United states information technology report q2 2015

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

Q2 2015 www.bmiresearch.com

UNITED STATES

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2019

Report Q2 2015

INCLUDES 5-YEAR FORECASTS TO 2019

Part of BMI’s Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: March 2015

© 2015 Business Monitor International Ltd

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DISCLAIMER

BMI Industry View 7

SWOT 9

IT SWOT 9

Wireline SWOT 11

Political 13

Economic 14

Operational Risk 15

Industry Forecast 16

Table: IT Industry - Historical Data And Forecasts (United States 2012-2019) 16

Macroeconomic Forecasts 22

Economic Analysis 22

Table: Economic Activity (United States 2010-2019) 27

Industry Risk Reward Index 28

Table: Americas Risk/Reward Index, Q2 2015 30

Market Overview 31

Hardware 31

Software 40

Services 47

Industry Trends And Developments 52

Regulatory Development 57

Table: IT Regulatory Authorities 57

Competitive Landscape 59

Local Companies 59

Table: CA Technologies 59

Table: Splunk 60

Table: Symantec 61

Table: EMC Corporation 62

Company Profile 63

IBM 63

Table: IBM Major Acquisitions, 2012-2014 65

Hewlett-Packard 69

Table: Hewlett-Packard Financial Performance By Division: 74

Microsoft Corporation 77

Dell 84

Regional Overview 90

Demographic Forecast 96

Table: Population Headline Indicators (United States 1990-2025) 97

Table: Key Population Ratios (United States 1990-2025) 97

Table: Urban/Rural Population & Life Expectancy (United States 1990-2025) 98

Table: Population By Age Group (United States 1990-2025) 98

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

Methodology 101

Industry Forecast Methodology 101

Sources 102

Risk/Reward Index Methodology 103

Table: It Risk/Reward Index Indicators 104

Table: Weighting Of Components 105

BMI Industry View

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

markets over the medium term, as a result of stronger economic performance and a greater interest from enterprises in the latest products and solutions Cloud computing, real-time enterprise software, security and big data are all areas of spending in which we expect to see strong growth, particularly in the latter years of our forecast The retail hardware outlook is more mixed, as we expect continued demand growth for tablets in the retail market; however, desktop and notebook sales continue to be squeezed Total

spending is expected to reach USD681bn in 2015, up 4.8% from 2014, and grow at a CAGR of 3.4% 2015-2019.

Headline Expenditure Projections

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

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

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

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

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

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

Key Trends & Developments

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

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

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

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

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

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

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

agreement, while in October 2014 Microsoft and IBM announced a partnership agreement to focus on hybrid cloud solutions In March 2015, Microsoft also entered into a partnership with Cisco Systems to

integrate their cloud services The new service will combine Microsoft's Windows Azure Pack, which form

the Windows cloud architecture, with Cisco's ACI, which provides the networking services layer BMI

believes the developing set of partnerships and collaborations reflects the increasing maturity of the cloudmarket and vendor plans for interoperability of services to enable future growth of complex deployments

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

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

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

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

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

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

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

■ As economic conditions strengthen, IT vendors should see more growth fromtraditional big-spending sectors such as banks, financial services, retail andmanufacturing

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

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

SWOT Analysis - Continued

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

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

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

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

Wireline SWOT

SWOT Analysis

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

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

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

■ Connect America Fund is seeking to expand coverage

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

anticipated and no real respite is expected

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

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

■ Despite Obama's USD7.2bn investment in improving broadband connectivity,deployment has been slow and a significant proportion of the population remainsunderserved

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

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

making it more attractive prospect for many clients

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

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

■ Government implemented new rules on net neutrality

SWOT Analysis - Continued

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

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

■ LTE means the fixed broadband market will become increasingly redundant

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

■ Consolidation is likely to occur in the wake of the Comcast-Time Warner deal

Political SWOT Analysis

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

international diplomacy

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

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

and divisive

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

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

may encourage both major parties to experiment with more consensual approaches

to certain policy areas

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

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

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

a default on its debt

Economic SWOT Analysis

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

and innovation, and high research and development spending

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

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

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

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

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

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

competitive dollar exchange rate, could boost export growth and help address theUS's external imbalances

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

the loss of manufacturing jobs

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

Operational Risk

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

sales, USDmn 206,837.6 211,414.1 216,287.4 222,854.2 227,898.6 232,486.8 238,015.0 242,092.1Personal computer

sales, USDmn 167,331.6 172,513.9 177,139.4 182,629.0 187,332.6 191,220.4 196,124.4 199,847.0Software sales,

