United states information technology report q1 2015

Cloud computing, real-time enterprise software, security and big data are all areas of spending in which we expect to see strong growth, particularly in the latter years of our forecast.

Q1 2015 www.businessmonitor.com

UNITED STATES

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2018

Technology Report Q1 2015

INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: December 2014

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DISCLAIMER

BMI Industry View 7

SWOT 9

IT SWOT 9

Wireline SWOT 11

Political 13

Economic 14

Industry Forecast 15

Table: IT Industry - Historical Data And Forecasts (United States 2011-2018) 15

Macroeconomic Forecasts 22

Economic Analysis 22

Table: Economic Activity (United States 2009-2018) 28

Industry Risk Reward Index 29

Americas Risk/Reward Index 29

Table: Americas IT Risk/Reward Index - Q1 2015 30

Market Overview 32

Hardware 32

Software 40

Services 46

Industry Trends And Developments 52

Regulatory Development 57

Table: IT Regulatory Authorities 57

Competitive Landscape 59

Local Companies 59

Table: CA Technologies 59

Table: Splunk 60

Table: Symantec 61

Table: EMC Corporation 62

Company Profile 63

IBM 63

Table: IBM Acquisitions, 2012 (Total Value, US$3.964bn) 65

Hewlett-Packard 69

Table: Hewlett-Packard Financial Performance By Division: 74

Microsoft Corporation 78

Dell 85

Regional Overview 91

Demographic Forecast 97

Table: Population Headline Indicators (United States 1990-2025) 98

Table: Key Population Ratios (United States 1990-2025) 98

Table: Urban/Rural Population & Life Expectancy (United States 1990-2025) 99

Table: Population By Age Group (United States 1990-2025) 99

Table: Population By Age Group % (United States 1990-2025) 100

Methodology 102

Industry Forecast Methodology 102

Sources 103

Risk/Reward Index Methodology 104

Table: It Risk/Reward Index Indicators 105

Table: Weighting Of Components 106

BMI Industry View

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

markets over the medium term, as a result of stronger economic performance and a greater interest from enterprises in 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 strong growth, particularly in the latter years of our forecast The retail hardware outlook is more mixed, as we expect continued demand growth for tablets in the retail market; however, desktop and notebook sales continue to be squeezed Total

spending is expected to reach USD681bn in 2015, up 4.8% from 2015, and grow at a CAGR of 4.5% 2015-2018.

Headline Expenditure Projections

■ Computer Hardware Sales: USD216bn in 2014 to USD223bn in 2015, an increase of 3.0% Tablet

volumes set to decline, but at a slower rate than 2014, while traditional form factors are expected tocontinue gaining ground after steep declines in 2012 and 2013

■ Software Sales: USD181bn in 2014 to USD191bn in 2015, an increase of 5.2% Enterprise

software-as-a-service adoption has strong momentum, while demand for cyber security solutions is also an area ofgrowth

■ IT Services Sales: USD252bn in 2014 to USD267bn in 2015, an increase of 6.1% Cloud computing

adoption is already high in the US but we expect strong growth to continue over the medium term despitesecurity concerns following on from the NAS Prism debacle

Key Trends & Developments

One major development with only limited importance for the US IT market, but huge ramifications for US

cloud providers was the New York District Court ruling in August 2014 that Microsoft must hand over

customer data stored in its Dublin datacentre due to the fact it is a US company Microsoft refused and ischallenging the ruling for fears it would undermine confidence in US providers which is already fragilefollowing the overreach of the Patriot Act and Snowdon revelations about NSA activities Microsoft's caseargues US government cannot reach across international borders and retrieve data without respecting localprivacy laws The position held by Microsoft has been shown to be supported by local populations outside

the US, leaving difficult questions about the case unanswered at the time of writing BMI believes a large

number of US vendors with international operations will be concerned with the case due to the large loss ofconfidence in the US legal system and foreign policy in the past two years

Regulatory issues aside, a significant trend in the cloud market has been the increased utilisation of

partnerships between leading providers In June 2014 Microsoft and Salesforce.com entered a partnership

agreement, while in October 2014 Microsoft and IBM announced a partnership agreement to focus on

hybrid cloud solutions As a result of the deal, key IBM middleware such as WebSphere Liberty, MQ, andDB2 will be accessible through Microsoft Azure, while IBM Cloud will provide support for WindowsServer and SQL Server Under the agreement, the two companies will also work to deliver a

Microsoft NET runtime for IBM's cloud development platform, Bluemix BMI believes the developing set

of partnerships and collaborations reflects the increasing maturity of the cloud market and vendor plans forinteroperability of services to enable future growth of complex deployments

■ Meanwhile most non-US global firms also have a research and retail presence.

