United states information technology report q2 2012

However, there will be opportunities for expansion in this market, and one major possibility will be demand from private and public sector organisations aiming to use cloud computing ser

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INFORMATION TECHNOLOGY REPORT Q2 2012

INCLUDES 5-YEAR FORECASTS TO 2016

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: April 2012

CONTENTS

Executive Summary 5

SWOT Analysis 7

US IT Sector SWOT 7

US Political SWOT 7

US Economic SWOT 8

US Business Environment SWOT 8

IT Risk/Reward Ratings 9

Table: Regional IT Risk/Reward Ratings 12

Americas IT Markets Overview 13

IT Penetration 13

Sectors And Verticals 17

United States Market Overview 21

Government Authorities 21

Overview 22

Hardware 24

Software 29

Services 32

Industry Developments 34

Industry Forecast 37

Table: USA IT Sector – Historical Data & Forecasts (US$mn Unless Otherwise Stated) 40

Industry Forecast Internet 41

Table: Telecoms Sector – Internet – Historical Data & Forecasts 41

Macroeconomic Forecast 43

Table: United States – GDP By Expenditure, Real Growth % 47

Competitive Landscape 48

Hardware 48

Tablets 49

Software 52

Company Profiles 58

Hewlett-Packard 58

Dell 64

Table: Selected Dell Mergers And Acquisitions 69

Microsoft Corporation 70

IBM 75

Country Snapshot: US Demographic Data 80

Section 1: Population 80

Table: Demographic Indicators, 2005-2030 80

Table: Education, 2002-2005 81

Table: Vital Statistics, 2005-2030 81

Section 3: Labour Market And Spending Power 82

Table: Employment Indicators, 2001-2006 82

Table: Consumer Expenditure, 2000-2012 (US$) 82

Table: Average Annual Wages, 2000-2012 (US$) 83

BMI Methodology 84

How We Generate Our Industry Forecasts 84

Transport Industry 84

Sources 85

Executive Summary

Market Overview

BMI View:USA IT spending is expected to reach US$558bn in 2012, up 5.5%, with BMI upwardly

revising its forecast due to macroeconomic factors Overall moderate growth in budgets is expected in

2012, but much depends on the economic situation Despite a drive to cut expenses across government, many public sector organisations have appeared willing to continue to spend on IT US businesses remain cautious, but there is pent-up demand from projects delayed as a result of the economic situation and cloud computing is expected to be increasingly important

Headline Expenditure Projections

Computer hardware sales: US$142bn in 2011 to US$147bn in 2012, +3.6% in US dollar terms

Forecast in US dollar terms upwardly revised due to macroeconomic factors, but parts shortages could

restrain growth in H112

Software sales: US$153bn in 2011 to US$163bn in 2012, +6.4% in US dollar terms Forecast in US dollar terms upwardly revised due to analyst modification, with more investment in utility software and

serviced-orientated architectures rather than traditionally packaged PC software

IT services sales: US$235bn in 2011 to US$249bn in 2012, +6.0% in US dollar terms Forecast in US dollar terms upwardly revised due to analyst modification as spending on IT services is quite closely

correlated with GDP growth

Risk/Reward Ratings: The USA's score was 76.25 out of 100.0 The USA ranks first in our

latest Americas RRR table, ahead of Canada, as well as Latin American giants such as Brazil and Mexico The country ranking was secured by its global highest Industry Rewards score of 82.50, while its

rating was also boosted a relatively high Country Rewards score of 90.00

Key Trends & Developments

ƒ IT vendors will be concerned when it comes to the effect of the ongoing US federal deficit issue and the failure of politicians to agree a deficit reduction programme If automatic federal spending cuts kick in during the next fiscal year, this could hit IT projects The November 2012 elections will also create uncertainty about the trajectory of future government IT spending

Administration (GSA) of the federal government The recession may have had a lasting effect on the IT market by encouraging consideration of cloud computing models such as SaaS

US PC sales are forecast to report single-digit growth in 2012, after an annualised contraction in Q411, closing off a difficult year The market slowdown was due in part to base effects, but a contributory factor was disappointing sales in the consumer segment, particularly notebooks Meanwhile, a shortage of hard-disk drives resulting from floods in Thailand is forecast to restrain market growth in H112, with faster growth likely in H212

SWOT Analysis

US IT Sector SWOT

ƒ Despite the challenging trading conditions, overall IT spending is still expected to remain in positive growth territory

short-term spending, particularly in areas such as consulting and software development

data centre consolidation, and cloud computing

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

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

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

technology could have another hard year

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

US Political SWOT

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

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

candidates in the 2008 presidential election, including President Barack Obama's), and the widespread dissatisfaction of the voting public, may encourage both major parties to experiment with more consensual approaches to certain policy areas

