) y-o-y This data supports research from Magid Advisors who estimates that intotal Apple's iPad was the dominant device in Q213, present in 59% of tablet-owning households (of which

6% is attributable to the iPad Mini) This is far ahead of Amazon's Kindle Fire, present in 31% of tablet

households, and Samsung devices, present in 19% of tablet owning households

Google's Android OS, which is used on Samsung, Asus and Google's own Nexus range accounted for just

1.5% of PC browsing traffic (up 1pp) y-o-y This recent data reinforces Apple's dominance; however, it isnotable that Android is becoming a more significant competitor for Apple following the release of populartablets such as the Kindle Fire from Amazon, the Nexus 7 and 10 and Samsung's Galaxy Tab range

However, unlike the global market, the US has a strong preference for brands, and as such OEM devicesrunning Android, which are available at much lower price points, have failed to make an impact so far

The success of Android vendors came only after the release of lower cost tablets, predominantly the smaller7" form This contrasted with Apple's larger and more expensive iPad - and the popularity of the smaller,cheaper devices, catalysed the development of Apple's own iPad Mini Apple is set to face competition

throughout 2013 from rival Android vendors that will offer consumers a greater choice in terms of price andsize, as well as specifications and features.

It is also important to note the gap between the strategies of some of the leading players On the one hand,Apple and Samsung are hardware vendors and look to profit from the sale of devices, while on the otherside, Google and Amazon are services firms and offer tablets almost at cost The strategies of services firms(combined with low cost OEM tablets from China) will likely put pressure on the margins of hardwarecentric vendors in the medium term

Another development that will affect both the tablet market and the notebook market is the arrival ofWindows 8 In October 2012, with the launch of the new OS, Windows vendors were able to introducetouch devices with a number of tablets released The addition of more vendors and another touch OS willadd to competition in the market, putting further pressure on prices

Hybrids/Convertibles

The current trend in the PC market is defined by the separation of productivity and consumption across

desktops/notebooks and tablets However, as tablet penetration rises, BMI believes there is an opportunity

for vendors able to produce devices bridging the divide without eroding the user experience For this reason,

we consider the more significant trend arising from the release of Windows 8 to be the medium-term impact

on innovation and form factors Windows has a traditional strength in productivity use cases and software,with the OS being central to the enterprise market and Microsoft's Office Suite ubiquitous There is

therefore an opportunity for vendors to leverage this strength over rival iOS and Android devices bydesigning tablets with strong productivity functionality alongside the passive media consumption features.This opportunity may also help explain Microsoft's lack of leveraging the mobile software revenue

opportunity in the Android and iOS ecosystems

Early examples have been hybrid devices such as Microsoft's own Surface (RT & Pro), Hewlett-Packard's

Envy and Lenovo's Yoga and Helix Although design innovation has some way to go, and prices of hybridswill need to decline, the multi-use device has scope to capture a share of the tablet market by offering astronger value proposition to consumers while not compromising on user experience

There was evidence in H113 of the hybrid/convertible form factor gaining traction in early adopter markets

including South Korea, which may gain momentum as vendors capitalise on the potential of Intel's new

Haswell chipsets released in June 2013 Meanwhile, according to a recent research report, 10% of all

laptops shipped worldwide in Q113 were touchscreen-enabled This figure is expected to grow as more andmore manufacturers develop laptops and touchscreen notebooks.

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 predictions due to high prices, and they therefore seemunlikely to enjoy the hoped-for success, at least initially In the US, in H112, the average market price for anultrabook was upwards of US$900, compared with an average of around US$500 for a Windows notebook

In contrast to netbooks, which prospered against the backdrop of the global financial crisis in 2008/2009,the relatively higher-priced category of ultrabooks appears ill-timed given the current global economicmalaise Vendors appear to have realised this and are moving ahead with plans to supply low-end

ultrabooks Intel reportedly has resisted lowering Ivy Bridge CPU prices, but manufacturers are attempting

to reduce costs by using cheaper Sandy Bridge CPUs and cheap batteries The final products are likely toreduce the price gap between netbooks and currently available ultrabooks, but it may still be questionedwhether this will be enough to ensure the take-off of this category Average ultrabook prices had alreadydropped to around US$850 by mid-2012 and were expected to dip further to around US$750 for the back-to-school season The release of Windows 8 in October 2012 was expected to provide a boost to sales ofultrabooks as consumers and businesses upgraded to the new operating system, but a shortage in

touchscreen components led to a thus far sluggish adoption of the new OS and correspondingly slow sales

of ultrabooks