United states information technology report q2 2011

Computer Sales ƒ The US addressable market for PCs and accessories is estimated by BMI at US$123.1bn in 2011, with single-digit growth compared with 2010.. Opportunities ƒ Demand for n

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DISCLAIMER

INFORMATION TECHNOLOGY REPORT Q2 2011

INCLUDES 5-YEAR FORECASTS TO 2015

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline : April 2011

CONTENTS

Executive Summary 5

Market Overview 5

Industry Developments 5

Competitive Landscape 6

Computer Sales 6

Software 7

IT Services 7

SWOT Analysis 8

US IT Sector SWOT 8

United States Political SWOT 9

United States Economic SWOT 9

United States Business Environment SWOT 10

IT Business Environment Ratings 11

Americas 11

Table: Regional IT Business Environment Ratings 14

United States Market Overview 15

Government Authorities 15

Overview 16

Hardware 18

Software 22

Industry Developments 27

Industry Forecast Scenario 30

Market Trends 30

Drivers 31

Segments 32

Summary 32

Table: US IT Sector Overview, 2007-2014 32

Internet 33

Table: Telecoms Sector – Internet – Historical Data & Forecasts 33

Macroeconomic Forecast 35

Table: United States – Economic Activity, 2008-2015 37

Competitive Landscape 38

Hardware 38

Software 41

IT Services 44

Company Profiles 46

HP 46

Dell 48

Microsoft 50

IBM 52

Section 1: Population 53

Table: Demographic Indicators, 2005-2030 53

Table: Rural/Urban Breakdown, 2005-2030 54

Section 2: Education And Healthcare 54

Table: Education, 2002-2005 54

Table: Vital Statistics, 2005-2030 54

Section 3: Labour Market And Spending Power 55

Table: Employment Indicators, 2001-2006 55

Table: Consumer Expenditure, 2000-2012 (US$) 55

Table: Average Annual Wages, 2000-2012 (US$) 56

BMI Methodology 58

How We Generate Our Industry Forecasts 58

IT Industry 58

IT Ratings – Methodology 59

Table: IT Business Environment Indicators 60

Weighting 61

Table: Weighting Of Components 61

Sources 61

Executive Summary

Market Overview

ƒ US spending on IT products and services is forecast to reach US$653bn by 2015

US spending on IT products and services is forecast to grow to reach US$653bn by 2015 BMI has

downwardly revised its forecast after PC sales entered negative y-o-y growth territory in Q410, after strong growth in the first half of the year Overall moderate growth is expected in 2011, with the public sector in retrenchment mode and the private sector relatively stronger

In 2011, an increase in project spending is expected A major demand driver will be private and public sector organisations looking for help to utilise efficiencies from cloud computing models such as

Software-as-a-Service and Infrastructure-as-a-Service 2010 saw a number of government agencies at federal and local level launch cloud strategies and pilot programs

Other key market drivers are expected to include:

ƒ Growing fixed and mobile broadband penetration

ƒ Datacentre consolidation and virtualisation

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

ƒ Technology innovation such as GPS and services

ƒ Economic recovery

Industry Developments

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

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

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

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

Competitive Landscape

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

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

In the final quarter of 2010, most leading vendors reported lower sales, due to a slowdown in consumer purchases compared with the same period of 2009 The contest for top spot between HP and Dell

continued HP’s share of total PC shipments in Q410 was estimated at close to 30%, although its

shipments had declined compared with Q409

In 2010, demand for enterprise software strengthened, with leading vendor SAP reporting a number of new American clients in Q410, including Glazer’s Wholesale Distributors, and American Lie Assurance

Co Meanwhile cloud computing is a major opportunity driver Over the year, SaaS pioneer

Salesforce.com added 20,000 net new customers, and reached a total of 3mn net paying subscribers

2010 saw increasing competition between vendors for a growing number of public sector cloud contracts

The GSA picked web-based Google Apps to replace IBM Lotus Notes as the provider of email and

collaboration software for its 17,000 full-time employees and contractors In October 2010, New York

City announced an initiative to bring Microsoft’s BPOS (Business Productivity Onine Suite) to around