Though we are not optimistic, the ongoing budget debates will provide a pertinent test of the degree to which bipartisan cooperation is possible

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

US Economic SWOT

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

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

competitive dollar exchange rate, could boost export growth and help restore balance

to the US's external imbalances

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

US Business Environment SWOT

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)

congested roads and airways

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

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

enterprise at risk

IT Risk/Reward Ratings

BMI's Americas IT Risk/Reward Ratings (RRRs) compare the potential of a selection of the region's

markets over our forecast period to 2016 The ratings reflect our consideration of political and economic risks, as well as risks associated specifically with IT intellectual property rights protection and the

implementation of government information and communications technology (ICT) projects

The US retains its top position in our regional rankings as by far the largest IT market in the region and the world, accounting for about 25% of global IT spending In the 'Limits of potential returns' arena, Industry Rewards has fallen marginally while Country Rewards has not changed This reflects our view that the relatively strong growth witnessed in 2011 will slow slightly through 2012, while there has been little change to the demography of the country

The US is likely to retain its position at the top of our table through 2012, given the sheer size and

advanced nature of its IT market However, in 2012, it is expected that the IT sector as a % of GDP will drop 0.1pps, but return to its current level in 2013 (0.6%) We believe this year will be a stormy one for

IT firms, with economic uncertainty affecting IT investments

However, there will be opportunities for expansion in this market, and one major possibility will be demand from private and public sector organisations aiming to use cloud computing services In 2012 further contracts for cloud computing provision are likely to be signed, while the rate of growth in

traditional big-spending IT verticals such as financial services, retail and manufacturing will depend on confidence in a sustainable economic recovery

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 It is likely to be the second fastest

growing market worldwide, second only to China

Canada is in second place for another quarter in our IT RRRs The country maintains this position from Q112 The country's Industry Rewards score fell this quarter, however, as we predict the IT market to deteriorate over the course of the year The Canadian IT market revenues expanded by 6% in 2011, but

we believe this number will drop to just 0.2% in 2012, as the country struggles to bolster demand

However, there may be growth in IT expenditure driven by Canada's broadband plan One key initiative is Broadband Canada, which has a mandate to expand broadband coverage to underserved areas Further,

beverage still have plenty of potential for growth Growing interest in cloud computing is expected, with Canada currently lagging the US and some other advanced markets

Out of the Latin American countries, Brazil is the highest ranked IT market We expect Brazil's growth trajectory to stay strong throughout 2012 and beyond as the government continues to support the

widespread development of IT infrastructure, particularly in the telecoms sector The Brazilian

Development Bank (BNDES) has made available a number of loans to telecoms firms looking to expand

into less developed regions of the country and as a result equipment vendors have capitalised on this Further, the country will continue to invest in the modernisation of services ahead of the World Cup in

2014 and Olympics in 2016 This will buoy up expenditure on IT services

Mexico follows Brazil, and has enjoyed minor rises in Industry Rewards this quarter This is the result of strong H211 sales, although these remain less than half the size of Brazil's However, we believe that Mexican expenditure on IT is to grow at a double-digit compound annual growth rate (CAGR) in our forecast period to 2016

Brazil and Mexico together account for around 75% of PC sales in Latin America Brazil's much bigger market is already estimated to be the fifth largest PC market in the world Despite this, 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

Expenditure on IT projects in Brazil is likely to be very high over the coming years, as the country promotes its national broadband plan, the PNBL, and also develops mobile network in more remote areas Further, the promotion of e-government services is likely to drive growth in business for technology firms

in the years to come

Another driver of growth in the Latin American IT market is outsourcing Given strong trade links between Mexico and the US, Mexico stands to benefit from this growth, as seen in cities such as

Monterrey However, due to the escalating drug-related violence in the city, many companies are

increasingly less willing to operate there While we continue to believe it will remain a hub for

outsourcing, we believe these problems may impact on the potential for stronger growth in the market However, Brazil is also not without problems, with issues such as inequality and unnecessary bureaucracy hindering rapid development of services

Chile takes fifth place once again in our rankings Chile experienced gains in its Country Risk and

Country Rewards scores, while there was no change in industry outlook The country has an excellent track record of fiscal discipline, although it may return to fiscal deficit in 2012 on the back of falls in

believe the counter-cyclical policies to stimulate private consumption in the country will continue to have positive benefits to the IT industry