USDmn 161,573.3 171,234.3 181,159.3 190,569.5 200,354.5 210,207.8 221,424.2 231,823.4Services sales,

USDmn 226,702.7 237,698.1 251,869.9 267,254.9 282,375.5 297,709.2 315,097.2 331,447.5

e/f = BMI estimate/forecast Source: BMI

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

USD680.7bn as stronger economic growth raises enterprise and consumer confidence We expect IT marketgrowth will remain robust considering the maturity of the US market, with a CAGR of 3.4% forecast for2015-2019, and total spending expected to reach USD805.4bn in 2019

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

of hybrid notebooks in the retail market, while in the enterprise market adoption of cloud computing, bigdata and the Internet of Things (IoT) will drive growth

2015 Outlook

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

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

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

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

US IT market growth will be sustained in 2015 by the supportive economic environment When comparedwith its developed market peers, the US market is expected to continue to perform well US economicgrowth for 2015 is forecast at 2.9% in real terms (up from 2.3% in 2014), while private final consumption isalso forecast to grow slightly faster at 2.6% (up from 2.5% in 2014).

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

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

e/f = BMI estimate/forecast Source: BMI

Overall, there will continue to be a squeeze on public sector IT spending, but growth will continue for cloudservices, for which there are expected to be many more contracts with the continued implementation of the

federal government of its Cloud First cloud migration strategy Departments such as the US GeneralServices Administration are already making significant use of cloud services, as the government seeks tomake savings in its USD80bn IT budget The recession may have had a lasting impact on the IT market byencouraging consideration of cloud computing models such as software-as-a-service (SaaS).

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

2015 as confidence begins to return However, while there is pent-up demand from projects delayed as aresult of the economic situation, some of this may now be abandoned or reconsidered The growing marketfor cloud solutions and virtualisation will constrain demand for on-premises computer networks Regardless

of the exact strength and nature of the recovery, the current economic environment will offer some

opportunities to vendors

Drivers

The economy will be generally supportive over the medium term, particularly when compared to otherdeveloped markets Real GDP growth is forecast to average 2.5% annually 2015-2019, with consumption

growth expected to be slightly slower at 2.3% Meanwhile, BMI's in-house Country Risk income

stratification forecast for the US shows that the gains will largely be captured by the highest earning 10% ofthe population, while incomes for the remaining 90% are expected to see only slow growth This bodes wellfor vendors of premium hardware, for instance Apple which targets its PC devices at the highest earners, butthe outlook for sales growth of mid-range devices is mixed, particularly in the context of market maturity

Income Per Capita Breakdown

(2012-2019)

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

2012 2013e 2014e 2015f 2016f 2017f 2018f 2019f -25,000

0 25,000 50,000 75,000 100,000

e/f = BMI estimate/forecast Source: BMI

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

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

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

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

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

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

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

Segments

The government remains a key consumer despite pressure on expenditure Federal IT spending reached alevel of around USD80bn as departments continue to issue IT tenders despite a drive to make savingsthrough closing hundreds of federal datacentres in 2012-2015 New government programmes, including theexpansion of healthcare, should generate lucrative new opportunities for IT vendors, although because ofthe budget deficit, there will be increased pressure to reduce costs

US GVA By Vertical (%)

2015f

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

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

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

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

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

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

Summary

The hardware market is predicted to grow from USD216bn in 2014 to USD242bn in 2019 Softwarespending should rise from USD181bn to USD232bn, and IT services from USD252bn to USD331bn, overthe forecast period

Macroeconomic Forecasts

Economic Analysis

BMI View: The US economy is set to grow at a more rapid pace in 2015, supported by lower oil prices, a

tightening labour market and improving sentiment We forecast real GDP growth of 2.9% in 2015, up from

an estimated 2.5% in 2014 Over the long term, global headwinds and a rebound in imports will cap real GDP growth below historical standards.

