United states information technology report q3 2010

Notebooks are the fastest growing PC market segment and were on course to account for more than 60% of unit sales in 2009, while netbooks were forecast to account for around 15% of noteb

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INFORMATION TECHNOLOGY REPORT Q3 2010

INCLUDES 5-YEAR FORECASTS TO 2014

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Publication Date: July 2010

CONTENTS

Executive Summary 5

SWOT Analysis 8

US IT Sector SWOT 8

United States Telecoms Market SWOT 9

US Political SWOT 10

US Economic SWOT 10

US Business Environment SWOT 11

IT Business Environment Ratings 12

Americas IT Business Environment Ratings 12

Table: Regional IT Business Environment Ratings 12

Latin America Regional IT Markets Overview 15

United States Market Overview 22

Government Authority 22

Overview 23

Hardware 25

Tablet Notebooks 28

E-Readers 29

Software 29

Operating Systems 29

Business Software 31

Services 32

Verticals 32

Segments 33

Industry Developments 34

Industry Forecast Scenario 36

Table: US – IT Sector (US$mn Unless Otherwise Stated) 38

Internet 39

Table: Telecoms Sector – Internet – Historical Data And Forecasts 39

Macroeconomic Forecast 41

Table: United States – Economic Activity 45

Competitive Landscape 46

Hardware 46

Software 48

Business Software 50

IT Services 52

Company Profiles 54

HP 54

Dell 56

Microsoft 58

IBM 60

Country Snapshot: US Demographic Data 61

Section 1: Population 61

Table: Demographic Indicators, 2005-2030 61

Table: Rural/Urban Breakdown, 2005-2030 62

Section 2: Education And Healthcare 62

Table: Education, 2002-2005 62

Table: Vital Statistics, 2005-2030 62

Section 3: Labour Market And Spending Power 63

Table: Employment Indicators, 2001-2006 63

Table: Consumer Expenditure, 2000-2012 (US$) 63

Table: Average Annual Wages, 2000-2012 (US$) 64

BMI Methodology 65

How We Generate Our Industry Forecasts 65

IT Industry 65

IT Ratings – Methodology 66

Table: IT Business Environment Indicators 67

Weighting 68

Table: Weighting Of Components 68

Sources 68

Executive Summary

Market Overview

US spending on IT products and services is forecast to reach US$629.3bn by 2014

In BMI’s core forecast scenario, US spending on IT goods and services will reach US$511.4bn in 2010

and then advance at a compound annual growth rate (CAGR) of 6.5% over our five-year forecast period

BMI has upwardly revised its forecast after the first quarter of 2010 brought strong growth in US PC

shipments and signs of improved confidence in some IT-spending verticals

A major IT services demand driver will be organisations looking for help to utilise efficiencies from cloud computing models such as software-as-a-service (SaaS) and infrastructure-as-a-service (IaaS)

Other key market drivers are expected to include:

! Growing fixed and mobile broadband penetration

! Product innovation such as tablet notebooks, e-readers and feature-rich netbooks

! Technology innovation such as GPS and services

! Business model innovations such as virtualisation

! Economic recovery

Businesses are likely to remain cautious in 2010, but upgrade cycles should accelerate in the second half

of the year, boosted by sales of Windows 7 The recession may have had a lasting impact on the IT market by creating the conditions for the popularity of low-cost netbooks and notebooks and

encouraging consideration of new IT delivery models such as SaaS In the light of these and other

changes, major vendors have also adjusted their competitive strategies

Industry Developments

In August 2009 the federal government reported on its 2009 calendar year IT spending

In full-year 2009, total IT spending including all federal IT investment was measured at US$74.2bn, up 1.99% on the previous year’s total of US$72.8bn In 2010, budgeted federal IT spending is set to rise to US$78.4bn

The Federal Government’s Stimulus Bill, which required the use of electronic healthcare records (EHS)

by doctors by 2015 is expected to be a major driver of investment in this area

Competitive Landscape

! The US PC competitive landscape is dominated by two big domestic vendors, Dell and HP,

which together have at least 50% of the US market

In April 2010 Apple finally launched its long-awaited iPad and achieved worldwide sales of around 2mn

units within the first two months Rival vendors such as HP and Dell have all announced or shown their

own tablet products, while smartphone makers Research In Motion (RIM) and Samsung are also

expected to compete in this segment

One current driver of acquisitions in the IT services space is vendors positioning themselves to compete

for the cloud computing services market In May 2010, IBM moved to improve its position in this

emerging area by purchasing California-based company Cast Iron Systems for an undisclosed sum.