President Sebastián Piñera highlighted the importance of the information society in Chile in November

2012, when he underlined his 'Estrategia Digital' for the years ahead Chile's fifth place in our table reflects its status as one of the most developed markets in the region Chilean IT spending is projected to grow at a CAGR of 11% until 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 2010 earthquake diverted consumer funds from technology to other priorities, but reconstruction offers

opportunities for government agencies to advance IT modernisation

However, PC penetration is still relatively low – below 20% Chile is propelled to a relatively high position in our RRRs due to the fact that it has the highest Country Risk rating of any of the Latin

American states Despite this, there is notable room for expansion

Peru is next in our rankings, but has suffered falls to its Country Rewards score The market has a free trade agreement with the US, which is likely to lead to an increase in demand for IT in the country The

IT market represents approximately 0.8% of GDP, with the market worth US$1.4bn in 2011 CAGR is high – 11% – and there is huge potential for growth in the market

Argentina is seventh in our rankings, but like Peru, suffered falls in our Q212 rankings This was due to a reduction in Industry Rewards scores, the result of a decrease in projected CAGR from 15% last quarter

to 11% from 2011-2015 There are strong doubts that the expansionary fiscal policy eagerly pursued by the government is sustainable This may pose a serious threat to public expenditure on IT over the coming years, despite government tenders appearing to dominate the market in 2012

Most IT expenditure in Argentina happens in Buenos Aires, where approximately one quarter of

computer sales take place IT spending is driven by the expanding availability of credit, increasing broadband penetration and social policies to promote the information society However, escalating inflation is causing costs to rise, deterring investors and raising doubt over the sustainability of the government's profligate spending habits

In eighth place is Colombia, which experienced a marginal rise in Industry Rewards, but a larger fall in Country Rewards, which overall brings its scores down The country had been enjoying strong growth in consumer electronics sales, but this is beginning to slow down While we expect the Colombian IT market to be worth US$3bn in 2012, lower levels of investment in the sector when compared to its peers puts Colombia nearer the bottom of our RRRs

However, we believe the market has great growth potential, and the economy continues to grow strongly With PC penetration only at 10% of the population, there exist great opportunities to expand on this

There are also growth opportunities through government programmes, and it is clear that these are a priority for the Santos administration The president has outlined objectives to expand infrastructure in the country, promoting the network rollout while increasing access to the internet The government aims to triple the number of municipalities from 200 to 700 by 2014, and increase internet connections from 2.2mn to 8.8mn by the same year This growth will have future benefits for the Colombian IT market and

we would expect to see the country climb in our table over the coming years

At the bottom of the ratings is Venezuela, and unfortunately we do not expect the Venezuelan market to enjoy anywhere near the same growth as we predict for Colombia The country suffers severe balance of payments problems, with rising concern over government appropriation and potential devaluation of the fixed exchange rate a mounting possibility While the government is doing its best to avoid capital flight

in attempts to avoid this devaluation, the financial account deficit continues to grow and poses an ever

greater threat to the stability of the bolívar This serves to deter investors from Venezuela, and the IT

market will be reliant on public programmes to sustain it We believe there will be flat or negative growth over our forecast period, despite improvements in PC penetration, which will arise from programmes to promote low-cost PCs for low income households

Table: Regional IT Risk/Reward Ratings

Industry Rewards

Country

Industry Risks

Country

Regional Ranking

Americas IT Markets Overview

The fastest growth in internet penetration is expected in Peru, while Brazil and Colombia will also see a solid advance Dial-up technology is still the dominant access method However, the number of

broadband subscribers continues to increase, with progress expected in all markets Brazil's National Broadband Plan announced in May 2010 should help to drive future growth in demand for IT products and services

Canada was estimated to have the region's

highest broadband penetration in 2011, of

42.8%, which should rise to 58.5% by

2015 Broadband penetration in the USwas

estimated at 28.1% in 2010, and is forecast

to reach 32.5% by 2015

Meanwhile, in Latin American markets,

broadband penetration is on course to

reach as high as 23.1% in Argentina and

18.7% in Mexico, and to pass 10% in

Brazil, Chile, Colombia and Venezuela

within our forecast period However, much

broadband penetration growth is now

being driven by mobile broadband users, thanks to the continued expansion of 3G mobile services across the region

Across Latin America, low average incomes and low PC penetration rates restrain information society development, and thousands of towns and villages still lack access to information communication

technology (ICT) While some cities and regions stand out, there is a general pattern of underdeveloped

