United states information technology report q2 2014

We also expect continued demand growth for tablets in the retail market; however, desktop and notebook sales continue to be squeezed.. Key Trends & Developments The US retail hardware ma

Q2 2014 www.businessmonitor.com

UNITED STATES

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2018

Technology Report Q2 2014

INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: March 2014

Business Monitor International

© 2014 Business Monitor International

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DISCLAIMER

BMI Industry View 7

SWOT 9

IT SWOT 9

SWOT 11

Political 13

Economic 14

Business Environment 15

Industry Forecast 16

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

Broadband 21

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

Macroeconomic Forecasts 23

Table: United States - Economic Activity 31

Industry Risk Reward Ratings 32

Table: Americas Risk/Reward Ratings, Q2 2014 34

Market Overview 35

Hardware 35

Software 42

Services 48

Industry Trends And Developments 51

Regulatory Development 55

Table: IT Regulatory Authorities 55

Competitive Landscape 57

Local Companies 57

Table: CA Technologies 57

Table: Splunk 58

Table: Symantec 59

Table: EMC Corporation 60

Company Profile 61

Hewlett-Packard 61

Dell 68

Microsoft Corporation 74

IBM 82

Table: IBM Acquisitions, 2012 (Total Value, US$3.964bn) 85

Table: IBM Most Recent Acquisitions 85

Regional Overview 90

Demographic Forecast 94

Table: The United States' Population By Age Group, 1990-2020 ('000) 95

Table: The United States' Population By Age Group, 1990-2020 (% of total) 96

Table: The United States' Key Population Ratios, 1990-2020 97

Table: The United States' Rural And Urban Population, 1990-2020 97

Methodology 98

Industry Forecast Methodology 98

Sources 99

Risk/Reward Ratings Methodology 100

Table: It Risk/Reward Ratings Indicators 101

Table: Weighting Of Components 102

BMI Industry View

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

over the medium term, as a result of stronger economic performance and a greater appetite from

enterprises for the latest products and solutions Cloud computing, real-time enterprise software, security and big data are all areas of spending in which we expect to see rapid growth We also expect continued demand growth for tablets in the retail market; however, desktop and notebook sales continue to be

squeezed There is also potential for deeper fiscal retrenchment to hit government IT spending The NSA PRISM scandal continues to produce fallout amid concerns about data security in the cloud computing market Total spending is expected to reach US$622bn in 2014, up 5.9% from 2013, and grow at a CAGR of 4.3% to 2018.

Headline Expenditure Projections

■ Computer Hardware Sales: US$152bn in 2013 to US$157bn in 2014, an increase of 3.9% Booming

tablet sales are driving growth while desktop and notebook sales are under continuing pressure fromcannibalisation

■ Software Sales: US$173bn in 2013 to US$184bn in 2014, an increase of 6.4% Emerging technologies

such as machine-to-machine and big data are being adopted by enterprises, while demand for cybersecurity solutions is also an area of growth

■ IT Services Sales: US$263bn in 2013 to US$280bn in 2014, an increase of 6.4% Cloud computing

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

Key Trends & Developments

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

Cloud computing has been a leading theme in the US IT market in recent years as local enterprises haveadopted more complex solutions; however, the market is subject to uncertainty as a result of revelations

around the National Security Agency (NSA) PRISM intelligence gathering programme Surveys in 2013showed that the scandal has hurt the prospects of US cloud providers internationally, most notably inEurope However, the domestic market appears to be relatively unscathed Nonetheless, cloud providersremain concerned about the impact of the government's activities on their growth prospects in a rapidlydeveloping market.