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

Weaknesses ■ In the wake of the recession and subsequent slow economic recovery, customers

have postponed IT investments and reduced short-term spending, particularly inareas such as consulting 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, smart TVs 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 conditions strengthen, IT vendors should see more growth fromtraditional big-spending sectors such as banks, financial services, retail andmanufacturing

■ 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

SWOT Analysis - Continued

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

Threats ■ Privacy and cyber security became more pressing issues with the PRISM spying

revelations This is expected to damage US cloud computing providers abroad, butdomestic impact is uncertain

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

Wireline SWOT

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 was 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 USD7.2bn 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

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 in the wake of the Comcast-Time Warner deal

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

■ Compromise is becoming increasingly difficult in domestic politics, and gridlock onspending issues could prompt another government shutdown, or even drive the US to

a default on its debt

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 address theUS's external imbalances

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

the loss of manufacturing jobs

■ Long-term budget imbalances, if left unaddressed, could eventually require an abruptcut back in spending that would weigh on economic growth

sales, USDmn 161,513.8 167,331.6 172,513.9 177,139.4 182,629.0 187,332.6 191,220.4 196,124.4Software sales,

USDmn 153,780.6 161,573.3 171,234.3 181,159.3 190,569.5 200,354.5 210,207.8 221,424.2Services sales,

USDmn 216,505.7 226,702.7 237,698.1 251,869.9 267,254.9 282,375.5 297,709.2 315,097.2

e/f - BMI estimate/forecast Source: BMI.

BMI forecasts US IT market growth will accelerate slightly to 4.8% in 2015 to reach a value of

USD680.7bn as stronger economic growth raises enterprise and consumer confidence We expect IT marketgrowth will remain robust considering the maturity of the US market, with a compound annual growth rate

of 4.5% forecast for 2015-2018, and total spending expected to reach USD774.5bn in 2018

Despite the maturity of the IT market in the US, we believe there is medium-term growth potential in sales

of hybrid notebooks in the retail market, while in the enterprise market adoption of cloud computing, bigdata and machine-to-machine (M2M) communications will drive growth

2015 Outlook

IT market spending growth in 2014 was limited by economic conditions and a decline in tablet volumes due

to market saturation after large numbers of first-time buyers entered the market 2011-2013 However boththese limitations are expected to ease in 2015, underpinning acceleration from 4.7% growth in 2014 to 4.8%

in 2015 The acceleration would have been stronger but for the fact that the withdrawal of Microsoft

support for XP in April 2014 brought forward some enterprise hardware and software upgrade demand from2015

US IT market growth will be sustained in 2015 by the supportive economic environment When comparedwith its developed market peers, the US market is expected to continue to perform well US economicgrowth for 2015 is forecast at 2.7% in real terms (up from 2.3% in 2014), while private final consumption isforecast to increase slightly slower at 2.4% (down from 2.5% in 2015).

The hardware market will be the underperforming segment of the IT market in terms of growth rates in

2015 The maturity of the market in terms of desktop, notebook and tablet penetration means first-timebuyer opportunities are scarce for vendors, and sales are concentrated in the replacement market Further,due to the rapid diffusion of tablet ownership and subsequent lengthening of replacement cycles in 2014 weexpect volumes will once again decline in 2015, down from a peak in 2013 when there were over 50mnfirst-time buyers However, areas of growth in 2015 are expected to be demand for hybrid-notebooks andChromebooks

e/f = BMI estimate/forecast Source: BMI

Overall, there will continue to be a squeeze on public sector IT spending, but growth will continue for cloudservices, for which there are expected to be many more contracts with the continued implementation of thefederal government of its Cloud First cloud migration strategy Departments such as the US GeneralServices Administration are already making significant use of cloud services, as the government seeks tomake savings in its USD80bn IT budget The recession may have had a lasting impact on the IT market byencouraging consideration of cloud computing models such as software-as-a-service (SaaS)

The strongest outlook is for enterprise spending on IT in 2015 BMI expects spending will accelerate in

2015 as confidence begins to return However, while there is pent-up demand from projects delayed as aresult of the economic situation, some of this may now be abandoned or reconsidered The growing marketfor 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 offer some

opportunities to vendors

The economy will be generally supportive over the medium term, particularly when compared to otherdeveloped markets Real GDP growth is forecast to average 2.5% annually 2015-2018, with consumption

growth expected to be slightly slower at 2.2% Meanwhile, BMI's in-house Country Risk income

stratification forecast for the US shows that the gains will largely be captured by the highest earning 20% ofthe population, while incomes for the remaining 80% are expected to see only slow growth This bodes wellfor vendors of premium hardware, for instance Apple which targets its PC devices at the highest earners, butthe outlook for sales growth of mid-range devices is mixed, particularly in the context of market maturity