Meanwhile, the government remains a key vendor target In May 2010, HP achieved one of its most recent local market successes with the win of a US$41.6mn contract from the US Department of

Homeland Security In September 2009, HP’s EDS unit won a US$30mn contract from the

US Department of the Treasury’s Office of the Comptroller of the Currency (OCC) to provide and maintain computing resources and mobility services

Computer Sales

! The US addressable market for PCs and accessories is estimated by BMI at US$115.5bn in

2010, with mid single-digit growth compared with 2009

US PC sales grew strongly in Q110 and BMI estimated that the market was on course for full-year total

PC sales of 77mn In the first quarter of the year, sales were boosted by a revival of the business PC market, which is expected to gather pace in the second half of the year

Notebooks are the fastest growing PC market segment and were on course to account for more than 60% of unit sales in 2009, while netbooks were forecast to account for around 15% of notebook sales However, netbooks and notebooks face competition from other form factors such as smartphones from

Palm, RIM, Apple and other vendors, and tablet notebooks, spearheaded by Apple’s iPad

Software

The US software market is estimated at US$148.3bn in 2010, with single-digit growth from 2009

Software CAGR for 2010-2014 is projected at around 6.2%, as the addressable market grows to around US$188.8bn 2010 should see a boost from systems upgrades deferred from 2009 when the economic crisis had an impact across sectors A combination of enterprise objectives such as cost reduction and greater efficiency should combine to drive more adoption of cloud services in 2010

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

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

IT Services

The US IT services market is estimated at US$227.3bn in 2010, with a sharp deceleration in spending expected compared with 2006-2008

IT services spending is expected to record growth of 6.5% in 2010, after a sharp deceleration in

2009 Spending on IT services is quite closely correlated with GDP growth: bad news in a recession

One opportunity will be organisations looking for help with to utilise efficiencies from cloud computing such as SaaS and IaaS, as organisations in those fields look to save money on IT investments Federal and local governments are one vertical where strong interest in cloud services is being expressed

SWOT Analysis

US IT Sector SWOT

2010

! Despite currently challenging trading conditions, overall IT spending still expected

to remain in positive growth territory

spending, particularly in areas such as consulting and software development

of 2010

! As economic woes ease, vendors should see more growth in other traditional spending IT verticals such as banks and financial organisations, retail and manufacturing

big-! Growing popularity of mobile broadband networks in the US driving netbook sales

! New business models like SaaS and virtualisation will continue to make progress

have another hard year

United States Telecoms Market SWOT

! Broadband growth remains robust despite a declining fixed-line market and falling pay-TV subscriptions

! Demand for faster speeds is leading to new technologies being introduced by operators

No real respite is expected in the market

! The recession has hit all areas of the market – even pay-TV operators have experienced declining subscriptions

! Popularity of mobile services reduces the need for wireline connections

contracts being awarded to ensure latest products made available

! Wireline broadband continues to offer faster download speeds than wireless options, making it a more attractive prospect for many clients

! Internet protocol television growth highlights opportunities for operators to bring subscribers over a single network offering considerable cost savings

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

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

US Political SWOT

most international diplomacy

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

tendency to become more polarised and divisive As today’s superpower, the

US attracts the enmity of a wide range of political groups opposed to the current international status quo

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

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

US Economic SWOT

dynamism, innovation and a high research and development spend

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

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

! Low savings rate by US households, although this has begun to reverse

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

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

US Business Environment SWOT

presents tremendous opportunities for businesses of all types and sizes

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

congested roads and airways

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

with stimulus package funds being dedicated to that purpose

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

enterprise at risk

IT Business Environment Ratings

Americas IT Business Environment Ratings

Table: Regional IT Business Environment Ratings

Limits Of Potential Returns

Risks To Realisation Of

Returns

IT Market

Country Structur

e Limits Market Risks

Country Risk Risks RatingIT BE

Regiona

l Ranking

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

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

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

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

markets over our forecast period, through to 2014 The ratings reflect our consideration of political and economic risks, as well as risks associated specifically with IT intellectual property rights protection and the implementation of government ICT projects

The US is the largest IT market in the region – and indeed the world – and accounts for around 25% of global IT spending Despite the challenge from faster growing IT markets of countries such as China and India, the US is forecast to maintain its global IT market leadership position for some time After three quarters of decline, the second half of 2009 brought a return to growth in US PC shipments and signs of improved confidence in key IT spending verticals

Across both consumer and business segments, US IT spending is expected to have a number of drivers, including the growing popularity of mobile broadband networks, product and technology innovation as well as economic recovery The economic downturn may have accelerated the growth of outsourcing of non-core processes and given additional momentum to IT delivery models such as software-as-a-service (SaaS)

The Latin American economic outlook has improved in Q210 and six of the regional markets covered by

BMI have received upgrades in our Country Structure scores this quarter Low PC penetration means

continued growth potential in a region characterised by significant income and geographical disparities

In many markets, increased penetration of credit cards and credit availability from stores, as well as a growing organised retail sector, should contribute to growth