30,000 city employees

Computer Sales

ƒ The US addressable market for PCs and accessories is estimated by BMI at US$123.1bn in

2011, with single-digit growth compared with 2010

US PC sales slowed in H210 but BMI estimated that the market was on course for full-year total

shipments of around 78mn units US PC sales slipped into negative y-o-y growth territory in the final quarter of 2010, dragging down the growth rate for the year as a whole The commercial refresh segment showed signs of vitality, with steady growth in replacement purchases, but consumers were spending less

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

for more than 60% of unit sales in 2010 However, netbooks and notebooks face competition from other

formats such as smartphones from Palm, RIM and Apple, as well as tablet notebooks

Drivers of demand for enterprise software include increasing operational efficiency, coordinating global supply chains and modernising logistics and warehouse functions More investment can be expected to be

in utility software and serviced-oriented architectures rather than traditionally packaged PC software

One opportunity will be organisations looking for help to utilise efficiencies from cloud computing such

as SaaS and IaaS, as organisations look to save money on IT investments National and local government

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

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

spending, particularly in areas such as consulting and software development

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

datacentre consolidation, and cloud computing

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

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

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

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

technology could have another hard year

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

United States Political SWOT

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

international diplomacy Long-standing democracy with vigorous and open political debate; the US continues to attract large numbers of immigrants committed to citizenship and self-advancement

Weaknesses ƒ Political debate between Republicans and Democrats has historically shown a

tendency to become more polarised and divisive As today’s superpower, the US attracts the enmity of a wide range of political groups opposed to the current international status quo

Opportunities ƒ The changing political mood (as evidenced by the popularity of unconventional

candidates in the 2008 presidential election, including Obama’s), and the widespread dissatisfaction of the voting public, may encourage both major parties

to experiment with more consensual approaches to certain policy areas

Threats ƒ The perception of inflexibility and bias in US foreign policy, particularly in the Middle

East, may stiffen opposition and at worst provide fertile recruiting ground for radical anti-US groups such as al-Qaeda Partly as a reaction to foreign policy difficulties,

US public opinion may return to isolationist and protectionist modes

United States Economic SWOT

Strengths ƒ The world’s largest economy with an impressive record of entrepreneurial

dynamism, innovation and a high research and development spend Despite some threats to its reserve status, the US dollar is treated as an international currency, meaning that investors around the world are prepared to hold US debt Because of this, the US is uniquely able to run large fiscal and current account deficits

Weaknesses ƒ Despite the dollar’s role as an international currency, excessive US debt levels are

a risk A decision by Japanese and Chinese central banks to reduce their larger dollar holdings could cause sharp falls in the value of the US currency Low savings rate by US households on a historic basis, although this has begun to reverse

Opportunities ƒ Further liberalisation of international trade through the WTO, coupled with a more

competitive dollar exchange rate, could boost export growth and help restore balance to the US’s external imbalances

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

the loss of manufacturing jobs Large growth in public spending, coupled with tax cuts, will worsen the fiscal deficit, eventually forcing more restrictive monetary policy and slower growth

United States Business Environment SWOT

Strengths ƒ The US boasts the world’s largest single internal consumer market, which presents

tremendous opportunities for businesses of all types and sizes

ƒ Few countries offer better environments for entrepreneurial activity, with a highly flexible labour force, a legal system that is friendly to business, and significant centres of technological innovation (such as California’s Silicon Valley)

Weaknesses ƒ Much of the country’s physical infrastructure is in need of improvement, with

congested roads and airways

ƒ US corporate tax is, on average, among the highest in the OECD

Opportunities ƒ The Obama administration is committed to improving the nation’s infrastructure,

with stimulus package funds being dedicated to that purpose

ƒ The US has often been the origin of new drivers of economic growth booms, and sectors ranging from biotechnology to alternative energy are being discussed as possible catalysts

Threats ƒ Government intervention in the economy puts the country’s reputation for free

enterprise at risk

IT Business Environment Ratings

Americas

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

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

implementation of government information and communications technology (ICT) projects

In Q211 the US retains its top position in our regional rankings as the largest IT market in the region and the world, and accounts for about 25% of global IT spending Despite the challenge from faster-growing