Income Per Capita Breakdown

(2011-2018)

Poorest 20%, net income per capita, USD Richest 20%, net income per capita, USD Middle 60% of population, net income per capita, USD

2011 2012 2013e 2014e 2015f 2016f 2017f 2018f 0

25,000 50,000 75,000 100,000

e/f - BMI estimate/forecast Source: BMI, National Statistics Office

Investments in supporting infrastructure will boost IT market spending over the medium term Telecomoperator investments in mobile and fixed broadband infrastructure will help to boost retail sales of

hardware, particularly mobile PCs such as tablets and hybrids/convertibles These investments also enableadoption of cloud computing services by consumers and small and medium-sized enterprises (SMEs) thatare not in large urban areas already served by high-quality telecoms infrastructure

There are also technology trends that will drive growth BMI has a bullish view for the development of the

M2M market, or Internet of Things, which is a medium / long-term opportunity for IT software and serviceproviders to partner with telecoms operators For instance, in 2013 leading software and services firms,

including SAP and Wipro, partnered with M2M communications providers to tap growth in the nascent

market US mobile operators are among the global leaders in the deployment of M2M services, withverticals such as utilities, security, asset tracking, vehicle infotainment and other smart services targets forgrowth We believe software and services firms will benefit either through partnerships with operators or byselling to them direct

Another technology trend is the adoption of cloud computing services, with surveys showing high levels ofsatisfaction with cloud services among US CIOs, reflecting the fact it is already the world's leading cloudmarket This means growth opportunities are relatively diminished compared to emerging markets, butvendors will drive value growth by rolling out more customised solutions and targeting SMEs

Segments

The government remains a key consumer despite pressure on expenditure Federal IT spending reached alevel of around USD80bn 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 budget deficit, there will be increased pressure to reduce costs

US GVA By Vertical (%)

2015f

f - BMI forecast Source: BMI, National Statistics, World Bank, UN

With real economic growth now underway, 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, theincreasing cyber security threat facing them will force further investment in services and solutions Theadvent 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, there are significant differences between the needs of businesses indifferent industries Increasingly, vendors will need to customise approaches based on industry-specificneeds

Summary

The hardware market is predicted to grow from USD216bn in 2014 to USD238bn in 2018 Softwarespending should rise from USD181bn to USD221bn, and IT services from USD252bn to USD315bn, overthe forecast period.

Macroeconomic Forecasts

Economic Analysis

BMI View: The US economy will see slightly stronger growth in 2014 and will accelerate further in 2015,

on the back of a rebound in private spending on both consumer goods and capital investment Over the longer term, growth will remain below the historical average due to constrained government spending and ongoing structural adjustments.

We forecast that US real GDP will expand by 2.3% in 2014 and 2.7% in 2015, improving on the 2.2%expansion seen in 2013, as the country's economy continues its plodding but persistent recovery This is anupgrade from our previous forecast of 2.1% for 2014 and 2.6% in 2015, a change largely attributable torecent changes in Bureau of Economic Analysis (BEA) methodology and historical revisions, which saw the

2013 print upgraded from 1.9% The private sector in particular showed signs of strength in Q214, the mostrecent quarter for which data have been made available by the BEA While the Q214 headline annualisedgrowth rate of 4.6% is unlikely to be repeated, improvements in the labour market and business sentimentwill support real growth to a greater extent in the coming quarters relative to recent years

Real Growth To Remain Subdued

US - Nominal GDP And Real GDP Growth

Nominal GDP, USDbn (LHS) Real GDP growth, % y-o-y (RHS)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f0

10,000 20,000 30,000

0

-5 -2.5

2.5 5

Note: f = BMI forecast Source: BEA, BMI

Real growth has failed to return to pre-crisis levels, and we believe that constrained government spendingand the ongoing structural adjustments in the capital and labour markets will continue to weigh on

economic activity over the coming years In the final three decades of the 20th century, US growth hoveredaround 3.2% annually Due to the recession which occurred following the terrorist attacks of September 11

2001 and the 'Great Recession' accompanying the global financial crisis of 2008-2009, the decade of the2000s averaged growth of just 1.7% More troubling for US policymakers is the fact that the current decadehas remained far below the historical average, coming in at just 2.2% over the first 18 quarters of the 2010s.While our forecasts envision a slight acceleration of economic growth in the coming quarters, we do notforesee a return to 3.0%-plus growth over our forecast time horizon through 2023

Settling Into A New Normal?