Over the coming years, the US economy will benefit from the ongoing recovery in private consumption andfixed investment, both of which will be supported by lower oil prices Data recently revised by the Bureau

of Economic Analysis (BEA) indicate that real GDP expanded by 5.0% in Q314 on an annualised,

seasonally-adjusted basis, compared to the previous estimate of 3.9% Given the latest revisions, whichshow strong momentum in key sectors, along with the prospect of continued support from lower oil prices,

we recently revised our full-year 2014 estimate from 2.3% to 2.5%, and now expect growth to accelerate to2.9% in 2015, up from our previous forecast of 2.7% Over the long term, we expect growth to remainrelatively subdued compared to historical trends, as headwinds in other major markets - including China,Europe, and Japan - weigh on the global economy

Growth To Pick Up Temporarily In 2015

2.5 5

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

Expenditure Breakdown

Private Consumption: The consumer sector will be a bright spot for the US economy over the coming

quarters, due to falling unemployment, lower fuel prices (and by extension greater levels of disposableincome), and rising incomes The BEA's Q314 print represents the most rapid real GDP growth seen inmore than a decade, and is due in large part to the strong performance of the consumer sector, whichaccounts for more than 70% of the economy Private consumption was revised up a full percentage point, to3.2%, while measures of consumer confidence have reached their highest levels since early 2008,

suggesting that this momentum will be maintained

Consumer Sector To Benefit From Rising Confidence

US - University Of Michigan Consumer Sentiment Index

Source: Bloomberg

Meanwhile, the end-2014 unemployment rate was just 5.6%, below our expectations of 5.9% and

significantly below the end-2013 rate of 6.7% Although further gains will be muted as the rate nearsstructural levels, we expect that labour market participation and wages, both of which have yet to recover inthe wake of the global financial crisis, will begin to gradually climb Higher household income will bolsterprivate consumption in the quarters ahead

Meanwhile, our Oil & Gas team has substantially revised down its forecast for oil prices, as new

technologies and sluggish European demand keep the global market well-supplied (see 'More Pain Ahead, But H115 To Provide A Base', January 8 2015) This will keep the domestic price of fuel subdued (the price

per gallon of gasoline has fallen to a national average of less than USD2.50, a multiyear low), and furtherbolster households' real purchasing power

Labour Market Consolidation Continues

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

Source: Bloomberg

Gross Fixed Capital Formation: Although stronger economic growth poses some upside risk to our

forecast for the federal funds rate to rise to only 0.50% by end-2015, low inflationary pressures will keepinterest rates extremely low by historical standards over the next several quarters This will help supportcontinued growth in fixed investment, another highlight in the latest BEA GDP figures Total investmentclimbed by 7.7% in Q314, while nonresidential investment soared to a multiyear high of 8.9%, including an11.0% increase in investments in equipment

Moreover, while the latest high-frequency manufacturing data (including capital goods and factory orders)have disappointed consensus expectations, stronger headline GDP growth and improving consumer

sentiment will see the sector turn around in the coming months Low interest rates will also bolster

residential investment, supporting the continued recovery in the still-flagging US housing sector

Net Exports: A stronger consumer sector will increase demand for consumer goods imports, while a

strengthening US dollar (in part due to the extraordinarily loose monetary policy being pursued by Japanand Europe) will increase households' purchasing power of foreign goods and services Meanwhile, thesteep decline in the price of oil has begun to weigh on US producers' margins, and will reduce the pace ofdomestic energy production over the coming quarters, potentially requiring greater volumes of fuel imports

As a result, while the nominal trade balance will improve in 2015 (see 'Lower Fuel Import Costs To Help

Offset Flagging Export Demand', January 13 2015), the real trade balance faces headwinds According to

the latest data, US producers have been resilient to the collapse in crude prices and our core scenario is thatproductivity gains will remain positive, but note that if oil continues to tumble we may have to revisit thisview

US exports of manufactured goods, meanwhile, are on the rise, with the automotive and consumer goodssectors seeing particularly strong expansion We expect real exports to pick up slightly in 2015, but remainwell below the historical trends (real exports grew by an average of 5.6% over the past decade), coming in

at 3.7%

Lower Oil Prices Will Likely Hinder Future Productivity Gains

US - Oil Prices, USD/bbl

Source: Bloomberg

Government Consumption And Investment: Despite a budget deficit in FY2014 which was quite low by

historical standards, due both to rising revenues and fiscal restraint at the federal level, we believe thatpolitical pressure to reduce spending is still considerable, and government consumption and investment will

be relatively subdued in 2015 The Republican Party now controls both houses of Congress following the

November 2014 midterm elections, and many representatives campaigned on reining in federal spending

(see 'Stronger Economy Will Bolster Fiscal Account, But Only Temporarily', January 7 2015).