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

In H210 the US commercial PC segment showed signs of vitality, with steady growth in replacement purchases, but consumers were spending less During the next few years, across consumer and business segments, US IT spending is expected to be driven by a number of factors including product and

technology innovation, and investment in fixed and mobile broadband infrastructure as well as economic recovery

A major opportunity will be demand from private and public sector organisations aiming to use cloud computing services In 2011 there are expected to be many more contracts for the provision of cloud services, following on contracts awarded during 2010 by the cities of New York and Los Angeles, and the General Services Administration (GSA) of the federal government As the US economy recovers, there will be more growth in traditional big-spending IT verticals such as financial services, retail and

manufacturing Meanwhile, government remains a key source of projects

The Latin American IT market outlook remains positive in Q211, with BMI retaining its IT business

environment ratings in Q211 Low PC penetration means continued growth potential in a region

characterised by significant income and geographic disparities In many markets, increased penetration of credit cards and credit availability from stores, as well as a growing organised retail sector, should

contribute to growth

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

period The government’s launch of a US$344mn modernisation strategy in late 2010 should mean enhanced IT spending over the next few years A National Broadband Plan was announced in 2010 and modernisation, ahead of Brazil’s hosting of the 2014 FIFA World Cup and 2016 Summer Olympics, should also help to drive demand for IT products and services

In 2011, Brazilian consumer PC sales are expected to continue growing, due to economic growth and low unemployment fuelling consumer confidence In 2010, double-digit shipments growth was boosted by major government procurements at national, provincial and municipal levels, and this should continue Meanwhile, a PC penetration rate of less than 25% indicates there is plenty of room for market growth

Brazil is our second-highest ranked market in North America and South America, ahead of Mexico, which retains third position Brazil scores higher than Mexico on market and country structure factors, but both have strong growth drivers Mexican IT spending is expected to grow at a double-digit compound annual growth rate (CAGR) over BMI’s five-year forecast period

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

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

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

Spending by the Mexican government should grow as public sector organisations launch e-services and supporting infrastructure Other market drivers include rising PC penetration and growing PC

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

outsourcing hub

However, despite business environment improvements there are structural inhibitors in Mexico and Brazil In Brazil these include a significant digital divide and bureaucracy Mexico has a heavily regulated labour market, while some vendors also have concerns about an apparent escalation in drug violence, which may affect channel activities in some regions of the country and increase operating costs

Meanwhile, Chile’s fourth place in our table reflects its status as one of the most developed markets in the region Chilean IT spending is projected to grow at a CAGR of 10% over 2010-2014 A wide-ranging government plan to increase ICT utilisation in government and other sectors such as healthcare and education will encourage IT investment The recent earthquake may have diverted consumer funds from technology to other priorities, but reconstruction offers opportunities for government agencies to advance

IT modernisation

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

of any of the states in our Latin America table However, PC penetration is below 20% in Chile and 25%

In sixth place, Argentina’s IT spending is projected by BMI to grow at a CAGR of 14% in 2010-2014

Recovery after 2010 will be driven by rising incomes, expanding retail channels and more flexible terms from retailers The Argentine market is dominated by the capital Buenos Aires, which accounts for about one-quarter of computer sales Continued growth in PC sales is expected and IT spending is driven by factors such as greater credit availability and growing broadband penetration

Educational tenders will be a particular area of opportunity for the Argentine market, with a tender to deliver 3mn PCs to public schools, due to be implemented over the 2010-2012 period Another driver will

be the introduction of new regulatory compliance laws for electronic invoicing

Peru and Colombia are in fifth and seventh positions respectively Peru’s free trade agreement (FTA) with the US will boost demand for IT products and services The regional structure of the Peruvian market will evolve, with slower growth likely in Lima compared with other Peruvian provinces

Colombia’s consumer-driven economic boom of the past few years has faded, but a PC penetration rate of about 10% is one of the lowest in the region and indicates untapped potential Investment in datacentres, information management and security solutions are expected to be growth areas in the large company segment Peru and Colombia offer opportunities despite some business environment risks Besides the boost from the US FTA, there are opportunities in Peru across the banking and financial services,

telecoms, retail, and mining sectors as well as small- and medium-sized enterprises (SMEs)