US - Quarterly GDP

Source: BEA, BMI

Expenditure Breakdown

Private Consumption: The most recent high frequency data for the US labour market support our view that

the sector will continue to make positive strides The unemployment rate, which came in at 5.9% in

September, beating consensus expectations, has fallen below the 6.0% threshold for the first time since

2011 Similarly, the change in nonfarm payrolls came in at 248,000 for the month, up from just 142,000 inAugust, significantly beating consensus expectations of 215,000 Consumer purchases of durable goods,particularly automobiles, also picked up sharply in Q214, a signal that consumers are confident enoughabout their financial security that they are increasingly willing to buy big-ticket items

Significant Improvement In The Labour Market

US - Unemployment Rate, % (LHS), And Change In Nonfarm payrolls, '000 (RHS)

Source: Bureau of Labor Statistics, Bloomberg, BMI

Nevertheless, although greater numbers of US residents are finding employment, incomes have struggled toreturn to pre-crisis levels In the last 12 months, month-on-month (m-o-m) growth for both personal incomeand personal spending has averaged about 0.3%, below the average of about 0.5% from 2005 through 2007

As a result, median household incomes are still about 4,000 dollars below their 2007 peak of just aboveUSD56,000

These two offsetting factors - increasing employment but stagnant wages - will result in private

consumption ticking up, but remaining below historical trends, despite the recent surge in the US dollarwhich has increased purchasing power for foreign goods We are forecasting private consumption growth of2.5% in 2014, up from 2.0% in 2013 but well below the average of around 3.5% over the past half-century

Gross Fixed Capital Formation: Private investment was by far the most important driver of the 4.6%

seasonally adjusted annualised growth rate seen in Q214, contributing 2.9 percentage points (pp) to thetotal, offsetting the contraction in the sector seen in Q114 We expect that private investment will continue

to drive headline growth, given the improving sentiment regarding the trajectory of the economy, which willresult in an increase in purchases of capital goods and facilities as firms anticipate an increase in demand fortheir output Indeed, within the private investment category, the purchase of non-residential equipment was

by far the most important single contributor to growth, with information processing equipment (includingcomputers) a major example.

Additionally, we believe that given the Federal Reserve's wariness of the strength of the labour market(particularly with regards to the stagnation of middle-class incomes), policymakers will keep interest rateslow until late-2015, and this should help bolster continued growth in the housing sector as mortgage ratesremain at historically low levels We expect that residential investment, which contributed 0.3pp to theQ214 figure, will continue to support investment growth in the coming quarters

Private Investment Makes A Big Comeback In Q214

US - GDP Components Contribution To Real GDP And Headline Real GDP Growth

Source: BEA, BMI

Net Exports: As noted above, the US dollar has sharply rallied in recent weeks, with the DXY dollar index

climbing by 8.7% since the beginning of July, before retracing slightly in recent days of trading As ofwriting on October 7, the index is still near multi-year highs, and this currency strength will discourageforeign costumers from purchasing US-produced goods and services over the near term, while promoting anincrease in imports As a result, we expect that any improvement in net exports will be subdued in realterms over the coming months Over a longer time horizon, our Oil & Gas team is optimistic about a range

of new fields coming online, which will reduce US demand for foreign energy, and eventually provide an

important source of export revenues in the form of liquefied natural gas (see 'Rising Energy Production To Drive Current Account Improvement', September 30).

Government Consumption & Investment: Spending at the federal level contracted for the seventh straight

quarter in Q214, and we expect it to remain subdued over the coming quarters given the unlikelihood ofmajor fiscal reforms amid the gridlock in Washington This will result in reduced spending levels, given thestill-lingering effects of the budget sequester put in place in early-2013 Nonetheless, we expect that sometypes of federal spending are likely to increase, for example we anticipate an uptick in military expenditures

to address the rising threat of the Islamic State in Iraq and Syria, as well as to counterbalance the increasingassertiveness of Russian and Chinese military policy We forecast that total government spending willcontract for the fourth consecutive year in 2014 in real terms (falling by 0.5%), before returning to positiveterritory in 2015 (when it will expand by 0.7%)

Risks To Outlook

Our view for a slight acceleration in real GDP growth in both 2014 and 2015 is dependent on continuedgains in the labour market, including increasing incomes If we were to see an uptick in the unemploymentrate or continued stagnation in wages, our forecasts may prove overly optimistic Additionally, if unforeseenenvironmental or other legislative hurdles emerge, which impede the US from reaching its productivepotential in the oil and gas sector, energy imports would not decline at the pace we currently expect,weighing on headline growth In terms of upside risks, given the US economy is based in large part oninnovation and technology, a major technological breakthrough could lead to faster-than-anticipated growth,

as was seen during the internet-fuelled boom of the 1990s

Table: Economic Activity (United States 2009-2018)