Broadband Penetration

Per 100 Population

e/f = estimate/forecast Source: BMI

However, government initiatives and growing PC affordability are now driving improvements on many ICT indicators In Brazil, a National Broadband Plan announced in May 2010, and modernisation ahead

of Brazil's hosting of the 2014 FIFA World Cup and 2016 Summer Olympics, should help to drive ICT utilisation

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

to progress from a current rate of 25% to at least 32% in 2015 A similar situation prevails in Chile and Mexico, where PC penetration is estimated to be below 25% Colombia's PC penetration reached 12.8%

as of mid-2009, surpassing the government's previous 2010 target of 10.8% BMI estimates PC

penetration in Peru could reach 25% within the forecast period, from less than 20% currently

ICT initiatives are central to the development plans of many regional governments In 2010, the

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

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

Meanwhile, Colombia's Zona Clic programme is expected to involve the requisition of as many as 90,000 computers over the next few years

Most governments also have a particular focus on promoting IT use by small and medium-sized

enterprises (SMEs), as Latin American SMEs typically invest less in IT than comparable companies elsewhere A recent study by the Getulio Vargas Foundation found that Brazilian companies on average spent around 5.5% of revenues on IT investments, compared with 7% globally Studies in Chile have shown that around a quarter of companies have no computers

Chile's state development agency, the Corporación de Fomento de la Producción de Chile (CORFO), has launched a programme to provide funding for projects that implement ICT for local SMEs, and similar initiatives have been seen in Mexico and elsewhere

Market Growth And Drivers

Across the Americas, in 2011, a greater

range of financing options for consumers

and more flexible terms from retailers will

be the main drivers of consumer IT

spending growth Key IT market drivers

will include growing mobile and fixed

broadband penetration, product innovation

such as feature-rich netbooks, technology

innovation such as 3G technology and

services, and economic recovery

However, in Canada and the United States

consumers remain in a phase of

retrenchment thanks to the often stretched

state of household balance sheets

Businesses are expected to increase their

IT investments in 2011 thanks to a general

economic recovery and improved credit

availability There will be a boost from

tenders previously delayed as a result of

the economic situation Meanwhile,

improved bank profitability should support

more demand from this key IT-spending

vertical Migrations to Microsoft's

Windows 7 operating system, and new

Intel core technology, should help to

trigger new cycles of hardware upgrades,

but in the US and Canada, some of this

pent-up demand may not be realised in

2011 due to doubts about the strength of the economic recovery Across the region, small and sized enterprises (SMEs) have great potential to drive enterprise application spending over the next few years Brazil still has an estimated 400,000 small businesses that do not have more than a very basic IT system In the US market, too, in early 2011, there were indications of improved SME confidence

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

Brazilian government's US$344mn modernisation strategy should mean enhanced IT spending in 2011 and over the next few years

Some structural risks pertain to our forecast scenario Many Latin American markets, from Argentina to Mexico, are characterised by significant income and geographical disparities Mexico's underpenetrated

south east and Pacific regions are expected to offer growth opportunities over BMI's five-year forecast

period, particularly in the south east The Argentine market is dominated by the capital Buenos Aires, which has higher per capita income and

education levels compared with the rest of

the country

Brazil's IT market also has a distinct

regional structure, with most spending

accounted for by the south east region,

which includes São Paulo as well as Rio de

Janeiro São Paulo alone accounts for

around 35% of spending and Rio de

Janeiro, Espírito Santo and Minas Gerais

for 25% Brazil remains on course to

become one of the top four computer

markets as an expanding economy lifts

millions into a middle class The

fundamentals of rising computer

penetration and growing affordability should keep the market on an upward path

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

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

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

Aside from regional trends, particular factors are forecast to market demand in individual markets Infrastructure investments following 2009's award of the 2016 Olympic Games to Rio de Janeiro is expected to drive new Brazilian market spending on IT systems and solutions, as happened in South Africa when it hosted the 2010 FIFA World Cup In Venezuela, the steep devaluation of the bolívar for non-essential imports such as computers will depress spending as consumers grapple with runaway

IT Markets Compound Growth

2011e-2015f (%)

e/f = estimate/forecast Source: BMI

The largest IT market in the region is, vastly, the US, with spending estimated at US$529.3bn in 2011, while Canada is a distant second with US$44.7bn Brazil is estimated at US$27.8bn in 2011, making it the largest IT market in the Latin American region, and a major global market in its own right Mexico is the second largest Latin American market with an estimated value in 2011 of US$14.4bn Argentina and Brazil are set to be the fastest-growing markets with projected 2011-2015 compound growth of 78% and 66% respectively This compares with a compound growth rate for the United States over the same period

of 22% The slowest growing market is forecast to be Venezuela, with a -3% growth rate in US dollar terms