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

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

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

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

SMEs, but BMI expects another difficult year in 2011

In 2010 the growth of Venezuela’s computer shipments lagged behind other countries in the region, but sales should still grow during the forecast period, due to the government’s affordable computer

programmes and more local production of computers The government’s 2007-2012 economic plan has a

Table: Regional IT Business Environment Ratings

Limits Of Potential Returns

Risks To Realisation Of

Returns

IT Market

Country Structure Limits

Market Risks

Country Risk Risks

IT BE Rating

Regional Ranking

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

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

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

United States Market Overview

Government Authorities

Administration (NTIA), Department of Commerce

Assistant Secretary for Communications and Information Lawrence E Strickling

The Department of Commerce (DoC) regulates various information technology industry-related areas The DoC is host to several agencies including the National Telecommunications and Information

Administration (NTIA), which advises the president on telecommunications and information-related issues

NTIA itself has several sub-bodies including:

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

ƒ The Office of Policy Analysis and Development

ƒ The Office of Telecommunications and Information Appliances (OTIA)

Major programmes run by the OTIA include:

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

ƒ A programme to drive the transition to digital television

The Department of Commerce also hosts the National Institute of Standards and Technology, which is a non-regulatory agency that promotes US innovation and standards

ƒ Various other federal government ministries are also relevant to IT vendors

ƒ Several departments including the Department of Defense, Homeland Security, Health and Human Services, and the Department of Commerce itself are major purchasers of IT products and services

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

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

Softw are 29%

Services 44%

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

Despite continued economic uncertainty, and the faster growing IT markets of countries such as China and India, the US is forecast to maintain its global IT market leadership position for some time

BMI estimated US IT spending at over

US$508bn in 2010 As a mature market, BMI

assumes that IT services accounts for around

44% of US IT spending, compared with 27% for

hardware and 29% for software

Each segment comprises several sub-segments

In the hardware segment, notebook computers

now account for around 58% of sales, and this

share is expected to rise to 81% by 2015,

pushing desktops down to less than one-fifth of

unit sales However, rival and even more

portable form factors such as tablets are

expected to restrain growth of traditional

notebooks

Software also comprises several segments The business software market (packaged software), including enterprise resource management, customer relationship management, human resources management, financial applications and so on, as well as business intelligence and other information-enabling

applications, is estimated to account for around a third of revenues Middleware, including systems management and database management software, accounts for between 15-20% of spending Operating systems of PCs, servers, and mainframes, as well as storage systems, account for around 20% of

spending Internally developed software accounts for a declining share of the market The software market is being transformed with the rise of the SaaS delivery model

The main segments in IT services include implementation, systems integration (SI), maintenance and service, as well as higher value services such as consulting and software development, and managed services/outsourcing

PC Spending – Segments

2010

Desktops 33%

Notebooks 67%

Source: BMI

BMI counts most custom-developed software in

IT services Custom-developed software has

declined in importance as packaged software has

become more specialised and customised to

particular industries, and it may now account for

around 10% of commercial software value

The two largest IT spending verticals are

discrete manufacturing and government, which

have typically accounted for around 10% of

total IT spending each Banking has traditionally

also accounted for a similar amount although it

remains to be seen what will happen to bank IT spending in the wake of the financial crisis Other

significant IT spending verticals include retail, wholesale, telecoms and construction

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

computers BMI estimates IT spend/capita was US$1,641 in 2010 However, a mature market with high

penetration rates requires product and technology innovation to drive continued growth: the average US household has 2.5 PCs

Hardware

BMI forecasts that the US computer and accessories market grow around 5% in 2011, similar to 2010

We have downwardly revised our projection after PC sales contracted in Q410, compared with the same period of 2009, after strong growth in the first half of last year The computer hardware market’s 2011-

2015 CAGR is projected at 3.1% and market value could reach US$163.6bn by 2015

Market Trends

US PC sales slipped into negative y-o-y growth territory in the final quarter of 2010, dragging down the growth rate for the year as a whole The commercial refresh segment showed signs of vitality, with steady growth in replacement purchases, but consumers were spending less Shipments were down by around 5% compared with the same period of 2009, as holiday season sales failed to meet expectations