Nominal GDP,

USDbn 14,417.9 14,958.3 15,533.8 16,244.6 16,799.7 17,521.0 18,375.7 19,189.0 20,043.2 20,940.6Real GDP

growth, % y-o-y -2.8 2.5 1.6 2.3 2.2 2.3 2.7 2.4 2.4 2.4GDP per capita,

USD 46,585 47,905 49,327 51,163 52,490 54,314 56,518 58,558 60,688 62,914Population, mn 309.5 312.2 314.9 317.5 320.1 322.6 325.1 327.7 330.3 332.8 Industrial

production, %

y-o-y, ave -11.3 5.7 3.3 3.8 2.9 4.7 5.4 3.0 3.0 3.0Unemployment,

% of labour

force, eop 10.0 9.4 8.5 7.8 6.7 5.9 5.6 5.6 5.6 5.5

Note: e/f = BMI estimate/forecast Source: National Sources, BMI

Industry Risk Reward Index

Americas Risk/Reward Index

BMI View: A surprising update to this quarter's Risk/Reward Index is the fact that Mexico has overtaken

Brazil and is generating a score very close to that of Chile Only the US, our top ranked market, saw no changes to its scores While country risks remain largely unchanged across the region, we note greater differences in the rewards scores given to markets such as Mexico and Venezuela.

The US and Canada's positions at the top of the table are unsurprising Both are developed economies where

IT services delivery is embedded in all industries, creating strong demand for IT products and keeping thesemarkets among the largest in the world The US benefits from having driven much of the world's IT

development for decades, and several of the largest global IT companies are based in the country A largeeconomy and a technologically adept population support strong demand for all levels of IT spending in theUS

Canada's population is similarly technologically forward looking, and the country is home to a number

of large IT companies Its lower position relates more to its smaller population and economy Nevertheless,

it shares many positive characteristics with its southern neighbour These include companies that are wellaccustomed to using technology for a variety of services and industries Growth will continue in the ITservices segment, and investment is supported by a stable country risk outlook

Chile leads the seven Latin American markets we measure While it has a smaller population than most ofits regional peers, it stands out for its more developed economy, which supports IT growth Although it has

a lower score than the US and Canada, Chile's risk scores are comparable with the two developed markets,and are held back mainly by lower rewards scores Chile reports the highest country rewards score for LatinAmerica, but cannot reach the levels reported by the US and Canada

Mexico's jump to fourth place is based on a strong performance in its industry rewards score The country isbenefiting from reforms in the telecoms sector, which will underpin growth for IT services and software anddrive demand for hardware We have revised upwards our forecasts for Mexico's IT market growth based onthe improving performance of IT companies and the interest in investment in the market Mexico benefitsfrom its proximity to the US and lower labour costs, which makes it a good location for business processoutsourcing (BPO), supporting the industry's long-term growth prospects

Brazil's scores have changed very little, but Mexico's improvement was sufficient to displace it in ourrankings There is some uncertainty surrounding the presidential elections, which could lead to changes in

the wider business environment, although not specifically affecting the IT market However, BMI believes

the market will continue to be an important one for development, and Brazil's fall in the rankings is notexpected to last long

Peru and Colombia occupy sixth and seventh position, sharing many characteristics as less developedmarkets in the region, with low levels of PC penetration among consumers and business adoption ofproducts and solutions such as enterprise resource planning (ERP) and cloud services far below levels ineven the advanced Latin American markets While this feature of the markets results in a low score, it alsotranslates into growth potential as incomes rise and firms modernise

Argentina had been much higher in our index, but the difficult business environment affects IT companiesboth directly and indirectly The economy and IT market remains in a state of uncertainty due to the

economic risks associated to the ongoing legal challenges over public debt High inflation affects allbusinesses, and companies are thus less likely to invest in IT services Consumers and businesses willremain hesitant about making large IT purchases, and significant import restrictions will limit sales

However, a strong country rewards score suggests Argentina could support far greater growth in the longterm

Earlier signs of improvement in Venezuela, which has also been hit by depreciation, inflation and domesticinstability, are quickly disappearing There are also positives in the IT market For instance, in March 2014the science, technology and innovation minister, Manuel Fernández, announced that the government wasplanning to digitise all its services by 2016 While there has been some improvement, Venezuela willcontinue to present challenges to vendors, with high inflation, a slowdown in private consumption and fiscalpressures

Table: Americas IT Risk/Reward Index - Q1 2015

Americas IT Risk/Reward Index - Q1 2015 - Continued

Colombia 55.0 60.0 47.5 46.8 53.8 7 7 Argentina 45.0 70.0 40.0 52.1 51.8 8 8 Venezuela 43.3 80.0 35.0 34.6 49.7 9 9