Sectors And Verticals

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

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

increase its share of the IT spend by 2015

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

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

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

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

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

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

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

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

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

vendors reporting a sharp drop in 2010 In 2010, Canadian netbook sales were down by around 25% compared with the previous year One additional pan-regional driver both of increased notebook sales and

of lower prices is the move of telecoms operators into the PC retail space

Software is estimated to account for 12-19% of IT spending in Latin American markets covered by BMI,

compared with 29% in the United States Despite the economic downturn, there are expected to be opportunities for software vendors in most markets Across the region, companies are investing

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

in the Argentine market

Some markets, particularly Venezuela, will be influenced by their governments' drives to promote open source software Following criticism of the initial programme, the second phase of Argentina's Mi PC was widened to offer consumers the option of purchasing PCs with Linux operating systems In the US the key issue and precondition for the more widespread adoption of open source will be the development

of a support infrastructure Customers are increasingly looking to vendors to offer support for

open-source software BMI expects this trend to continue with the development of more support infrastructure

for the most important open source applications

In general, enterprise resource planning (ERP) and other e-business products still dominate the Latin American enterprise software market, but vendors are also looking to other areas where faster growth is possible In Argentina, ERP solutions are estimated to represent more than 80% of the enterprise software total Customer relationship management (CRM), the next largest category, is still less than 10% of the total Demand for ERP solutions will remain robust in the near term due to the large potential market represented by SMEs in many parts of the country

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

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

Software-as-a-service (SaaS) has enjoyed steady growth in most markets, and improved broadband infrastructure will assist the popularisation of the rented software model Brazil is thought to be one of the most promising regional markets for the SaaS model, with growing demand in sectors such as retail, finance and healthcare There are estimates that around 50% of Mexico's large companies have conducted cloud pilots In Chile, too, vendors have reported that large companies have been the most enthusiastic early adopters of cloud solutions

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

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

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

The IT services segment accounts for 15% to 40% of spending in the Latin American markets covered by

BMI, compared with above 40% in both the United States and Canada The global economic crisis had an

impact on projects in some verticals and led to negative spending growth in some markets such as

Mexico Much will depend on the speed of the US and global recovery, with the likelihood of budget cuts increasing the longer the slowdown lasts

The IT services has become one of the most dynamic drivers of IT sector spending in the region, and this has attracted greater investment from international vendors The increasing number of multinational corporations operating in markets such as Mexico, Chile and Brazil is in itself an important driver for spending, while local companies are trying to use computing resources more effectively and integrate investments made in hardware and software

In more developed markets such as the US and Canada, a major demand driver going forward will be organisations looking for help to utilise efficiencies from cloud computing models such as SaaS and infrastructure-as-a-service In the US in 2011 there are expected to be many more contracts for provision

of cloud services, following on contracts awarded in 2011 by the cities of New York and Los Angeles

Outsourcing is also becoming an important spur to growth for the IT services sector, as several Latin American markets try to consolidate their reputations as regional offshoring hubs By some estimates, outsourcing may be equivalent to as much as 30% of IT spending in Brazil, with demand growing around 10% each year One driver for many markets will be ambitions to develop capabilities in the business process outsourcing (BPO) area and capture a larger global market share Chile's development as an offshoring location will attract more investment in IT services, with sectors such as retail, distribution, financial services, telecoms and healthcare all offering opportunities

Market Structure (% Of Total IT Market)

e/f = estimate/forecast Source: BMI

United States Market Overview

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

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

NTIA itself has several sub-bodies including:

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

ƒ The Office of Policy Analysis and Development

ƒ The Office of Telecommunications and Information Appliances (OTIA)

Major programmes run by the OTIA include:

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

ƒ A programme to drive the transition to digital TV

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

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

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

Overview

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

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

BMI estimated US IT spending at around

US$529bin 2011 As a mature market, BMI

assumes that IT services accounts for

around 44% of US IT spending, compared

with 27% for hardware and 29% for

software

Each segment comprises several

sub-segments In the hardware segment,

notebook computers now account for around

58% of sales, and this share is expected to

rise to 81% by 2016, pushing desktops

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 revenue Middleware, including systems

management and database management software, accounts for between 15-20% of spending Operating systems of PCs, servers, and mainframes, as well as storage systems, account for around 20% of