However, there is bipartisan agreement on the need for greater infrastructure investments, to help the USmaintain its global competitive edge Republican leaders have expressed a willingness to work with

President Barack Obama on tax reform, with the proceeds earmarked for infrastructure spending As aresult, we expect that long-neglected capital spending will begin to tick up in the coming quarters

Risks To Outlook

Given that several components of GDP are affected by the recent collapse in the price of oil, a majorrebound in the price of crude over the next several months (not our core scenario) would likely lead toanother revision of our forecasts Other global dynamics, including the economic and monetary policies ofmajor central banks, will also have a direct impact on the outlook for the US If Europe is able to transcendits economic headwinds, for example, the outlook for US exports would greatly improve, while US

monetary policy would likely be more hawkish than we currently envision, impacting both consumption andinvestment opportunities through higher interest rates

Table: Economic Activity (United States 2010-2019)

2010 2011 2012 2013 2014e 2015f 2016f 2017f 2018f 2019f

Nominal GDP,

USDbn 14,964.4 15,517.9 16,163.2 16,768.1 17,568.4 18,343.8 19,155.4 19,972.7 20,832.2 21,741.5Real GDP

growth, % y-o-y 2.5 1.6 2.3 2.2 2.5 2.9 2.6 2.4 2.3 2.4GDP per capita,

USD 46,177 47,519 48,874 50,501 51,980 54,035 55,979 58,000 60,006 62,108Population, mn 312.2 314.9 317.5 320.1 322.6 325.1 327.7 330.3 332.8 335.4 Industrial

production, %

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

% of labour

force, eop 9.4 8.5 7.8 6.7 5.6 5.4 5.5 5.6 5.5 5.5

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

Industry Risk Reward Index

Argentina is a surprise outperformer as our forecasts are extended to 2019 and markets change places in ourRisk/Reward Indices The US and Canada still lead the way, outpacing Latin American markets by morethan 10 points However, we have seen changes to most countries' scores as the economic outlook slows inthe latter part of our forecast years Notably, the country risk scores remain largely unchanged, reflectingstability in our outlook for these markets

Canada narrows the gap behind the US in the latest update with the regional leader's scores remainingunchanged While the countries share a number of characteristics, the US' larger economy and consumerbase make it the more attractive market in the longer term However, their country risk outlooks are almostidentical and there is no difference between the country rewards scores Advantages the US holds includethe presence of major IT service providers and drivers of the global IT market, leading to early productreleases to US companies and consumers Strong connectivity in major cities across both the US andCanada also help to maintain the strong demand for IT services and products Both markets are maturemarkets, with the sales of services much higher than the hardware that is required to run it

Chile just retains its lead for Latin American IT markets, with the country benefiting from historical

investment in the sector and long term support for communications services that underpin the growth of IT.Chile's more developed market means that a higher proportion of the IT market is driven by the sale ofsoftware and IT services Hardware sales are still significant, but spending on the devices and infrastructureneeded to build an IT market is slower in comparison to regional peers

Mexico's market is far less developed but its larger market and greater potential for growth have seen it gainground on Chile Mexico's improved position saw it overtake Brazil in 2014 as regulations for the telecoms

market were finally pushed through and BMI believes it will provide much of the basis for long-term

development and growth Mexico also benefits from its proximity to the US, offering business processoutsourcing opportunities on top of manufacturing options There are opportunities in the hardware segmentwith the country's low PC penetration rate supporting strong growth and with pull factors such as growingonline services and greater awareness of online products encouraging more consumers to get online Thesetrends are similar to Brazil, the largest country population-wise in Latin America The improved score saw

it match Mexico this quarter

Argentina rises two places to overtake Peru and Colombia Its weak economic and political outlooks areexpected to ease in 2015, leading to the market returning to stronger growth and better prospects for IT

companies in the market While Argentina performed better, we note its position is precarious with currencydepreciation and inflation serving to make the sale of foreign produced devices very much more expensive.However, under our core scenario we expect macroeconomic stabilisation including inflation and the peso,

as well as stronger growth This will in turn generate higher levels of consumer and enterprise confidenceand boost spending on IT products and solutions

Peru and Colombia retain largely similar scores, with Peru's lower development rate offering higher growthover the term of our forecasts, pulling it ahead of Colombia Both countries offer strong opportunities forgrowth, particularly hardware Similarly the two countries' governments have made ICT development plansthat will support the long-term growth of local companies and device manufacturers Peru's growth inparticular has been supported by declining device prices and greater access to high speed networks thatsupport the growth of IT services