Average 58.7 71.1 48.3 54.3 59.7 -

-Scores out of 100, with 100 the best -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' score evaluates the size and growth potential of the IT market in any given state, and broader economic/socio-demographic characteristics that affect the industry's development The 'Risks' score evaluates industry-specific dangers and those emanating from the state's political/economic profile, based on BMI's proprietary Country Risk Indices Source: BMI

Market Overview

Hardware

The US hardware market has not been immune to the global squeeze on desktop and notebook sales

2012-2014, but it is in better health compared with other developed markets where the decline in desktopand notebook sales was more pronounced This is in part explained by the steeper recession in Europe, andalso the lower PC penetration rate in the US, allowing vendors to continue to tap first-time buyers

BMI forecasts continued outperformance for US PC spending versus developed markets 2015-2018, but we

expect slower growth due to tablet market saturation We estimate 2013 was the peak year for first-timetablet buyers in the US, and the market shifted rapidly to replacement/upgrade sales in 2014 as a result ofthe rapid initial diffusion of ownership As a result tablet shipments contracted in 2014, and we forecastanother year of decline in 2015 as the market adjusts towards the replacement rate

We forecast total US IT hardware sales will increase 3.0% to USD222.9bn in 2015, while PC sales areexpected to increase to USD182.6bn Meanwhile, datacentre construction is helping to boost server sales.The IT hardware market's 2015-2018 compound annual growth rate (CAGR) is projected at 2.4% and themarket value should reach USD238bn by 2018

Market Trends

Although PC sales have held up better in the US than in Europe, the desktop and notebook markets haveboth still declined, as consumers increasingly opted for tablets Despite the decline, the market still remainshuge, with around 100mn units shipped in 2013 (excluding tablets) Although vendors of traditional formfactors are experiencing a difficult market, the new categories of ultrabooks, as well as ultra-thin notebooksand hybrids/convertibles, offer avenues for growth but remain under pressure from Tablets

As well as cannibalisation by tablets, retailers have been disappointed by the sluggish uptake of Microsoft's

new Windows 8 operating system Windows 8 touch notebooks were available; however, the improvedperformance may have been due to the third quarter being considered the 'back-to-school' quarter for PCs as

well as new models featuring Intel's Haswell chipsets BMI estimates stronger uptake of Windows 8 in

2014 after Microsoft support for the Windows XP operating system ceased in April 2014, a push factor for

enterprise hardware upgrades The release of Windows 10 in 2015 could be a push factor for retail andenterprise upgrades, however there are only limited details regarding OS capabilities available in late 2014

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 However the rate of

decline is expected to continue to diminish in 2015 as demand stabilises with core users still requiring theadditional productivity features offered by notebooks and desktops versus tablets.

Hardware Market

(2011-2018)

Personal computer sales, USDmn Servers sales, USDmn

2011 2012 2013 2014e 2015f 2016f 2017f 2018f 0

50,000 100,000 150,000 200,000 250,000

e/f - BMI estimate/forecast Source: BMI.

Servers And Storage

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

Meanwhile, Lenovo agreed in January 2014 to acquire IBM's x86 server business for USD2.3bn The deal

includes System x, BladeCenter and Flex System blade servers and switches, x86-based Flex integratedsystems, NeXtScale and iDataPlex servers and associated software, blade networking and maintenanceoperations The deal will dramatically increase Lenovo's exposure to the US server market

In December 2013 IBM announced that it intends to invest more than USD1.2bn to increase its global cloudfootprint The company will unveil 15 new centres globally, in addition to the existing 13 and 12 global datacentres from SoftLayer and IBM respectively Elsewhere in November 2014 the US Department of Energyawarded IBM a USD325mn contract to develop two supercomputers, to be named Sierra and Summit, aspart of the project called Coral The purpose of the supercomputers will be to calculate car aerodynamics,forecast the performance of new drugs and to find structural weaknesses in airplane designs.

In January 2015 it was reported that Oracle Corporation may divest its hardware business to computer technology company Dell, according to Moor Insights and Strategy Founder and President, Patrick

Moorhead Moorhead attributed the sluggish growth in Oracle's hardware business as a possible reason,since the company registered its profit mainly from software and services

Desktops And Notebooks

The US continues to be the second largest PC market globally, having been surpassed by China in 2012.However, high household penetration means there is only limited scope for sales to first time buyers, and as

a result the market is predominantly based on personal devices and upgrades/replacement purchases andwill exhibit slower growth over the medium term compared to emerging markets

The US PC market is relatively mature, with a household PC penetration rate of 77% in 2010, however, this

is still some way off the levels of PC penetration in European markets with comparable income levels BMI

attributes the deficit versus Western European markets as the result of the much higher inequality in the US,leaving low income households without sufficient purchasing power There is therefore limited scope forsales to first-time buyers, meaning that the market is predominantly based on personal devices and

upgrades/replacement purchases

There is a strong bias towards mobile PCs, which had benefited notebook/netbook vendors prior to thearrival of tablets, which have subsequently eliminated netbooks as a device category 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