In 2011, BMI expects continued restraint in the consumer segment, due to intensifying competition for

PCs from tablets and smartphones, and a fall-off in netbook demand After double-digit growth in the first half of 2010, PC market growth had already slowed significantly in Q310, a period when consumer sales are usually boosted by back-to-school sales

Software Spending – Segments

2010

Source: BMI

The market appeared to be affected by uncertainty about job growth and the economic recovery, which led consumers to delay purchases Meanwhile, publicity about new model releases and form factors, such as tablets, may also have contributed to a ‘wait and see’ mentality Annualised shipments growth dropped to mid single-digits, compared with the double-digit rates seen earlier in the year

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

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

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

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

2015

The US addressable market for PCs and accessories is estimated by BMI at US$123.1bn in 2011,

with mid-single-digit growth compared with 2010 In H110, sales were boosted by a revival of the

business PC market, which was expected to gather pace in the second half of 2010 Business demand remained sluggish going into 2010, due to uncertainty about the economic recovery, but there was a boost from computer hardware tenders delayed from 2009 Migrations to Windows 7 was less of a driver of PC sales in H110 than had been hoped

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

Impact of Recession

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

according to market research firms Gartner and IDC

The downside to this was significant downwards pressure on prices, with consumers unwilling to pay big money and looking for ‘good enough’ solutions to their computing needs Lower prices were also driven from the supply side, with vendors competing fiercely due to the market slowdown, and the disruptive popularity of low-priced netbooks The strong response by consumers in this environment to netbooks and ultra-slim laptops ended up pushing prices of notebooks into the under US$500 range Average PC selling prices were estimated to have fallen by around 20% between 2008 and H109 However, prices were more stable in 2010

Drivers

Total PC sales were estimated at around 78mn units in 2011 One additional driver of increased sales and lower prices is the move of telecoms operators into the PC retail space With increasing mobile and fixed broadband penetration, notebooks and netbooks have become popular wireless connectivity options for consumers As in other markets, telecoms operators have emerged as significant distribution channels for

netbooks, which are offered to subscribers bundled with broadband service packages AT&T and

Verizon have moved quickly to offer these to subscribers for subsidised prices of as low as US$50

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

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

The continuing build-out of Wi-Fi networks in major cities is an important driver of demand for netbooks Studies have suggested a relatively greater demand in cities such as New York, San Francisco and

Boston, where Wi-Fi is relatively ubiquitous

Segments

Desktop shipments were estimated at around 26mn units in 2010 and could rise to 28mn by 2015 In 2010 commercial sales of desktops and notebooks were stronger after falling by a double-digit factor in 2009 due to the economic slowdown Commercial desktop purchases were also down, before stabilising in the second half of the year Desktop sales in both consumer and commercial segments and are expected to comprise less than one-quarter of the PC market by 2015

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

in 2010 Notebook sales were estimated at around 53mn units in 2010 and could pass 89mn by 2015 The popularity of netbooks was a big factor keeping notebook sales in positive territory during the recession

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

However the netbook growth trajectory flattened in 2010 as the price differential with fully featured notebooks became less significant Meanwhile, enhanced versions of netbooks with features such as larger screens and more powerful processors should further blur the line between the two categories The emergence of tablets has also undermined demand for netbooks At their peak, netbooks are estimated to have accounted for about 12% of notebook sales in the US in 2009, with estimated unit sales of more than 6mn

While the popularity of netbooks was well timed to help offset PC market stagnation during the global

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

A future industry trend is likely to be vendor concentration on ultra-thin or power-saving notebooks, which can potentially bridge the divide between netbooks and fully fledged notebooks Netbooks are also likely to be enhanced, with larger screen and hard-drive sizes

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

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

solutions and often include a Wi-FI option

Tablet Notebooks

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

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

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

inconvenient for watching videos or using the internet, but for whom a netbook is still too big or heavy The much-hyped iPad2 was due to be released in March 2011.Other vendors have followed Apple in releasing net tablet devices, which have a form factor between the size of a smartphone and a netbook