Brazilian IT spending is expected to bounce back in 2010, as the economy makes a strong recovery from the recession Brazil is our second highest-ranked Americas market, ahead of Mexico in third Brazil scores higher than Mexico on both market and country risk factors, but both have strong growth drivers Meanwhile, Chile’s fourth place reflects its status as one of the most developed markets in the region Chilean IT spending dipped into negative growth territory during 2009, but is expected to bounce back in

2010

In fifth place, Argentina’s IT spending is projected by BMI to grow at a compound annual growth rate

(CAGR) of 10% over 2010-2014 Recovery after 2010 will be driven by rising incomes, expanding retail channels and more flexible terms from retailers Peru and Colombia are in sixth and seventh spots

respectively Peru’s free trade agreement (FTA) with the US will boost demand for IT products and services The regional structure of the Peru market will evolve, with slower growth likely in Lima

compared with other Peruvian provinces Meanwhile, Colombia’s consumer-driven economic boom of the past few years has faded, but a PC penetration rate of around 10% is one of the lowest in the region and indicates untapped potential

Venezuela’s last place in our rankings reflects BMI’s judgement that the economic situation and business

environment in the country are unfavourable for IT spending growth, with consumer-driven growth of recent years cooling due to economic uncertainty, the collapse in oil prices and currency devaluation

There will continue to be areas of opportunity, but BMI anticipates another difficult year in 2010

Brazil and Mexico account for around 75% of PC sales in Latin America, with economic growth lifting millions into a computer-owning middle class However, Brazil currently ranks higher than Mexico on grounds of market size, as well as country risk environment At twice the size of Mexico’s market, Brazil

is already estimated to be the fifth largest PC market in the world Growing broadband penetration, including 3G mobile, will drive the PC markets of both countries

BMI projects that Mexican IT spending will grow again in 2010, despite continued economic

uncertainties Close ties with the US are a long-term driver of IT opportunities; for example, the city of Monterrey is developing as an important outsourcing hub There should also be opportunities in key IT verticals such as financial services, telecoms and government, with other growth sectors in 2010 set to include healthcare, utilities and small and medium-sized enterprises (SMEs)

Despite business environment improvements, there are structural inhibitors in Mexico and Brazil In Brazil, these include a significant digital divide and bureaucracy Mexico has a heavily regulated labour market, while another negative factor is the government’s austerity drive

Chile’s fourth place, ranking ahead of Argentina, is partly earned by having the highest country risk rankings of any of the states in our Latin America table However, with PC penetration of only 18% in Chile and 22% in Argentina, there is considerable room for growth in both states Continued PC sales growth is expected in Argentina, where IT spending is being driven by factors such as greater credit availability and growing broadband penetration In both Chile and Argentina, government ICT policies support market growth

Both Peru and Colombia offer opportunities despite some business environment risks Peru’s market will receive a boost from the FTA with the US There are opportunities in sectors such as banking and

financial services, telecoms, retail, mining and SMEs Government programmes are also a factor,

particularly PCs for schools In Colombia, the government regards ICT as a means to advance its central strategic goal of helping to reintegrate disaffected groups The Ministry of Communications assigned a COP1.5bn budget for its National ICT Plan for the 2008-2010 period

Investment in Venezuela is likely to remain relatively low, given the political environment, which is increasingly adverse for private investment However, computer shipments should still grow, thanks to government affordable computer programmes and more local production of computers The government’s 2007-2012 Economic Plan has a key role for technology in development and various public bodies are rolling out e-infrastructure projects However, concerns remain about currency devaluation, import restrictions and government policies on issues such as open-source software, which will require investor caution

Latin America Regional IT Markets Overview

The fastest growth in internet penetration is

expected in Peru, while Brazil and Colombia will

also see a solid advance Dial-up technology is

still the dominant access method However, the

number of broadband subscribers continues to

increase, with progress expected in all markets

Brazil’s National Broadband Plan announced in

May 2010 should help to drive future growth in

demand for IT products and services

Canada was estimated to have the region’s

highest broadband penetration in 2010, of 32%, which should rise to 39% by 2014 Broadband

penetration in the United States was estimated at 27% in 2010, and is forecast to reach 32.2% by 2014

Meanwhile, in Latin American markets, broadband penetration is on course to reach as high as 20.9% in Argentina and 15.5% in Chile, and to pass 10% in Colombia, Mexico and Venezuela within our forecast period In Venezuela, the recent government consultation on a new telecoms law to promote competition may be a hopeful augur of progress

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

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

potential, with IT spending as a percentage of GDP well below 2% in countries covered by BMI

However, government initiatives and growing PC affordability are now driving improvements on many ICT indicators