Notebook sales have also been hit by a shift to tablets, before staging a small recovery from 2014, whiledesktops are increasingly being run as utility machines and being overlooked for upgrades as householdsopt for mobile devices as a way into the latest technology The latest data from Gartner show total PC

shipments increased 4.2% year-on-year (y-o-y) to almost 16.6mn in Q314, and the third successive quarter

of unit growth The data show that Hewlett Packard leads the market, with a share of 27.8% and shipmentsgrowth of 9.5% y-o-y However second placed Dell managed to increase shipments in the US by over 18%y-o-y to Q314 as it closed the gap to HP Another notable success was Apple, which achieved a 14.3%market share with its high priced Mac devices, meaning its share of profit is likely to markedly exceed itsshare of sales According to Gartner data the underperforming vendor in the US was Toshiba, which saw a9.9% y-o-y decline in shipments to Q314

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

Device Penetration* (%)

2006-2013

*Age 18+ Source: Pew Research Centre, BMI

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 centred on Apple's iPad, but 2014 saw a more complex

competitive environment emerge with Apple facing competition from vendors producing devices running

Google's Android OS and Microsoft's Windows 8 (including hybrid notebooks) Furthermore, tablet vendors had to face the challenge of declining volumes, with BMI estimating tablet volumes declined by

almost 20% in 2014 due to a diminished pool of first-time buyers

Research by the Pew Research Centre indicates that the deepening of the tablet market occurred rapidly2011-2013, with a variety of models available at different price points helping to drive penetration rateshigher It reported significant increases in penetration of tablets among US adults, with growth acceleratingfrom mid-2012 as cheaper Android devices, and Apple's own iPad Mini, hit the market Pew Researchfound that more than one-third of adults owned a tablet by May 2013, but as penetration rises, it is expectedthat tablet sales will continue to slow The uncertainty arises from the fact that consumers in the US initiallyshowed a willingness to upgrade tablet devices with a short replacement cycle, a trend that will weakenedconsiderably in 2014 as vendor innovation slowed This is a trend observed across mature tablet markets,and in general we expect volumes will only return to growth once the replacement rate for existing users isreached

As is the case globally, the US tablet market has been dominated by Apple; however, its position didweaken in 2012 and it faced much stronger competition from 2013 Research from Magid Advisors showedthat in total 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 However, data fromStatcounter show that Apple's iOS, run on its tablets, accounted for 8.3% of US PC browsing traffic in

December 2014 - a figure that was down by 0.4 percentage points (pp) y-o-y BMI believes this decline

reflects the dip in overall tablet sales in 2014, as well as a relative weakening of Apple's dominant position

in the tablet market to Android and Windows rivals

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

accounted for just 2.0% of PC browsing traffic (down 0.5pp y-o-y to December 2014) This recent datareinforces Apple's dominance, and also shows Android vendors were hit by the small swing back awayfrom tablets towards notebooks and Chromebooks in 2014

While Apple's tablet lead in the US seems insurmountable, it is also important to note the gap between thestrategies of some of the leading players On the one hand, Apple and Samsung are hardware vendors andlook to profit from the sale of devices, while on the other side, Google and Amazon are services firms andoffer tablets almost at cost The strategies of services firms (combined with low cost OEM tablets fromChina) will likely put pressure on the margins of hardware centric vendors in the medium term.

Another development that has begun to affect both the tablet market and the notebook market is the arrival

of Windows 8 In October 2012, with the launch of the new OS, Windows vendors were able to introducetouch devices for the first time

PC Volume Forecast

2011-2018

United States - Desktop sales, '000 United States - Notebook sales, '000 United States - Tablet sales, '000

2011 2012 2013e 2014e 2015f 2016f 2017f 2018f 0

25,000 50,000 75,000

e/f - BMI estimate/forecast Source: BMI.

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

Early examples have been hybrid devices such as Microsoft's own Surface (RT & Pro), Hewlett-Packard'sEnvy, Dell's Idea Pro range and Lenovo's Yoga and Helix Dell released its latest hybrid, the Dell Venue 11Pro tablet, in November 2014, which comes preapproved for use by security-minded contractors, includingthe Department of Defense, and is targeted at those working for the government Looking at the hybridmarket more widely, design innovation has some way to go, and prices of hybrids will need to decline, themulti-use device has scope to capture a share of the tablet market by offering a stronger value proposition toconsumers 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 alllaptops shipped worldwide in Q113 were touchscreen-enabled This figure is expected to grow as more andmore manufacturers develop laptops and touchscreen notebooks