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

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

PC Spending – Segments

2009

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 value will grow about 3.7% in 2012 We

have upwardly revised our figures due to macroeconomic factors and expect a modest rebound after a disappointing year for PC sales in 2011 was closed out with negative annualised growth in

Q411 The computer hardware market's 2012-2016 CAGR is projected at 3.1% and the market value could reach US$165bn by 2016

Market Trends

PC shipments are expected to report stronger single-digit growth in 2012 However due to factors such as parts shortages, resulting from the Thailand floods in H211, the full recovery may be deferred until H212 The shortages of hard-disk drives, of which Thailand is the world's premier manufacturer, had a relatively limited contribution to the sluggish market in Q411, but an impact is expected to be felt more in H212

Software Spending – Segments

2010

Source: BMI

PC sales endured a year of overall stagnation in 2011, although there were growth areas such as tablets The market continued to contract in H111 y-o-y and remained flat in Q311 In Q412, vendors reported a further annualised dip in shipments

A number of factors dragged down the US PC market in H211, including the sluggish economic recovery and competition from other form factors, particularly tablets Vendors also pointed to a lack of

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

at least manage positive growth in Q311 in contrast to negative growth in Canada

For much of 2011, demand was restrained in consumer and commercial segments Sales had dipped sharply in Q111, after having entered negative growth territory in the final quarter of 2010 Shipments were down by around 8% compared with the same period of the previous year The weak performance was in contrast to the momentum shown during the market recovery of the three quarters of 2010

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

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

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

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

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

In 2012, BMI expects single-digit overall PC market growth There should be a pick-up in H212,

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

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

The stagnant growth in 2011, which began with a PC market contraction in Q410, halted the robust growth trend previously established 2010 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

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

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

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

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

sales of around 83mn units, up from around 69mn in 2009

The US addressable market for PCs and accessories is estimated by BMI at US$122.5bn in 2011,

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

business PC market, which is expected to gather pace in 2011 with signs of an improvement in SME confidence Business demand remained sluggish going into 2010, due to uncertainty about the economic recovery, but there was a boost from computer hardware tenders delayed from 2009 Migrations to Windows 7 was less of a driver of PC sales in H110 than had been hoped

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

The sluggish economic situation has created significant downwards pressure on prices, with consumers unwilling to pay big money and looking for 'good enough' solutions to their computing needs Lower prices have also been driven from the supply side, with vendors competing fiercely due to the market slowdown, and the disruptive popularity of low-priced netbooks During the recession in 2008-2009 the strong response by consumers in this environment to netbooks and ultra-slim laptops ended up pushing prices of notebooks into the under US$500 range Average PC selling prices were estimated to have fallen

by around 20% between 2008 and H109 However, prices were more stable in 2010

Drivers

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

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

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 more than 28mn by

2016 In 2010 commercial sales of desktops and notebooks were stronger after falling by a double-digit factor in 2009 due to the economic slowdown Commercial desktop purchases were also down, before stabilising in the second half of the year Desktop sales in consumer and commercial segments and are expected to comprise around one-quarter of the PC market by 2016

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

in 2010 Notebook sales were estimated at around 53mn units in 2010 and could pass 88mn by 2016 The popularity of netbooks was a big factor keeping notebook sales in positive territory during the recession

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

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

While the popularity of netbooks was well timed to help offset PC market stagnation during the global economic slowdown, some vendors expressed concerns that the cheaper portable computers would erode

margins for the industry The recession boosted the fortunes of lower priced Taiwanese vendor Acer in

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

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

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

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

solutions and often include a Wi-FI option

Tablet Notebooks

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

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

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

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

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

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

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

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

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

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

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

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

projects.Over BMI's five-year forecast period, the number of cloud computing contracts open to vendors

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

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

such as office supply retail group Staples

Despite being an advanced market, it is still estimated that around 20% of software used in the US is illegal or pirated According to the lobbying group the Business Software Association, total losses from illegal software in the US market totalled about US$9bn in 2008 The industry continues to push for stiffer penalties Legal history was made in 2009 when a 39-year-old woman received a six-month jail sentence in federal prison for selling illegal software

Operating Systems

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

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 Windows 7 attracted more support from businesses than the vendor's previous operating system Windows Vista did, largely because Windows XP is now getting old Businesses that declined to upgrade from XP to Vista, due to reported problems with the latter, will now go straight to Windows 7 Microsoft will still offer reduced support for XP until 2015, but many hardware manufacturers will start to wind down their support from about 2012 This, as much as the lack of support from Microsoft, has been among the factors

driving business upgrades to Windows 7 Microsoft also argues that Windows 7 can help businesses to save costs, enabling IT departments to be run more efficiently