E-readiness

2010e-2014f

e/f = estimate/forecast Source: BMI

Growing affluence has brought computers within

the reach of a greater proportion of the population

PC penetration is below 25% in Brazil, but is set to

rise to above 32% by 2014, while Argentina is

forecast to progress from a current rate of around

24% to at least 28% in 2014 A similar situation

prevails in Chile and Mexico, where PC penetration

is estimated to be less than 20% and 25%

respectively Colombia’s PC penetration reached

12.8% as of mid-2009, surpassing the government’s

previous 2010 target of 10.8% BMI estimates that

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

ICT initiatives are central to the development plans of many regional governments In April 2010 the Argentine government was preparing to launch a tender to provide 3mn PCs to public schools nationwide

In Brazil, thousands of rural schools have received computers, while the government also has an

ambitious agenda to spend US$23bn on science and technology programmes as part of the country’s Growth Acceleration Plan (PAC) Meanwhile, Colombia’s Zona Clic programme is expected to involve the requisition of as many as 90,000 computers over the next few years

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

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

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

Market Growth and Drivers

Going into 2010, across the Americas region, vendors reported that demand was up in the enterprise segment, reinforcing relatively robust consumer demand in many markets Both North American and Latin American IT markets were affected by the global economic slowdown in 2009, as tighter credit conditions led to deferred IT spending by consumers and businesses

In the US and Canada, as the recession eases,

vendors should see more growth in other traditional

big-spending IT verticals such as banks and

financial organisations, retail and manufacturing

With a wave of mergers and acquisitions expected

in the banking industry in the wake of the fallout of

the financial crisis, more opportunities should be

generated Key IT market drivers will include

growing mobile and fixed broadband penetration,

product innovation such as feature-rich netbooks,

technology innovation such as GPS technology and

services, and economic recovery In Canada the consumer segment should remain a bright spot, with a steadily improving unemployment situation supportive of consumer confidence

Lower prices, a greater range of financing options for consumers and more flexible terms from retailers are the main growth drivers for PC sales in Latin American markets The fundamentals of growing affordability and rising PC penetration should help keep regional markets in positive territory during the forecast period

Government programmes to deepen and broaden ICT access will drive IT spending growth in some markets, while others face a climate of fiscal austerity In some countries such as Colombia, government programmes and growing computer affordability will support more spending on IT products and services However, given the uncertain economic environment, and large deficits faced by the Ontario government among others, vendors will need to provide public sector clients with ways to reduce costs by driving efficiencies

In 2010 PC vendors across the region will focus on new form factors, such as smaller notebooks that blur

the distinction between a notebook and a netbook Following the launch of Apple’s iPad, tablet

notebooks are also projected to be a growth area in 2010-2011 and will appeal to consumers who find that smartphones are not convenient for web surfing or multimedia consumptions Businesses will remain cautious in 2010, but there should be a ramp-up in spending However, there remains a possibility that the economic recovery in some countries could be anaemic, or even that there could be a ‘double-dip’

recession, in which case tech spending could have another hard year

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

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

period, particularly in the south east The Argentine market is dominated by the capital Buenos Aires, with higher per capita income and education levels compared with the rest of the country Brazil’s IT

2010 IT Market Sizes

US$mn*

* estimate Source: BMI

market also has a distinct regional structure, with most spending accounted for by the south east region, which includes São Paulo as well as Rio de Janeiro São Paulo alone accounts for around 35% of

spending and Rio de Janeiro, Espírito Santo and Minas Gerais for 25%

The impact of the global economic slowdown varied from country to country Brazil remains on course to become one of the top four computer markets as an expanding economy lifts millions into a middle class for whom computers are no longer beyond reach IT spending slowed in 2009 as the global credit crunch, and the more expensive US dollar, had an impact, but the fundamentals of low computer penetration and growing affordability should keep the market on

an upward path

Colombia is one market that continued to grow in

2009 as government programmes and growing

computer affordability help to sustain spending

on IT products and services Evaluations of

virtualisation are currently being conducted in

areas such as education and healthcare where

there is particular potential, but this is very much

an emerging sector

Meanwhile, Chile retains some strong IT market

fundamentals including consumer affluence and a relatively favourable business environment There are expected to be areas of opportunities in 2010 in the government sector, with a stream of tenders delayed from 2009 In the current global economic climate, Mexico’s close economic ties to the US represent vulnerability as well as opportunity There should be opportunities in key IT verticals such as financial services, telecoms and government, with other growth sectors in 2010 set to include healthcare, utilities and SMEs

Aside from regional trends, particular factors are forecast to market demand in individual markets Infrastructure investments following 2009’s award of the 2016 Olympic Games to Rio de Janeiro is expected to drive new Brazilian market spending on IT systems and solutions, as it has done in South Africa, host country for the 2010 FIFA World Cup In Venezuela the steep devaluation of the bolívar for non-essential imports such as computers will depress spending as consumers grapple with runaway inflation and the attendant erosion of real wages Meanwhile, it is still too early to assess how the Chilean earthquake and subsequent reconstruction efforts will impact on the local IT sector, but rebuilding is expected to begin apace in H210