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

have postponed IT investments and reduced short-term spending, particularly inareas such as consulting and software development

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

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

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

■ As economic woes ease, IT vendors should see more growth from traditional spending sectors such as banks, financial services, retail and manufacturing, where,for example, take up of Windows 8 has been slow Microsoft support of Windows XPceases in Q214, which should significantly accelerate W8 adoption by business usersduring 2014

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

SWOT Analysis - Continued

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

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

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

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

drag on adoption of cloud services and big data solutions

■ Privacy and cyber security became more pressing issues with the PRISM spyingrevelations This is expected to damage US cloud computing providers

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

United States Wireline SWOT Analysis

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

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

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

■ Connect America Fund is seeking to expand coverage

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

than anticipated and no real respite is expected

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

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

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

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

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

making it more attractive prospect for many clients

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

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

United States Wireline SWOT Analysis - Continued

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

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

■ LTE means the fixed broadband market will become increasingly redundant

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

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

Political SWOT Analysis

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

international diplomacy

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

Weaknesses ■ Political debate between Republicans and Democrats has historically been polarised

and divisive

■ As today's superpower, the US attracts the enmity of a wide range of political groupsopposed to the current international status quo

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

may encourage both major parties to experiment with more consensual approaches

to certain policy areas

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

East, may stiffen opposition and at worst provide fertile recruiting ground for radicalanti-US groups such as al-Qaeda Partly as a reaction to foreign policy difficulties, USpublic opinion may return to an isolationist and protectionist mode

Economic SWOT Analysis

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

and innovation, and high research and development spending

■ Despite some threats to its reserve status, the US dollar is treated as an internationalcurrency, meaning investors around the world are prepared to hold US debt Because

of this, the US is uniquely able to run large fiscal and current account deficits

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

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

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

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

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

to the US's external imbalances

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

the loss of manufacturing jobs

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

Business Environment

SWOT Analysis

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

tremendous opportunities for businesses of all types and sizes

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

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

Weaknesses ■ Much of the physical infrastructure is in need of improvement, with congested roads

and airways

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

Opportunities ■ The US has often been the origin of new drivers of economic growth booms, and

sectors ranging from biotechnology to alternative energy are being discussed aspossible catalysts

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

effective corporate tax rates, following a multi-decade downtrend

Industry Forecast

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

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

IT Market Value 529,329 551,031 587,620 622,113 654,649 681,490 705,410 726,008 o/w Hardware 141,478 144,679 151,506 157,450 162,574 165,993 168,459 169,920

- PC 114,880 118,636 125,447 130,369 134,611 137,442 139,484 140,694

- Servers 12,733 13,021 13,636 14,171 14,632 14,939 15,161 15,293 o/w Software 152,976 160,626 172,760 184,456 195,740 205,469 214,445 222,522 o/w Services 234,875 245,727 263,353 280,206 296,335 310,028 322,506 333,567

IT Market, % of GDP 3.4 3.4 3.4 3.4 3.5 3.5 3.4 3.4

e / f = BMI estimate/forecast Source: BMI

BMI forecasts US spending on IT products and services will reach US$622.1bn in 2014, an increase of

5.9% over 2013, and then reach US$726bn by 2018 Despite the maturity of the IT market in the US, weidentify medium-term growth potential in sales of tablets, ultra-thin notebooks and hybrids/convertibles, aswell as adoption of cloud computing, big data and machine-to-machine (M2M) communications in theenterprise market These growth trends will support a CAGR of 4.3% from 2013 to 2018

2014 Outlook

The IT market in the US is highly developed, meaning growth will be slower than the faster-growingemerging markets However, when compared with its developed market peers, the US market is expected to

continue to perform well US economic growth for 2014 is predicted to be in the 2.5-3% range BMI

forecasts real-term private final consumption growth of 2.5% in 2014, which is a positive for the retailhardware market as rising incomes and progress made by consumers in deleveraging boosts confidence

Government expenditure is forecast to remain static in real terms in 2014, with modest growth forecast for2015

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

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

There hardware market had a mixed performance in 2013 Tablet sales boomed in 2013 despite risingpenetration as consumers seem willing to accept much shorter replacement cycles compared with traditionalform factors Meanwhile, desktop and notebook shipments were declining PC shipments (excluding tablets)declined by around 1.5% year-on-year (y-o-y) to Q213 as consumers continue to exhibited a preference for

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

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

to vendors' hopes However, there is potential for significantly increased uptake of Windows 8 in 2014 asMicrosoft ceases support for Windows XP in Q214 Traditionally conservative business consumers will be

forced to undertake operating system upgrades BMI believes hybrids/convertibles and ultra-thin

touch-screen notebooks have the potential to experience rapid growth, but with momentum only beginning tobuild in 2013, the impact will be felt more strongly later in our forecast period