Vendor Developments

Struggling former global PC market leader Hewlett Packard announced a new line-up of devices in June

2014 as it looks to recover ground on tablet early movers, and gain traction in the hybrid notebook market

It expanded its line-up of touch convertible PCs with the launch of a new group of form factors and multipleoperating system (OS) options HP launched HP Envy x360, equipped with an Intel Core processor and a15.6-inch diagonal, full HD 10-point touch screen display The company has also rolled out HP Pavilionx360, featuring a 13.1-inch diagonal 10-point touch screen and HP Split x2 with an Intel core processor and

a 10-point touchscreen display In addition, the company has introduced the HP Chromebook and the HPSlateBook under its Chrome and Android offerings

As vendors are facing the reality of declining desktop and notebook sales, there is a renewed focus on the

ecosystem and retail In June 2013, Microsoft announced that it was partnering with Best Buy to set up a

store-within-a-store in 500 locations in the US and 100 in Canada Microsoft will work with Best Buy totrain an additional 1,200 sales associates, as well as supplying dedicated Microsoft specialists to the stores.The Microsoft stores will be in direct competition with Apple, which also has stores within some branches

of Best Buy Microsoft's strategy is for the stores to be a location for consumers to try, compare and

purchases tablets, PCs, Windows Phones, Office Software and Xbox The stores will also feature an

ecosystem section to market Xbox SmartGlass, SkyDrive and other services

In June 2013, Google confirmed its Chromebook laptops would be stocked at US retail chains Walmart and Staples Walmart will stock Chromebooks across 2,800 retail locations in the US, priced at USD199,

while Staples will sell Chromebooks across its 1,500 US stores Google unveiled the Chromebook platform

in the US in 2011 and also confirmed plans to expand overseas, including the UK and Sweden

Lenovo has targeted domestic manufacture as a strategy to improve product quality while also potentiallyuseful marketing In June 2013, Lenovo opened its first US manufacturing plant in Whitsett, North

Carolina The plant initially employed 115 works to assemble notebooks and desktops using componentsfrom overseas Lenovo admits it would be cheaper to manufacture outside the US but said 'speed of

execution is key' The computers produced from this plant will have an American flag on the palm rest.Lenovo also confirmed plans to increase the scope and scale of its first US manufacturing site in Whitsett,North Carolina, according to WXII12 The company aims to add 155 new jobs to its Greensboro productionline by the end of July 2013

Dell announced plans to bundle an improved security suite with its hardware in June 2013 in an effort todifferentiate is products to protect market share and insulate downward pressure on prices, particularly inthe enterprise segment The new suite provides anti-malware defence and encryption services and is

available via Dell's Protected Workspace program

The tablet market is another area of intense competition, with vendors moving to release models to capture

a share of the spoils which still predominantly accrue to Apple In June 2013, Toshiba confirmed plans toexpand its tablet offerings in the US towards late 2013 The company, as it explores more screen sizes andprice points, is set to introduce new Windows 8 and Android tablets in various price ranges in the US.Toshiba is reportedly willing to compete at prices as low as USD199, and will also look into higher pricepoints for better-performing tablets

In 2015 Samsung will continue to target the notebook market in the US, in contrast to retrenchment in otherregions In January 2015 Samsung Electronics' US-based subsidiary Samsung Electronics America

launched a new, ultraportable laptop, the ATIV Book 9 The laptop will be available for pre-order startingfrom Q115 for USD1,199.99 Samsung also launched the ATIV One 7 Curved in early 2015, the firstcurved All-In-One PC in the industry The 27-inch PC will also be available for pre-order starting Q115 forUSD1,299.99

BMI forecasts software spending will increase at a CAGR of 5.1% 2015-2018, with the market expected to

reach a value of USD221.4bn in 2018 We expect software sales growth will surpass growth in hardwarespending as business software vendors pitch efficiency gains, in line with companies focusing on reducingcosts Meanwhile, the software market is being influenced by the continued move towards distributedcomputing, software-as-a-service (SaaS) and service-oriented architectures

Market Trends

The US software market is expected to be worth USD190.6bn in 2015, a 5.2% increase over 2014 Weforecast slightly slower growth in 2015 after some operating system upgrade demand was brought forward

to 2014 by the withdrawal of Microsoft support for XP in April 2014

A stronger economic outlook will translate to higher confidence levels and greater demand for software,while at the same time recent economic headwinds and looming risk factors in the global economy willensure clients retain a focus on a clear return on investment from software investments The economicbackdrop in recent years has also given additional momentum to the adoption of cloud computing - despitefallout from the NSA Prism scandal

Cloud computing is now an established technology in the US, but nonetheless, 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 andpublic sector organisations announced cloud computing strategies and launched pilot projects US

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

as office supply retail group Staples