The largest IT market in the region is, vastly, the United States, with spending estimated at US$516.3bn

in 2010, while Canada is a distant second with US$39.9bn Brazil, estimated at US$23.3bn in 2008,

IT Market Sizes As % Of National GDPs

2010e-2014f

e/f = estimate/forecast Source: BMI

making it the largest IT market in the Latin American region, and a major global market in its own right Mexico is the second largest Latin American market with an estimated value in 2010 of US$11.7bn The next largest markets were Argentina (US$3.8bn) and Chile (US$2.3bn) Argentina and Peru are set to be the fastest-growing markets with each projected to have 2010-2014 compound growth of 71% The slowest growing market is forecast to be Canada, with total growth of just 17% over the five-year forecast period through to end-2014, compared with a

projected 28.6% in the United States

Sectors and Verticals

Hardware accounts for less than one-third of IT

spending in both the United States (27%) and

Canada (34%) In contrast, Latin American IT

markets remain hardware centric, with hardware

accounting for between 46% (in Brazil) and 68%

(in Venezuela) of the total spending in these

markets

However, in all markets spending on software

and services is projected to increase its share of the IT spend in most markets by 2014 Notebook sales are growing much faster than the PC market as a whole, with growth driven by falling prices, more features and their general popularity, while volume CAGRs of 20-30% are expected for notebooks in most

markets

In 2010, regional businesses are expected to increase their IT investments in 2010, despite uncertainty about a sustainable global economic recovery There could be a boost, particularly in the second half of the year, from computer hardware tenders delayed from 2009 Sales of the Windows 7 operating system,

and new Intel core technology, have the potential to help trigger a new cycle of hardware

upgrades, although much will depend on business and consumer confidence Stronger corporate demand should fuel a revival in desktop sales in 2010

Even PC markets such as Venezuela’s, which is being buffeted by strong economic headwinds, should continue to perform reasonably well, with one factor in Venezuela’s case being more local production of affordable computers There is a sizable grey regional market, although evidence suggests that its size has been diminishing in many places Investment in call centres is one trend currently driving spending on hardware

One additional pan-regional driver both of increased notebook sales and of lower prices is the move of telecoms operators into the PC retail space With increasing mobile and fixed broadband penetration, notebooks and netbooks have become popular wireless connectivity options for consumers Netbooks and

IT Markets Compound Growth,

2010e-2014f, %

e/f = estimate/forecast Source: BMI

notebooks face competition from other form factors such as smartphones from Palm, RIM, Apple and

other vendors, and tablet notebooks, spearheaded by Apple’s iPad,

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

compared with 29% in the United States Sales of the Windows 7 operating system have the potential

to impact positively on sales in 2010, despite business caution Despite the economic downturn, there are expected to be opportunities for software vendors in most markets The economic situation is likely to lead to further consideration of open source solutions in some sectors

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

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

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

most important open source applications

In general, enterprise resource planning (ERP) and other e-business products still dominate the Latin American enterprise software market, but vendors are also looking to other areas, such as customer relationship management (CRM) and business intelligence, where faster growth is possible

The economic slowdown may have encouraged companies to consider cloud computing solutions such as Software-as-a-Service (SaaS) SaaS has enjoyed steady growth in most markets, and improved broadband infrastructure will assist the popularisation of the rented software model Brazil is thought to be one of the most promising regional markets for the SaaS model, with growing demand in sectors such as retail, finance and healthcare The market in most countries remains relatively small, with a 2008 survey finding that only 20% of Canadian firms were considering this business model

The IT services segment accounts for between 15% and 40% of spending in the Latin American markets

covered by BMI, compared with above 40% in both the United States and Canada The global economic

crisis had an impact on projects in some verticals and led to negative spending growth in some markets such as Mexico Much will depend on the speed of the US and global recovery, with the likelihood of budget cuts increasing the longer the slowdown lasts

The IT services market has become one of the most dynamic drivers of IT sector spending in the region, and this has attracted greater investment from international vendors The increasing number of

multinational corporations operating in markets such as Mexico, Chile and Brazil is in itself an important driver for spending, while local companies are trying to use computing resources more effectively and integrate investments made in hardware and software

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

Outsourcing is also becoming an important spur to growth for the IT services sector, as several Latin American markets try to consolidate their reputations as regional offshoring hubs One driver for many markets will be ambitions to develop capabilities in the business process outsourcing (BPO) area and capture a larger global market share Brazil, for example, has an ambitious plan to become one of the world’s top IT outsourcing destinations by 2010 Chile’s development as an offshoring location will attract more investment in IT services, with sectors such as retail, distribution, financial services,

telecoms and healthcare all offering opportunities

Market Structure (% Of Total IT Market)

e/f = estimate/forecast Source: BMI

United States Market Overview

Government Authority

Government Authority National Telecommunications and Information

Administration (NTIA), Department of Commerce Assistant Secretary for Communications and Information Lawrence E Strickling