Enterprise spending on IT should experience moderate growth in 2014 as confidence begins to return.However, while there is pent-up demand from projects delayed as a result of the economic situation, some

of this may not now be realised The growing market for cloud solutions and virtualisation will constraindemand for on-premises computer networks Regardless of the exact strength and nature of the recovery, thecurrent economic environment will offer some opportunities to vendors

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

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

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

the nascent market US mobile operators are among the global leaders in the deployment of M2M services,with verticals such as utilities, security, asset tracking, vehicle infotainment and other smart services targetsfor growth We believe software and services firms will benefit either though partnerships with operators or

by selling to them direct

Another area of growth is the cloud computing market, with surveys showing high levels of satisfactionwith cloud services among US CIOs Vendors are now rolling out more customised SaaS solutions forSMEs The roll-out of more service offerings, including from new market players, will fuel

demand.However take-up may be adversely affected by fallout from the NAS Prism scandal Virtualisation

is making headway and will continue to do so, and it is proceeding to more and more parts of the

datacentre Another growth opportunity will be private and public sector organisations looking for help toutilise efficiencies from cloud computing models such as SaaS and Infrastructure-as-a-Service (IaaS) Thefederal government's Cloud First initiative is one of a number of federal and local government agency cloudmigrations and pilot programmes

The economic downturn may also have accelerated the growth of outsourcing of non-core processes and ashift Already, more and more software development has been outsourced to India and other locations, andvendors will be able to make the case that external spending on IT solutions can help the bottom line andadd to efficiency

Segments

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

a level of around US$80bn as departments continue to issue IT tenders despite a drive to make savingsthrough closing hundreds of federal datacentres in 2012-2015 New government programmes, including the

expansion of healthcare, should generate lucrative new opportunities for IT vendors, although because ofthe ever-growing budget deficit, there will be increased pressure to reduce costs.

With economic growth now underway, IT vendors should experience more growth from traditionally

big-spending sectors such as banking, financial services, retail and manufacturing BMI expects financial

services will be a key spending vertical as new regulations require increased investment, and in addition, theincreasing cyber security threat facing them will force further investment in services and solutions Theadvent of mobile payment systems will be an additional source of spending growth

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

is a substantial market However, there are significant differences between the needs of businesses indifferent industries Increasingly, vendors will need to customise approaches based on industry-specificneeds

The hardware market is predicted to grow from US$157.5bn in 2014 to US$170bn in 2018 Softwarespending should rise from US$184.5bn to US$222.5bn, and IT services from US$280bn to US$334bn, overthe forecast period

Industry Trends - IT Market

2011-2018

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

250,000 500,000 750,000 1,000,000

f = BMI forecast Source: BMI

Table: Telecoms Sector - Internet - Historical Data & Forecasts

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

No of internet users ('000) 218,965 236,503 249,389 256,090 266,784 271,529 273,973 276,164

No if internet users/100 inhabitants 69.5 74.5 77.9 79.4 82.1 82.9 83.0 83.0

No of broadband internet

subscribers ('000) 84,870 91,668 97,038 99,646 103,807 106,066 107,021 107,877

No of broadband internet subscribers/

100 inhabitants 27.0 28.9 30.3 30.9 31.9 32.4 32.4 32.4

e/f = BMI estimate/forecast Source: BMI, FCC

New data from the FCC show there were 91.668mn

fixed broadband subscribers in the US at the end of

2012, alongside 170.076mn mobile broadband

subscribers The FCC's definition of broadband uses

data transfer rate benchmarking that is not wholly

consistent with that employed elsewhere in the

world Nevertheless, it is clear from the FCC's data

that the most significant growth in broadband is in

the wireless arena and that, as has been seen in other

mature markets worldwide, the greater flexibility of

mobile relative to fixed connections is causing some

xDSL customers to 'cut the cord'

The fixed broadband market remains buoyant mainly

due to cable and fixed wireless usage, which remains

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

fibre accesses BMI forecasts the number of fixed

broadband connections to reach 97.038mn by the end of 2013, rising to 107.8mn by 2018