Venezuela's scores fell further this quarter with both local currency and US dollar figures showing

contractions Diverging black market exchange rates, political and economic instability and a lack of ICTgrowth put the country on the back foot, from which it will take years to catch up A government taxsubsidy aims to help local companies to continue investing in the IT sphere, but growth will remain sluggishand will not overtake forecasted inflation rates

Table: Americas Risk/Reward Index, Q2 2015

Country Industry Rewards Country Rewards Industry Risks Country Risks IT Score Rank Previous Rank

USA 82.5 90.0 55.0 66.8 78.2 1 1 Canada 65.8 90.0 65.0 66.7 71.8 2 2 Chile 54.2 70.0 50.0 68.2 60.1 3 3 Mexico 65.8 60.0 52.5 48.1 59.6 4 4 Brazil 66.7 60.0 45.0 50.8 59.6 5 5 Argentina 56.7 75.0 40.0 52.1 58.3 6 8 Peru 51.7 55.0 45.0 55.1 52.3 7 6 Colombia 51.7 55.0 47.5 46.8 51.1 8 7 Venezuela 38.3 70.0 35.0 34.6 45.0 9 9

Scores out of 100, with 100 the best Scores are weighted as follows: 'Rewards' at 70%, of which Industry Rewards 65% and Country Rewards 35%; 'Risks' at 30%, of which Industry Risks 40% and Country Risks 60% The 'Rewards' score evaluates the size and growth potential of the IT market in any given state, and broader economic/socio-demographic characteristics that affect the industry's development The 'Risks' score evaluates industry-specific dangers and those emanating from the state's political/economic profile, based on BMI's proprietary Country Risk Indices Source: BMI

Market Overview

Hardware

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

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

BMI forecasts continued outperformance for US PC spending versus developed markets 2015-2019, but we

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

We forecast total US IT hardware sales will increase 3.0% to USD222.9bn in 2015, while PC sales areexpected to increase to USD182.6bn Meanwhile, datacentre construction is helping to boost server sales.The IT hardware market's 2015-2019 compound annual growth rate (CAGR) is projected at 1.7% and themarket value should reach USD242bn by 2019

Market Trends

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

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

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

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

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

enterprise hardware upgrades The release of Windows 10 in 2015 could be a push factor for retail andenterprise upgrades, however Microsoft's decision to offer the new OS for free for one year will postponethis effect into 2016

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

tablets, with average prices and margins declining further to fight off cannibalisation However the rate ofdecline is expected to continue to diminish in 2015 as demand stabilises with core users still requiring theadditional productivity features offered by notebooks and desktops versus tablets

Market Trends

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

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

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

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

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

enterprise hardware upgrades The release of Windows 10 in 2015 could be a push factor for retail andenterprise upgrades, however Microsoft's decision to offer the new OS for free for one year will postponethis effect into 2016

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

tablets, with average prices and margins declining further to fight off cannibalisation However the rate ofdecline is expected to continue to diminish in 2015 as demand stabilises with core users still requiring theadditional productivity features offered by notebooks and desktops versus tablets

Hardware Market

(2012-2019)

Personal computer sales, USDmn Servers sales, USDmn

2012 2013 2014e 2015f 2016f 2017f 2018f 2019f 0

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

e/f = BMI estimate/forecast Source: BMI

Servers And Storage

The US datacentre market has become very competitive in recent years as real estate investment trusts(REITs) join IT companies, telecoms operators, Internet content providers and pay-TV companies inbuilding high-capacity facilities to service their own needs as well as those of local and multinational

businesses This has attracted the attention of vendors including the May 2013 announcement that Lenovo

will release a rebranded version of its LenovoEMC storage solutions in North America The EZ Media and

ix Series Desktop line now carry the Lenovo Iomega brand, and the px Series Desktop and ox Series rackmount families are now branded as LenovoEMC products

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

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

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

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

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

In February 2015, the Wall Street Journal reported that AT&T may sell some or all of its datacentres as part

of its efforts to pay down its debts and give it the leverage needed to secure financing for the expansion ofits core growth businesses, mobile and pay-TV The sale could generate up to USD2bn, it is reported Weexpect AT&T will not struggle to offload its datacentres and will be able to command a considerable

premium on its investment to date Digital Realty Trust, Global Switch and CyrusOne are likely buyers

for the facilities, most likely on a site-by-site basis rather than as a complete package as they will be looking

to fill gaps in their footprints

Desktops And Notebooks

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

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

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

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

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

upgrades/replacement purchases

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

emergence of tablets, the negative netbook trend now seems irreversible In H112, former netbook leader