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

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

NTIA itself has several sub-bodies including:

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

! The Office of Policy Analysis and Development

! The Office of Telecommunications and Information Appliances (OTIA)

Major programmes run by the OTIA include:

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

! A programme to drive the transition to digital television

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

Various other federal government ministries are also relevant to IT vendors

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

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

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

Overview

Source: BMI forecasts Source: BMI forecasts

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

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

BMI estimated US IT spending at around

US$487bn in 2009 As a mature market,

BMI assumes that IT services accounts for

around 44% of US IT spending, compared

with 27% for hardware and 29% for

software

Each segment is comprised of several

sub-segments In the hardware segment,

notebook computers now account for around

58% of sales, and this share is expected to

rise to 81% by 2014, pushing desktops

down to less than one-fifth of unit sales A

major driver will be sales of netbooks,

which now account for around 12% of sales, although the netbook growth trajectory will flatten as the price differential with fully featured notebooks becomes less significant

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

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

spending Internally developed software accounts for a declining share of the market The software market is being transformed with the rise of the Software-as-a-Service (SaaS) delivery model

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

PCs: Segments

2009

Source: BMI

BMI counts most custom-developed software in

IT services Custom-developed software has

declined in importance as packaged software has

become more specialised and customised to

particular industries, and it may now account for

around 10% of commercial software value

The two largest IT spending verticals are

discrete manufacturing and government, which

have typically accounted for around 10% of

total IT spending each Banking has traditionally

also accounted for a similar amount although it

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

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

US consumers are sophisticated and enthusiastic consumers of consumer electronics products including computers According to the Consumer Electronics Association, the average US household spent

US$1,405 on consumer electronics products during the period March 2007-March 2008 Meanwhile,

BMI estimates IT spend/capita was just below US$1,600 in 2009 However, a mature market with high

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

Hardware

BMI forecasts that the US computer and accessories market will grow 4.2% in 2010 We have upwardly

revised our projection after a robust PC sales performance in Q110; PC market 2010-2014 compound annual growth rate (CAGR) is now projected at 4.5% and value could reach the US$132bn mark by 2014

2010 Outlook

US PC sales grew strongly in Q110, with unit sales estimated by BMI at above 17mn units BMI

estimates that the market is on course for full-year total PC sales of 77mn In the first quarter of the year, sales were boosted by a revival of the business PC market, which is expected to gather pace in the second half of 2010

The US addressable market for PCs and accessories is estimated by BMI at US$115.5bn in 2010, with

low single-digit growth compared with 2009 In H209, the US PC market had finally shown signs of recovery, with low single-digit growth in Q309, following three consecutive quarters of shipments

decline Sales leapt forward in Q409, due to stronger than expected holiday sales, and were up by at least

25% year-on-year according to market research firms Gartner and IDC

Software: Segments

2009

Source: BMI

The recovery in Q409 was based however mainly consumer purchases of notebooks, while the corporate

PC segment remained sluggish Low priced notebook and netbooks were the main drivers, along with the launch of Windows 7, and vendor and retailer promotions Vendors targeted consumers with aggressive marketing and price points which eroded profitability However, the downside to this was significant downwards pressure on prices, with consumers unwilling to pay big bucks, and looking for good enough solutions to their computing needs Lower prices were also driven from the supply side, with vendors competing fiercely due to the market slowdown, and the disruptive popularity of low-priced netbooks

The strong response by consumers in this environment to netbooks and ultra-slim laptops ended up pushing prices of notebooks into the sub-US$500 range Average PC selling prices were estimated to

have fallen by around 20% as between 2008 and the first half of 2009 However, BMI believes that prices

will remain relatively stable in 2010

Annual computer sales are forecast at 77mn units 2010, higher than previously forecast, and up from around 69mn in 2009 Shipments are projected to reach 114mn by 2014 Despite the challenging trading conditions in 2009, vendor reports indicated that many segments of the US computer market proved surprisingly resilient, pointing to future growth potential Particularly in Q409, the market outperformed not only analyst expectations but also some emerging markets

Business demand remained sluggish going into 2010 Businesses are expected to maintain a cautious attitude to IT investments in 2010 due to uncertainty about the economic recovery, but there could be a boost, particularly in the second half of the year, from computer hardware tenders delayed from 2009

The launch of Windows 7, in October 2009, reportedly saw closer collaboration between Microsoft and leading PC vendors like HP, Acer and Dell Both Acer and Dell said that, as of launch day, there was to

be zero inventory of Vista-based machines going into stores However, Windows 7 requires less power than its predecessor, Vista, and so there is a possibility that some consumers may simply decide to

upgrade their existing machine rather than buy a new one

Prior to the global economic crisis, PC sales had growth peaked in Q308, but then fallen off as the effects

of the crisis started to impact consumer confidence The two leading PC vendors HP and Dell saw sales decline by around 4% and 16% respectively in that period Dell was harder hit because of its relatively greater reliance on desktops and the enterprise segment There were reports of some companies deferring spending as tighter margins and flagging export sales increased a focus on the bottom line