High-speed internet is central to the marketing strategies of telecoms operators, with cable companies andmobile operators pursuing the high revenue area At the same time, the sheer popularity of internet-basedservices means that the point is fast approaching when most Americans will view such services as being

Industry Trends - Internet

2011-2018

Internet users, '000 (LHS) Broadband internet subscribers, '000 (RHS)

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

100,000 200,000 300,000

0 20,000 40,000 60,000 80,000 100,000 120,000

e/f = BMI estimate/forecast Source: BMI Operators, FCC

essential to their daily lives The Broadband Technologies Opportunities Program backs up this view andefforts to extend broadband services into rural areas will ensure that this trend continues, particularly asservice providers and content developers/vendors grow their product portfolios and become more adept atmarketing and pricing content that appeals to a broad range of consumers Similarly, the FCC's NationalBroadband Plan aims to ensure universal access, competition and the efficient allocation of spectrum tobenefit the broadband sector Increased revenue derived from such activities will allow operators to expandinto new markets and it seems increasingly likely that fixed-line operators will need to become broadband-focused in order to survive.

Macroeconomic Forecasts

BMI View: Our view for gradual strengthening in the US economy through end 2014 continues to play out,

driven by a tightening labour market and sustained growth in the cyclical components of the economy, notably the residential housing sector and business investment in equipment Data have been particularly strong in recent months, and we acknowledge that risks are weighted to the upside.

Macro Outlook: The US economy picked up steam in the second half of last year, in line with our view

that the economic recovery would find firm footing in 2013 and accelerate into 2014 Incremental labourmarket improvement, a relatively stronger external environment, monetary stimulus from the US FederalReserve (Fed), and a cyclical uptick in the residential housing market have all played their part in 2013,outweighing a considerable fiscal drag on real GDP growth from the US federal government budget

sequester went into effect Additionally, having reviewed high frequency data through most of Q413, it isbecoming apparent that the October 2013 federal government shutdown was a considerable hurdle, but didnot derail the economic recovery We see these trends continuing, and in some cases accelerating, throughthe end of 2014

Growth To Pick Up In 2014

US - Real GDP Growth, SAAR %

Note: e=BMI estimate, f=BMI forecast; Source: BEA, BMI

The ISM PMI ended 2014 on a high note, suggesting that fourth quarter growth could come in quite strong,posing some upside risk to our 2013 real GDP growth estimate of 1.8% Indeed, if Q413 real GDP growthwere to equal the 4.1% figure from Q313, 2013 growth would likely come in around 2.0% Furthermore,this would have substantial positive base effects for 2014, and we would likely revise up our forecast from2.8%, where it currently stands, to 3.0 or 3.1% However, 1.7 percentage points of the 4.1% growth

recorded in Q313 came from inventory building, which we believe unwound slightly Q4, offsetting stronggrowth in the rest of the economy As such, we are maintaining our 2013 estimate and 2014 forecast of1.8% and 2.8% respectively, although we acknowledge risks weighted firmly to the upside in both cases

PMI Shows Strengthening Economy

US - Real GDP Growth, SAAR % & ISM PMI (3-Month MA)

Source: BMI, BEA, FRED

Expenditure Breakdown

Private Consumption: The broad trends supporting stronger real personal consumption expenditure (PCE)

growth remain in place, and as such we expect real PCE growth to continue to accelerate in 2014 Themonthly change in nonfarm payrolls is hovering between 150,000 and 200,000, a level we believe issufficient to lead to a further reduction in the unemployment rate Additionally, consumer confidence is nearpost-financial crisis highs, having largely recovered after the October 2013 federal government shutdown.Indeed, spending accelerated to 3.5% year-on-year (y-o-y) in November 2013, the strongest growth rateover the year, and we maintain our view that real PCE growth will accelerate to 2.5% in 2014 from ourestimate of 2.2% last year