Windows 7 is better suited to virtualisation than XP or Vista Virtualisation looks set to become an important trend in IT in the next few years and allows businesses to simplify the management of desktop PCs by running desktop applications and storing user data within the data centre Given the current economic climate however, IT directors will need to justify any upgrade in terms of cost savings

Open Source

The economic downturn was projected to add to the trends that are driving adoption of open-source software The desire to make savings has led some businesses and customers to look more closely at open-source software However, many customers have by now made a realistic assessment of the

advantages and disadvantages of open source and have adopted a practical approach

Interest in open source is growing in the public sector An increasing number of government IT managers and service providers are looking at open-source software stacks as part of a drive to consolidate data centres Virtualisation has become a major trend in the data centre, and open-source virtual machine products are becoming popular Meanwhile, a number of open-source tools are already widely deployed across government

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

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

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

most important open-source applications

Most netbook computers originally came with open-source Linux operating systems due to the heavy systems requirement of Windows Vista Netbooks were therefore seen as a threat to Microsoft's revenue

Business Software

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

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

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

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

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

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

software and serviced-oriented architectures rather than traditionally packaged PC software Major application areas such as ERP, CRM and business intelligence, security and supply chain management are increasingly being delivered this way

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

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

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

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

Cloud Computing And SaaS

The US is a key hub of the emerging market for cloud solutions, which is set to transform the way IT products and services and sold and procured Research indicates that the US will account for around half

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

computing spending being software-oriented The economic crisis may have given lasting additional momentum to cloud computing business models where applications are hosted on a centralised server and accessed remotely

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

Cloud 2, to reference 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 2012 The biggest software opportunities will be in non-critical file storage, or customer-facing applications such as CRM Opportunities should occur across economic sectors as awareness of cloud computing grows In June 2010, a survey by industry

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

computing, indicating potential for further penetration as awareness increases

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

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

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

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

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

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

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

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

Meanwhile, an increasing number of government organisations at both federal and state level are rolling out or at least studying cloud strategies In December 2010, the US General Services Administration became the first federal agency to move email to a cloud-based system for its entire organisation

Services

IT services spending is expected to grow about 6% in 2012, with an upwards revision in our foreast due

to an improved economic outlook Spending on IT services is closely correlated with GDP growth, which

is bad news in a recession, but better news in a recovery However, the ongoing debt crisis and political stalemate about how to deal with this issue will have a negative impact on public sector IT demand IT contractors will be worried that automatic federal spending cuts could kick in, with an effect on tech investment

Market Trends

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 should show the strongest rebound during the recovery 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

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

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

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

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

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

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

Even departments such as the Department of Defense have a long-standing interest in private cloud-type solutions, some of which may even be hosted by commercial organisations external to the government agency in question However, such arrangements are most likely to apply in the case on 'less security sensitive' information related to healthcare provision and recruitment activities

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

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

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

Industry Developments

Federal IT Spending

In 2012, IT vendors and contractors will be concerned about the possibility that the failure in 2011 of the Congressional Super Committee to reach a US deficit reduction agreement, will lead to automatic federal spending cuts beginning in the next fiscal year The first federal budget proposals are expected in

February 2012 and may provide an indication about how cuts may hit federal IT spending The

government has to cut US$1.2trn over ten years from federal spending under a process called

"Sequestration." In 2011, more than 50 tech companies wrote a letter to the super committee urging it to reach a solution and avoid "the sequestration trigger." The government has already outlined plans to close about 962 of around 2,800 data centres by 2015 Any IT facility of more than 100 sq ft in dimension is considered to be a data centre

In 2011, the public sector debt crisis and the associated political fallout has had a constraining effect on

IT demand However, despite a drive to cut expenses across government, many public sector

organisations have appeared willing to continue to spend on IT The government considered this as a way

to achieve efficiency Therefore, despite the adverse fiscal environment, it is possible that federal IT spending could actually rise by 1%-2% in the next fiscal year

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 data centre consolidation programs to help cut US$3bn from the federal budget The move was also regarded as a way to reduce the government's real estate holdings, which includes 2,000 federal data centres

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

In full-year 2009, total IT spending including all federal IT investment was 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 was increased again to US$78.4bn Defence was expected to spend the most, with a budget of US$33.4bn However, the largest budgeted increase was for the Department of