Drivers

In H210 vendors were preparing for the summer fun and graduation gifting market with a focus on friendly competitively priced devices that offered a range of options to access digital content such as video games Summer internships and travels plans will also provide a seasonal boost to PC purchases

user-The consumer channel was the main growth area in 2009, with consumers continuing to spend on

notebooks, despite the recession Consumer spending was stronger than anticipated and should continue

to drive opportunities going forward Lower prices and product innovation apparently offset some of the effects of falling consumer confidence

One additional driver both of increased sales and of lower prices is the move of telecoms operators into the PC retail space With increasing mobile and fixed broadband penetration, notebooks and netbooks have become popular wireless connectivity options for consumers As in other markets, telecoms

operators have emerged as significant distribution channels for netbooks, which are offered to subscribers

bundled with broadband service packages AT&T and Verizon have moved quickly to offer these to

subscribers for subsidised prices of as low as US$50

Sales of Microsoft’s new Windows 7 operating system and new Intel Core technology have the potential

to help trigger a new cycle of business hardware upgrades Windows-7 driven PC upgrades were slower than hoped for in the first half of 2010, but are expected to gather strength in the second half of the year Much though will depend on business confidence in a continued economic recovery

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

Boston, where Wi-Fi is relatively ubiquitous

Segments

Desktop shipments were estimated at around 24mn units in 2009, and could rise to around 26mn by 2014

In H109 commercial sales of desktops and notebooks fell by a double-digit factor and commercial

desktop purchases were also down, before stabilising in the second half of the year Desktop sales

declined in both consumer and commercial segments and are expected to comprise less than one-quarter

of the PC market by 2014

Notebooks are the fastest growing PC market segment and projected to be on course to account for nearly 60% of unit sales in 2009, rising to a projected 81% by 2014 Notebook sales were estimated at around 44mn in 2009 and could pass 87mn by 2014 The popularity of netbooks in 2009 was a big factor keeping notebook sales in positive territory and accounted for around 80% of notebook segment growth

Netbooks are estimated to have accounted for around 12% of notebook sales in the US in 2009, with estimated unit sales of more than 6mn The netbook growth trajectory is expected to flatten as the price differential with fully featured notebooks becomes less significant Meanwhile, enhanced versions of netbooks with features like larger screens and more powerful processors should further blur the line between the two categories

Netbooks

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

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

in the US this year, while traditionally higher end vendors like Apple have suffered Notebook prices in

the US$500-600 range are already common Intense competition in the current economic climate and a reduction in component prices and manufacturing costs are among other drivers of low prices

Netbook prices were expected to stabilise at around the US$350-400 level during the 2009 back-to-school

season In Q409 the launch of a new version of Intel’s Atom chip, code-named ‘Pine Trail’, was

scheduled with the new chip billed as a cheaper, and more efficient, version than the current Atom, which helped to drive the netbook explosion

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

notebooks Netbooks are also likely to be enhanced, with larger screen and hard-drive sizes

However netbooks and notebooks face competition from other form factors In particular smartphones

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

solutions and often include a Wi-Fi option Meanwhile, 2010 has also seen the emergence of tablet notebooks, spearheaded by Apple’s iPad

Tablet Notebooks

Initial sales of Apple’s iPad, which received its US and global launch in March 2010, were strong, with around 2mn units sold worldwide within the first two months Other vendors are expected to follow Apple in releasing net tablet devices which have a form factor between the size of a smartphone and a

netbook In H110 Dell, HP and Lenovo all announced or showed off some type of tablet computer

NetTabs are being designed to appeal to consumers who find a smartphone inconvenient for consuming video media or surfing the web, but for whom a netbook is still too big or heavy

Most NetTabs are expectedly to be significantly more expensive than smartphones at between US$800 On launch, unlocked Wi-Fi only models of the iPad cost US$499 for a 16GB version and up to US$599 for 64GB Despite a previous mixed track record, this form factor is seen as a growth area in 2010-2011 Some analysts forecast that tablet sales could overtake sales of netbooks within the next two

US$400-to three years and be well ahead of deskUS$400-tops

E-Readers

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

Amazon’s Kindle There are currently around 450,000 book titles in Amazon’s Kindle store, compared

with around 60,000 in the iBookstore The Kindle is also significantly cheaper than the iPad, at around US$259, although this price is likely to drop further, and battery life is around two weeks compared with around 10 hours for the iPad However, layouts and user-friendliness are both areas where the iPad scores over its rivals