Further Labour Market Tightening To Support Stronger Consumption

US - Change In Nonfarm Payrolls, 000 (3-Month MA) & Unemployment Rate, %

Source: BMI, FRED

Fixed Investment: We forecast real fixed investment growth will accelerate in 2014, due to continued

expansion into residential housing and business equipment Both of these two categories of spending, whichare key cyclical indicators of GDP growth, have trended higher over the past several quarters but remainlow by historical standards, indicating that additional expansion is sustainable Our infrastructure teamforecasts another year of growth in the residential construction sector, a view that is supported by ourexpectations of a strengthening labour market, relatively low mortgage rates by historical standards, andrising home prices And while business investment into equipment has waned recently, failing to keep pacewith the overall rate of economic growth in Q313, strong corporate profitability leads us to believe that theprivate sector could rapidly increase investment into capacity if confronted with accelerating consumerdemand

Housing & Business Investment Will Continue To Drive Investment Growth

US - Residential Housing & Business Equipment Investment, % of GDP

Note: Recessions Shaded; Source: BMI, BEA

Indeed, there are already signs of an uptick in business investment Capital goods orders growth dropped to1.6% y-o-y in October amid the government shutdown, but rebounded sharply to 6.0% y-o-y in November.Furthermore, the National Federation of Independent Business (NFIB) reports that capital expenditure plansare near post-crisis highs Our expectation of sustained growth in residential construction and strongerbusiness investment underpins our forecast for real fixed investment growth to accelerate to 7.1% in 2014from our estimate of 5.9% in 2013, which we admit may be revised downward in the months ahead

Demand Growth Will Support Fixed Investment Expansion

US - ISM Manufacturing Capital Goods Orders Ex Aircraft And Parts, % chg y-o-y (3-Month MA) &

NFIB Capital Expenditure Plans Index (3-Month MA)

Source: BMI, Bloomberg

Net Exports: Both structural and cyclical factors underscore our view that net exports will prove to be less

of a drag on real GDP growth in 2014 (-0.1pp) compared to in 2013 (-0.2pp) The steady increase of USdomestic energy production has led to less reliance on crude oil imports and exerted a positive impact onnet exports of refined products, a trend that our Oil & Gas team forecasts to continue into 2014 The cyclicalboost will come from recovery in key export markets next year; we forecast stronger real GDP growth inkey US trade partners, including Mexico, Canada, the United Kingdom, and the Eurozone, which webelieve will increase external demand for US goods and services Indeed, new export orders for bothmanufacturing and non-manufacturing indices were trending higher in late 2013, a dynamic we expect tohold this year

External Demand Will Pick Up In 2014

US - ISM Manufacturing & Non-manufacturing New Export Order Indices (3-Month MA)

Source: BMI, Bloomberg

We believe stronger external demand will push real export growth to 5.2% next year from our estimate of2.5% in 2013 That said, this acceleration will nearly be matched by stronger import demand; we expectmore robust private consumption in 2014 to boost real imports of goods and services growth to 5.1% fromour estimate of 3.3% in 2013

Government Consumption & Fixed Investment: We believe that real government consumption and fixed

investment, which has contracted in each of the last three years, will post zero growth and have no netimpact on real GDP in 2014, with risks to the upside A positive contribution from state and local

governments will likely cancel out additional austerity measures at the federal level, and there is somepotential that the Murray-Ryan budget deal concluded in late 2013 could result in a positive contribution to

growth from the federal government (see 'Deal Avoids Another Shutdown, But Future Progress Uncertain',

December 11).

Once we see this shift to growth in government spending after several years of contraction - either in 2014

or 2015 - we believe that the public sector will be a modest tailwind for the economy over the next several

years Government budget balances have improved substantially compared to just a few years ago, meaningthat there will be less political incentive for steep cuts in spending over the medium term Furthermore,several years of contraction in government fixed investment has likely led to capacity constraints that must

be addressed sooner or later As such, we believe there are upside risks to our forecast for governmentconsumption and investment in 2014

Government Drag On Economy Will Soon End

US - Contribution To Real Growth In Government Consumption And Fixed Investment, pp

Source: BMI, BEA

Risks To Outlook

As we have mentioned, we believe that risks are firmly weighted to the upside across the US economy Themost likely of these risks, we believe, is that a greater-than-expected improvement in the labour market orconsumer sentiment leads to much stronger demand for goods and services In addition to stronger real PCEgrowth, such an outcome would likely lead to stronger business investment in capacity and support furtherhousing market growth, potentially pushing US real GDP growth above 3.0% this year However, downsiderisks are also present: a renewed economic crisis in Europe or policy crisis in Washington, potentially over

raising the federal debt limit, could weigh on the US economy next year, resulting in slower real GDPgrowth than we currently forecast.