Commerce, where IT spending was increased from US$3.6bn to US$6.4bn

Accountability

The IT Dashboard was 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

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 decision that could influence other agencies that have previously held back from similar moves due to security or service concerns

An increasing number of government organisations at federal and state level are rolling out or at least studying cloud strategies In October 2010, New York City announced an initiative to bring Microsoft's BPOS (Business Productivity Online Suite) to around 30,000 city employees, while the city of Los Angeles reached a similar agreement with Google regarding cloud-based apps In 2010 the city of

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

management

Healthcare IT

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

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

Industry Forecast

US spending on IT products and services is forecast to reach US$558bn in 2012 and US$669bn by 2016

BMI has upwardly revised its 2012 forecast due to macroeconomic factors, after a difficult year for PC

vendors in 2011 Commercial and consumer segments were restrained, as a result of the economic

uncertainty, which is expected to persist in 2012, an election year

One growth opportunity will be private and public sector organisations looking for help to utilise

efficiencies from cloud computing models such as Software-as-a-Service and Infrastructure-as-a-Service

2011 saw a number of government agencies at federal and local level launch cloud strategies and pilot programs

Market Trends

In 2012, IT vendors will be concerned when it comes to the effect of the ongoing US federal deficit issue and the failure of politicians to agree a deficit reduction programme If automatic federal spending cuts kick in during the next fiscal year, this could hit IT projects the November 2012 elections will also create uncertainty about the trajectory of future government IT spending

US PC sales recorded negative growth again in Q411, compared with Q311, closing off a difficult year, following a sharp dip in H111 The market slowdown was due in part to base effects, but a contributory factor was disappointing sales in the consumer segment, particularly of notebooks The surge of demand for tablets also hit sales of traditional PCs, and led to below-expectation sales for Microsoft's Windows operating system Meanwhile a shortage of hard-disk drives resulting from floods in Thailand is forecast

to restrain market growth in H112, with faster growth likely in H212

In 2012 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 2012, but much depends on the economic situation Despite a drive to cut expenses across government, many public sector organisations have appeared willing to continue to spend on IT However, with continuing fiscal retrenchment in the government sector, now translating into cuts in real terms, private sector growth is expected to be stronger

In our core forecast scenario, IT market growth will advance at a CAGR of 5.5% 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 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 are not convenient for web surfing or multimedia consumptions

Despite the return of economic growth, US businesses remain cautious There is pent-up demand from projects delayed as a result of the economic situation, but some of this may not be realised The growing market for cloud solutions and virtualisation will constrain demand for on-premises computer networks Regardless of the exact strength and nature of the recovery, the current economic environment will offer some opportunities to vendors The tough trading conditions for many businesses have strengthened the need to reduce costs through improved

data management and other efficiencies

Drivers

Across both consumer and business

segments, the US IT market is expected to

have a number of drivers One is the

growing popularity of mobile broadband

networks in the US and applications such

as location-based-services that are based

on these These are boosting demand for

netbooks and notebooks, which are

increasingly favoured for connectivity

Whereas it was once thought consumers

would purchase netbooks or second

notebooks as personal mobile devices, it now appears likely that they will purchase tablets and other alternative mobile devices Tablets, originally seen as primarily for consumers, are also forecast to

experience increasing take-up in the business segment In the consumer segment, the affordability of netbooks compared with traditional notebooks helped to prevent stagnation in the notebook category during the economic slowdown

Cloud computing models such as SaaS, the rented software model, is expected to be increasingly

important Vendors are now rolling out more customised SaaS solutions for small and mid-sized

businesses The rollout of more service offerings, including from new market players, will fuel demand

IT Spending – Segments

2007-2013 (US$bn)

e/f = estimate/forecast Source: BMI

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

Management in 2010 called for federal agencies to consider such initiatives

Segments

Government remains a key end-user, with federal IT spending increasing to US$78.4bn in 2009 as

governments at all levels continue to issue IT tenders New government programmes, including the expansion of healthcare, should generate lucrative new opportunities for IT vendors, although, because of the ever-growing budget deficit, there will be increased pressure to reduce costs

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

Small businesses are also a target for vendors There are more than 8mn small businesses in the US, which is a substantial market However, particularly in a difficult economic climate, there are significant differences between the needs of businesses in different industries Increasingly, vendors will need to customise approaches based on industry-specific needs

Summary

The hardware market is predicted to grow from US$147bn in 2012 to US$163bn in 2016 Software spending should rise from US$163bn to US$202bn, and IT services from US$249bn to US$304bn, over the forecast period