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

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

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

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

to experience increasing take-up in the business segment Some analysts forecast that tablet sales could overtake sales of netbooks within the next two to three years and be well ahead of desktops

As of the end of 2010, analysts had different views about whether tablets had significantly impacted on the US PC market However, it is projected that tablet sales could be equivalent to around 20% of the PC market in 2011 Moreover, PCs face a growing challenge not only from tablets but also other devices such

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

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

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

E-Readers

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

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

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

It is forecast the US software market will be worth US$154.6bn in 2011, with single-digit growth from

2010 2010 saw a stabilisation of the market, with pent-up demand as a result of the economic situation in 2008-2009, leading to many vendors reporting strong growth The recession led some companies to review IT budgets or look to defer systems updates and may have given additional momentum to the adoption of cloud computing In 2010, several private and public sector organisations announced cloud computing strategies and launched pilot projects

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

to dramatically increase, presenting a challenge to traditional desktop-centric software models In Q410,

US companies migrating to new cloud solutions included office supply retail group Staples

Despite being an advanced market, it is still estimated that around 20% of software used in the US is illegal or pirated According to the lobbying group the Business Software Association, total losses from illegal software in the US market totalled about US$9bn in 2008 The industry continues to push for

Operating Systems

BMI estimates that operating systems and storage software account for around 10% of the US software

market Growing PC sales have driven the share up from around 5% a few years ago PCs account for about 40% of the operating system segment, with servers, mainframes and storage devices making up the rest

Migrations to Microsoft’s Windows 7 operating system were the most significant event for Microsoft since the launch of Windows 95, and should continue to support software sales in 2011 Microsoft’s previous operating system Windows Vista ran into problems when business users found that many of their business applications could not run on the Vista operating system There were also complaints from both business and household users about performance defects, generally due to the large amount of processing power and memory required by Vista The Windows 7 launch went much more smoothly, thanks to closer cooperation in the pre-launch period between Microsoft and other players in the software value chain, including PC vendors and end-users

Microsoft has a lot riding on the new release, given the continuing challenge from open source The company has taken a couple of steps to fix perceived problems with Vista On the compatibility problem, Microsoft has tackled this with a free extension to Windows 7 called XP Mode This allows users to run Windows XP applications on Windows 7 According to estimates, as many as one in five Vista users had found that they could not run XP applications on the new operating system Secondly, Windows 7 will use less processing power and memory than Windows Vista

The new system has attracted more support from businesses than Windows Vista did, largely because Windows XP is now getting old Businesses that declined to upgrade from XP to Vista, due to reported problems with the latter, will now go straight to Windows 7 Microsoft will still offer reduced support for

XP until 2015, but many hardware manufacturers will start to wind down their support from about 2012 This, as much as the lack of support from Microsoft, will be the factor that drives business upgrades to Windows 7 Microsoft also argues that Windows 7 can help businesses to save costs, enabling IT

departments to be run more efficiently

Windows 7 is better suited to virtualisation than XP or Vista Virtualisation looks set to become an important trend in IT in the next few years and allows businesses to simplify the management of desktop PCs by running desktop applications and storing user data within the datacentre Given the current

economic climate, however, IT directors will need to justify any upgrade in terms of cost savings

Open Source

The economic downturn was projected to add to the trends that are driving adoption of open source

source software However, many customers have by now made a realistic assessment of the advantages and disadvantages of open source and have adopted a practical approach

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

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

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

a support infrastructure Customers are increasingly looking to vendors to offer support for open source

software BMI expects this trend to continue with the development of more support infrastructure for the

most important open source applications

Most netbook computers originally came with open source Linux operating systems due to the heavy systems requirement of Windows Vista Netbooks were therefore seen as a threat to Microsoft’s revenues However, Microsoft has fought back by allowing netbooks to ship Windows XP, bringing its market share back up, and in Q410 the company was preparing to release a Windows 7-based tablet

Business Software

Business software is estimated to account for around 50% of total US software revenues Spending on applications such as enterprise resource planning (ERP), customer relationship management (CRM), financial management systems and information software is perhaps around 60% of the sub-category total Middleware, such as database management systems and systems management tools, accounts for around 40%