Table: United States - Economic Activity

2009 2010 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f

Nominal GDP,

USDbn 2 14,418.0 14,958.3 15,533.8 16,244.6 17,218.0 18,086.1 18,938.8 19,728.0 20,609.0 21,534.8 Nominal GDP,

US$bn 2 14,418.0 14,958.3 15,533.8 16,244.6 17,218.0 18,086.1 18,938.8 19,728.0 20,609.0 21,534.8 Real GDP

growth, %

y-o-y 2 -2.8 2.5 1.8 2.8 1.8 2.8 2.6 2.4 2.4 2.4 GDP per

capita, US$ 2 46,586 47,905 49,327 51,163 53,798 56,067 58,250 60,203 62,402 64,700 Population, mn

3 309.5 312.2 314.9 317.5 320.1 322.6 325.1 327.7 330.3 332.8 Industrial

production, %

y-o-y, ave 4 -9.3 5.8 4.0 4.8 3.2 3.6 3.3 3.0 3.0 3.0 Unemployment

, % of labour

force, eop 1,5 10.0 9.4 8.5 7.8 7.2 6.8 6.5 6.5 6.4 6.3

Notes: e BMI estimates f BMI forecasts 1 Q4 Employment Rate Sources: 2 BEA/BMI; 3 World Bank/UN/BMI; 4 Federal Reserve/BMI; 5 BLS.

Industry Risk Reward Ratings

BMI View: IT markets in Latin America and North America offer considerable growth potential and

opportunities for investors The markets separate broadly into three bands, led by developed states US and Canada, which, although already mature, have large IT markets and the vast majority of industries heavily reliant on IT development and technology advances to sustain their economies Increasingly, however, there are strong opportunities in emerging markets where technologies leapfrog older iterations seeing a strong appetite for new developments such as telecare, smart cities and telematics.

The US and Canadian markets have a longer history of IT development and, more importantly, IT useamong consumers and businesses Several of the world's largest IT companies are based in the US and this,combined with the size of the country's economy, makes it the largest IT market in the region Canada'sdevelopment is largely the same, but its smaller economy and consumer market hold its scores back

considerably Nevertheless, Canada's location and strong ties with the US market make it a strong marketwith steady growth potential

The size of the potential IT market is mainly related to the country's GDP This is especially true in

emerging markets where governments make up a significant proportion of IT spending Lower cost devicesare reaching consumers and bringing more Latin Americans into the consumer IT market than ever before,but companies and governments still account for the bulk of IT spending As the markets mature and access

to computing devices increases, IT spending will continue to expand

Despite the size of the country being a major factor in the position of the countries in our ratings, Chileleads Latin American markets The country is the most technologically advanced in the region, supported byhigher levels of education and a strong stable government with strong scores in key areas such as investorprotection and rule of law This often makes Chile a first stop for newcomers to the region or establishedplayers to launch their latest product updates

Market size does help Brazil and Mexico, Latin America's two most populous countries, to maintain strongpositions in the list Brazil's economic growth has attracted considerable investment and important

government plans such as rural broadband networks and moving to reduce the digital divide help to supportthat growth Mexico should also benefit from its large population, but difficulties in the telecoms market'sregulation have, over several years, weakened the market's growth and meant broadband growth has notreached the rates seen in its peers In turn this has limited demand for computing hardware on which ITservices and software market growth depends These factors limit Mexico's ability to move up the ratings A

bright spot is the level of scrutiny the telecoms market's competition is undergoing, which BMI believes may solidify the base on which the IT market can grow These reforms have not been finalised and BMI

continues to watch the changes with a view to increasing Mexico's IT forecasts

Much like Chile, Argentina's population shows a higher level of education, which supports the IT market'sgrowth potential Government spending was a political weapon in the run up to the October 2013 elections,boosting spending in the IT market While we forecast this to decline in subsequent years, the boost has had

a positive impact on Argentina's overall market size, allowing it to overtake Mexico