Toshiba announced that it was following Dell and Lenovo in withdrawing from the segment in the US HP and Asus continued to compete in the netbook segment, but Asian giants Sony and Samsung did not

release new models in the US market in 2012, and all vendors were focused elsewhere by 2013

Notebook sales have also been hit by a shift to tablets, before staging a small recovery from 2014, whiledesktops are increasingly being run as utility machines and being overlooked for upgrades as householdsopt for mobile devices as a way into the latest technology The latest data from Gartner show total PCshipments increased 13.1% year-on-year (y-o-y) to almost 18.1mn in Q414, and the fourth successivequarter of unit growth The data show that Hewlett Packard leads the market, with a share of 29.2% andshipments growth of 26.2% y-o-y Second placed Dell managed to increase shipments in the US by 13.5%y-o-y to Q414, falling further behind HP Another notable success was Apple, which achieved a 11.7%market share with its high priced Mac devices, meaning its share of profit is likely to markedly exceed itsshare of sales

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

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

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

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

Device Penetration* (%)

2006-2013

*Age 18+ Source: Pew Research Centre, BMI

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

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

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

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

Research by the Pew Research Centre indicates that the deepening of the tablet market occurred rapidly2011-2013, with a variety of models available at different price points helping to drive penetration rateshigher It reported significant increases in penetration of tablets among US adults, with growth acceleratingfrom mid-2012 as cheaper Android devices, and Apple's own iPad Mini, hit the market Pew Researchfound that more than one-third of adults owned a tablet by May 2013, but as penetration rises, it is expectedthat tablet sales will continue to slow The uncertainty arises from the fact that consumers in the US initially

showed a willingness to upgrade tablet devices with a short replacement cycle, a trend that will weakenedconsiderably in 2014 as vendor innovation slowed This is a trend observed across mature tablet markets,and in general we expect volumes will only return to growth once the replacement rate for existing users isreached.

As is the case globally, the US tablet market has been dominated by Apple; however, its position didweaken in 2012 and it faced much stronger competition from 2013 Research from Magid Advisors showedthat in total Apple's iPad was the dominant device in Q213, present in 59% of tablet-owning households (of

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

tablet households, and Samsung devices, present in 19% of tablet owning households However, data fromStatcounter show that Apple's iOS, run on its tablets, accounted for 10.1% of US PC browsing traffic in

February 2015 - a figure that was up by 1.1 percentage points (pp) y-o-y BMI believes this decline reflects

the dip in overall tablet sales in 2014, as well as a relative weakening of Apple's dominant position in thetablet market to Android and Windows rivals

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

accounted for just 2.7% of PC browsing traffic (up 0.5pp y-o-y to February 2015) This recent data

reinforces Apple's dominance

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

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

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

PC Volume Forecast

2011-2018

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

2012 2013 2014e 2015f 2016f 2017f 2018f 2019f 0

25,000 50,000 75,000

e/f = BMI estimate/forecast Source: BMI

Hybrids/Convertibles

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

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

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

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

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

therefore an opportunity for vendors to leverage this strength over rival iOS and Android devices bydesigning tablets with strong productivity functionality alongside the passive media consumption features

Early examples have been hybrid devices such as Microsoft's own Surface (RT & Pro), Hewlett-Packard'sEnvy, Dell's Idea Pro range and Lenovo's Yoga and Helix Dell released its latest hybrid, the Dell Venue 11Pro tablet, in November 2014, which comes preapproved for use by security-minded contractors, includingthe Department of Defense, and is targeted at those working for the government Looking at the hybrid

market more widely, design innovation has some way to go, and prices of hybrids will need to decline, themulti-use device has scope to capture a share of the tablet market by offering a stronger value proposition toconsumers while not compromising on user experience.

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

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

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

Vendor Developments

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

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

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

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

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

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

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

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

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

ecosystem section to market Xbox SmartGlass, SkyDrive and other services

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

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

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

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

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

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

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

available via Dell's Protected Workspace program

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

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

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

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

Software

BMI forecasts software spending will increase at a CAGR of 4.0% 2015-2019, with the market expected to

reach a value of USD231.8bn in 2019 We expect software sales growth will surpass growth in hardwarespending as business software vendors pitch efficiency gains, in line with companies focusing on reducingcosts Meanwhile, the software market is being influenced by the continued move towards distributedcomputing, software-as-a-service (SaaS) and service-oriented architectures

Market Trends