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

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

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

Software is often seen as an investment that helps to save costs and that will make an impact on the

bottom line However, over BMI’s five-year forecast period, more investment can be expected in utility

application areas such as ERP, CRM and business intelligence, security and supply chain management are increasingly being delivered this way

Surveys indicate that an average ERP implementation for manufacturing and distribution companies takes

around 19-20 months, with an average sales cycle of around four months A survey by Panorama

Consulting Group found that average total cost of ownership was in the region of US$8.6mn

Companies spent around 23% of the total implementation budget on business implementation costs, including third-party consulting

Cloud Computing And SaaS

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

applications Indeed, some vendors are promoting the idea of Cloud 2, to reerence integration of cloud computing with devices such as the iPad, iPhone, BlackBerry and smartphones

However, a combination of enterprise objectives such as cost reduction and greater efficiency should combine to drive adoption of cloud services in 2011 The biggest software opportunities will be in non-critical file storage, or customer-facing applications such as CRM Opportunities should occur across economic sectors as awareness of cloud computing grows In June 2010, a survey by industry

association CompTia found that 14% of law firms planned to invest in cloud computing over the next year At the same time, the survey found that only 30% of attorneys had any awareness of cloud

computing, indicating potential for further penetration as awareness increases

Sales in the business SaaS segment by vendors such as Google and Salesforce.com continued to grow

during the economic downturn SaaS has become more accepted as smaller businesses have increasingly had to meet performance, visibility and compliance standards previously expected more of larger

companies SaaS potentially enables these smaller companies to meet these needs cost-effectively,

enabling them to compete and offer better service BMI estimates that spending on SaaS applications by

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

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

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

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

Meanwhile, an increasing number of government organisations at both federal and state level are rolling

Services

IT services spending is expected to grow by 6% in 2011, with faster growth building on a stabilisation of the market in the previous year Spending on IT services is quite closely correlated with GDP growth,

which is bad news in a recession but better news in a recovery In 2010 vendors such as Accenture

reported building momentum in revenues and unlike in 2010, when hardware refreshes drove IT

spending, in 2011 services is expected to be the fastest-growing segment

Market Trends

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

stabilisation after a solid recovery in 2010 (compared with 2009 ) Infosys and IBM both cut their

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

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

Segments

The most severely hit area during the economic slowdown was softer project-type spending such as consulting and software development, and it is project spending which is expected to show strongest growth in 2011 Contractors were cut and hiring frozen during the economic slowdown as customers cut back on short-term spending particularly in areas such as consulting and software development These therefore were always likely to bounce back strongest in 2010-2011

The economic situation meant reduced spending in some key IT services verticals that had driven IT spending Vendors exposed to the financial sector, particularly major Indian financial services vendors

such as Wipro were vulnerable, given the financial crisis Many vendors responded by trying to diversify

away from financial services to other verticals and by targeting resources at markets outside the US

Federal and local governments are among verticals where strong interest in cloud services is being

expressed Market research firm INPUT has forecast that the state and local government market for

vendor-supplied IT systems could grow to US$60.1bn by 2014, equivalent to around 30% of the IT Services market Software products account for around 15% of this projected spend Education and Healthcare are among areas with tremendous potential at local level

Even departments such as the Department of Defense have a long-standing interest in private cloud-type

agency in question However, such arrangements are most likely to apply in the case on ‘less security sensitive’ information related to healthcare provision and recruitment activities

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

companies come under cost pressures, some may use outsourcing as a way to reduce costs However, the main beneficiaries are likely to be service providers in major global destinations such as India and the Philippines The same goes for offshore software development

Custom software development has been moving to lower cost countries for many years India remains the main destination but faces competition from other suppliers such as Eastern European countries, Ireland, Israel, Russia and China Spending on application development tools has grown substantially in the past decade

Industry Developments

Government Cloud Strategies

In December 2010, the US General Services Administration (GSA) became the first federal agency to

move email to a cloud-based system for its entire organisation The GSA picked web-based Google Apps

to replace IBM Lotus Notes as the provider of email and collaboration software for its 17,000 full-time

employees and contractors As the first transition of its kind, the GSA’s move is seen as a landmark that could influence other agencies who have previously held back from similar moves due to security or service concerns