The remaining markets in our ratings have much lower potential, and consequently lower scores Peru canpull ahead of Colombia by its faster growth potential over our five-year forecast period, but Colombia'smore established market is more mature Colombia is really held back by weaker country risk scores, with aweaker peso and continuing political challenges facing the government Peru's scores place it only slightlyhigher than Colombia with its weaker industry risks score an important factor for potential investors to beaware of

Venezuela's weak performance needs little introduction A hostile business environment, especially toforeign investors does little to incentivise companies to enter the market State-controlled telecoms

infrastructure and a slow rate of economic growth offer little to tempt even the most adventurous

companies BMI believes it would take a significant change in the country's government policy to move

Venezuela higher up the ratings

Table: Americas Risk/Reward Ratings, Q2 2014

Country Industry rewards Country rewards Industry risks Country risks IT Rating Rank Previous Rank

US 82.5 90.0 55.0 66.8 78.2 1 1 Canada 64.2 90.0 65.0 66.7 71.1 2 2 Chile 54.2 75.0 50.0 68.2 61.3 3 3 Brazil 68.3 60.0 45.0 50.8 60.3 4 4 Argentina 60.0 75.0 40.0 52.1 59.8 5 6 Mexico 60.8 60.0 52.5 48.1 57.3 6 5 Peru 58.3 55.0 45.0 55.1 55.3 7 7 Colombia 55.0 60.0 47.5 46.8 53.8 8 8 Venezuela 43.3 75.0 35.0 34.6 48.5 9 9

-Scores out of 100, with 100 highest -Scores are weighted as follows: 'Rewards' at 70%, of which Industry Rewards, 65%, and Country Rewards, 35%; 'Risks' at 30%, of which Industry Risks, 40%, and Country Risks, 60% The 'Rewards' rating evaluates the size and growth potential of a telecoms market in any given state, and a country's broader economic/socio- demographic characteristics that impact the industry's development; the 'Risks' rating evaluates industry-specific

dangers and those emanating from the state's political/economic profile, based on BMI's proprietary Country Risk

Ratings that could affect the realisation of anticipated returns Source: BMI

Market Overview

Hardware

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

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

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

that the US computer and accessories market value will grow by 3.9% to US$157bn in 2014 Decliningsales of desktops and notebooks are a drag on growth, but booming sales of tablets is offsetting this trend

As a result, growth of PC shipments has been maintained overall Meanwhile, datacentre construction ishelping to boost server sales The computer hardware market's 2013-2018 compound annual growth rate(CAGR) is projected at 2.3% and the market value should reach US$170bn by 2018

Market Trends

Although PC sales held up better in the US than in Europe, the desktop and notebook markets still declined

as consumers opted for tablets Despite the decline, the market still remains huge, with around 29mn unitsshipped in H113 (excluding tablets) Although vendors of traditional form factors are undoubtedly underpressure, the new category of ultrabooks, as well as ultra-thin notebooks and hybrids/convertibles, offer anavenue for growth

Retailers had hoped that the 2012 release of Windows 8 would boost sales of PC, particularly touch screenequipped models but uptake was disappointing Windows 8 still has potential to boost PC sales as themarket adjusts to delayed hardware upgrades and the cessation of Microsoft support for Windows XP inQ214, and could also provide a fillip to the ultrabook market as tablet makers leverage its capabilities tooffer devices with touchscreens and convertible designs

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

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

economic situation has created significant downwards pressure on prices, with consumers unwilling to paybig money and looking for 'good enough' solutions to their computing needs

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

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

In December 2013 IBM announced that it intends to invest more than US$1.2bn to increase its global cloudfootprint The company will unveil 15 new centres globally, in addition to the existing 13 and 12 global datacentres from SoftLayer and IBM respectively The new data centres will be in China, Washington DC,Hong Kong, London, Japan, India, Canada, Mexico City and Dallas

Hardware Market (US$mn)

2011-2018

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

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

Desktops And Notebooks

With already high household penetration there is limited scope for sales to first time buyers, meaning themarket is predominantly based on personal devices and upgrades/replacement purchases As a result, there

is a heavy bias towards mobile PCs, which had benefited notebook/netbook vendors prior to the arrival oftablets which have virtually eliminated netbooks as a device category Notebook sales have also been hit by

a shift to tablets, while desktops are increasingly being run as utility machines and being overlooked forupgrades as households opt for mobile devices

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

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

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

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

However, following the emergence of tablets, the negative netbook trend now seems irreversible In H112,

former netbook leader Toshiba announced that it was following Dell and Lenovo in withdrawing from the segment in the US HP and Asus continued to compete in the netbook segment, but Asian giants Sony and Samsung did not release new models in the US market in 2012, and all vendors were focused elsewhere by

2013

Tablets

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

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

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

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

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

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

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

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

1.5% of PC browsing traffic (up 1pp) y-o-y This recent data reinforces Apple's dominance; however, it is

notable that Android is becoming a more significant competitor for Apple following the release of populartablets such as the Kindle Fire from Amazon, the Nexus 7 and 10 and Samsung's Galaxy Tab range.

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

The success of Android vendors came only after the release of lower cost tablets, predominantly the smaller7" form This contrasted with Apple's larger and more expensive iPad, and the popularity of the smaller,cheaper devices, catalysed the development of Apple's own iPad Mini Apple is set to face competitionthroughout 2014 from rival Android vendors that will offer consumers a greater choice in terms of price andsize, as well as specifications and features

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

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

of Windows 8 In October 2012, with the launch of the new OS, Windows vendors were able to introducetouch devices with a number of tablets released

Hybrids/Convertibles

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

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

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

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

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

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

opportunity in the Android and iOS ecosystems

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

Envy and Lenovo's Yoga and Helix Although design innovation has some way to go, and prices of hybrids

will need to decline, the multi-use device has scope to capture a share of the tablet market by offering astronger value proposition to consumers while not compromising on user experience.

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

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

Haswell chipsets released in June 2013 Meanwhile, according to a recent research report, 10% of alllaptops shipped worldwide in Q113 were touchscreen-enabled This figure is expected to grow as more andmore manufacturers develop laptops and touchscreen notebooks

Ultrabooks

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

MacBooks - are an emerging product category that Intel and certain vendors backed heavily However, inH112, sales of the devices fell far short of Intel's predictions due to high prices, and they therefore seemunlikely to enjoy the hoped-for success, at least initially In the US, in H112, the average market price for anultrabook was upwards of US$900, compared with an average of around US$500 for a Windows notebook

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

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

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

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

of ultrabooks 2014 is expected to see an increase in Windows 8 uptake as Microsoft cease support forWindows XP in Q214

Vendor Performance

The latest estimates from IDC and Gartner are for

sales of desktops and notebooks to be in decline in

early 2013, although the market is faring better than

sales in Western Europe IDC estimates that total

sales declined 1.9% y-o-y to 15.7mn in Q213, a

slightly more pessimistic outlook than Gartner's

estimate of a 1.4% decline to 15.0mn The data show

that Hewlett Packard leads the market, although its

position is under threat as its sales declined y-o-y

while second placed Dell managed to increase

shipments in the US by around 6% y-o-y to Q213

The only other vendor to achieve an increase in

shipments was Lenovo, although it remains some

way behind to the two largest vendors by shipments

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

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

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

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

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

ecosystem section to market Xbox SmartGlass, SkyDrive and other services

In June 2013, Google confirmed its Chromebook laptops would be stocked at US retail chains Walmart and Staples Walmart will stock Chromebooks across 2,800 retail locations in the US, priced at US$199,

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

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

Lenovo, the outperformer in terms of shipment growth, has targeted domestic manufacture as a strategy toimprove product quality while also potentially useful marketing In June 2013, Lenovo opened its first USmanufacturing plant in Whitsett, North Carolina The plant initially employed 115 works to assemblenotebooks and desktops using components from overseas Lenovo admits it would be cheaper to

Device Penetration* (%)

2006-2013

*Age 18+ Source: Pew Research Centre, BMI