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

at least studying cloud strategies In October 2010, New York City announced an initiative to bring Microsoft’s BPOS (Business Productivity Online Suite) to around 30,000 city employees, while the City

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

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

management

Federal IT Spending

In 2010, the Obama administration called on federal agencies to develop strategies to simplify and where possible combine often sprawling IT operations so as to reduce costs Guidelines published in 2010 by the Office of Management and Budget asked agencies to initiate datacentre consolidation programs to help cut US$3bn from the federal budget The move was also seen as a way to reduce the government’s real estate holdings, which includes 2,000 federal datacentres

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

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

In full-year 2009, total IT spending including all federal IT investment was measured at US$74.2bn, up

by 1.99% on the previous year’s total of US$72.8bn A total of 7,409 investments were made, with 781 investments made by federal agencies classified as ‘major’ Major investments accounted for US$38.6bn

of the total

The defence department was the largest spending department again, with US$33.0bn spent, down from US$37.0 the previous year The Department of Homeland Security ranked second with US$6.2bn, up from US$5.3bn the previous year Health and Human Services spent US$5.9bn, up from US$5.6bn

In 2010, federal IT spending is set to rise to US$78.4bn Defence is again expected to spend the most, with a budget of US$33.4bn However, the largest budgeted increase is for the Department of Commerce, where IT spending is set to increase from US$3.6bn to US$6.4bn in 2010

Healthcare IT

One significant growth area for the US IT market during BMI’s five-year forecast period is expected to

be healthcare IT The stimulus bill, which requires the use of electronic healthcare records by doctors by

2015 is expected to be a major driver of investment in this area Market research firm BCC has forecast

that US healthcare IT spending could reach as much as US$35bn by 2011

Accountability

The IT Dashboard has been launched to monitor IT projects across the federal government This reflects pressure for cost cutting and increased efficiency in government, as a result of the difficult financial

climate, rising deficit and the ambitious social programmes of the Obama administration The dashboard

is intended to help provide information to improve decision making related to IT projects, from

accountability to personnel and contracting The information will be used to decide which projects should

be cancelled

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

Industry Forecast Scenario

US spending on IT products and services is forecast to reach US$537bn in 2011 and US$653bn by 2015

BMI has downwardly revised its forecast after PC sales entered negative y-o-y growth territory in Q410,

after strong growth in the first half of last year The commercial segment showed signs of vitality, with steady growth in replacement purchases, but consumers were spending less

In 2011, an increase in project spending is expected A major demand driver will be private and public sector organisations looking for help to utilise efficiencies from cloud computing models such as

Software-as-a-Service and Infrastructure-as-a-Service 2010 saw a number of government agencies at federal and local level launch cloud strategies and pilot programs

Market Trends

US PC sales slowed in H210 after strong growth in H110, but BMI estimated that the addressable market

was about78mn units In Q110, sales were boosted by a revival of the business PC market, which is expected to gather pace in H210 However, many businesses remained reluctant to launch major new projects Others had contingency plans to scale back investments if necessary, so, in the short term, the market will depend on business confidence

In 2011 there are expected to be many more contracts for provision of cloud services, following on contracts awarded in 2011 by the cities of New York and Los Angeles, and the General Services

Administration (GSA) of the federal government The recession may have had a lasting impact on the IT market by encouraging consideration of cloud computing models such as SaaS In light of these and other changes, major vendors have also adjusted their competitive strategies, with the old desktop-centric model of software delivery appearing increasingly outdated

Overall moderate growth in budgets is expected in 2011, with the market stabilising following the

economic slowdown and rebound in 2010 With continuing fiscal retrenchment in the government sector, now translating into cuts in real terms, private sector growth is expected to be stronger in 2011

In our core forecast scenario, IT market growth will advance at a CAGR of 5% over our five-year forecast period Key drivers will include growing mobile and fixed broadband penetration, product innovation and new form factors such as tablets, technology innovation such as GPS technology and services, and

economic recovery In 2011, PC vendors will focus on tablet notebooks, which are projected to be a growth area as more vendors launch rival models and will appeal to consumers who find that smartphones