Software

Software CAGR for 2010-2014 is projected at around 7.4%, as the addressable market grows to around US$188.8bn In the current economic climate, business software vendors will look to pitch efficiency gains, as declining margins encourage companies to focus on reducing costs

2010 Outlook

It is forecast the US software market will be worth US$148.3bn in 2010, with single-digit growth from

2009 Sales of Windows 7 are expected to provide a boost to the operating system market in 2010 The year should see a boost from systems upgrades deferred from 2009 when the economic crisis had an impact across sectors Strong economic headwinds led some companies to review IT budgets or look to defer systems updates and may have given additional momentum to alternative software models such as SaaS and cloud computing

Piracy

Despite being an advanced market, it is still estimated that around 20% of software used in the US in

2008 was illegal or pirated According to lobbying group the Business Software Association, total losses from illegal software in the US market were around US$9bn in that year The industry continues to push for stiffer penalties Legal history was made in H109 when a 39-year-old woman received a six-month jail sentence in federal prison for selling illegal software

Operating Systems

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

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

The launch of Microsoft’s Windows 7 operating system in October 2009 was the most significant event for Microsoft since the launch of Windows 95 Windows Vista ran into problems when business users

found that many of their business applications could not run on the Vista operating system There were also complaints from both business and household users about performance defects, generally due to the large amount of processing power and memory required by Vista By all accounts, the Windows 7 launch went much more smoothly, thanks to closer cooperation in the pre-launch period between Microsoft and other players in the software value chain, including PC vendors and end-users

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

BMI projects that Windows 7 will provide a boost to the operating system software market in 2010 The

new system will attract more support from businesses than Windows Vista did, largely because Windows

XP is now getting old Businesses that declined to upgrade from XP to Vista, due to reported problems with the latter, will now go straight to Windows 7 Microsoft will still offer reduced support for XP until

2015, but many hardware manufacturers will start to wind down their support from about 2012 This, as much as the lack of support from Microsoft, will be the factor that drives business upgrades to Windows

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

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

Open Source

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

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

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

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

most important open source applications

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

Business Software

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

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

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

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

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

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

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

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

around 19 to 20 months, with an average sales cycle of around four months A survey by Panorama Consulting Group found that average total cost of ownership was in the region of US$8.6mn

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

Cloud Computing and Software-As-A-Service

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

efficiency should combine to drive more adoption of cloud services in 2010 The biggest software

opportunities will be in non-critical file storage, or customer-facing applications such as CRM

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

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

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

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

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

A survey by market research firm Gartner found that 95% of companies that use SaaS applications were planning to expand their use in 2010 Larger companies, particularly in the technology sector, are also now experimenting with an on-demand software model Leading sector company Salesforce.com counts

Cisco and Dell among its accounts, with around 30,000 and 40,000 subscribers at each company

It is estimated the US IT services market will be worth US$227.3bn in 2010 with a ramp up of spending

after a sharp deceleration in 2009 compared with 2006-2008 Infosys and IBM both cut 2009 revenues

projections last year However, the most pain was felt by vendors that are more exposed to the crisis-hit financial sector

In early 2009 many vendors reported they were not seeing many major blow-offs on existing deals However, there were reports of IT managers in various sectors reviewing spending In the near term, budgets had often already been commissioned, and so the effects were more likely to be felt in the second half of 2009

Verticals

The economic situation was expected to mean reduced spending in some key IT services verticals that have driven IT spending Vendors exposed to the financial sector, particularly major Indian financial

services vendors such as Wipro etc were vulnerable, given the financial crisis In 2009 many vendors

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

Early signs, however, were that many large companies in key IT verticals such as finance had maintained previously budgeted spending A Society For Information Management (SIM) survey at the end of 2008 found that around 80% of IT officers expected IT budgets to increase or remain the same in 2009 Much will depend, however, on the strength and timing of US and global economic recovery, which remains a subject of debate among economists The likelihood of IT budgets being cut will increase the longer the slowdown lasts

Segments

The most severely hit area during the economic slowdown was softer project-type spending such as consulting and software development Contractors were cut and hiring frozen as customers postpone projects and cut back on short-term spending particularly in areas such as consulting and software

development These therefore are likely to bounce back strongest in 2010-2011

A major demand driver will be organisations looking for help with to utilise efficiencies from cloud computing such as SaaS and IaaS Particular areas of opportunity for cloud computing include banking and retailing as organisations in those fields look to save money on hardware investments Federal and local governments are another vertical where strong interest in cloud services is being expressed Market

research firm INPUT has forecast that the state and local government market for vendor-supplied IT

systems could grow to US$60.1bn by 2014, equivalent to around 30% of the IT Services market

Software products account for around 15% of this projected spend

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

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

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

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

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

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

In 2010, budgeted federal IT spending is set to rise to US$78.4bn The biggest spending agency is once again projected to be the Department of Defense, with budgeted spending of US$33.4bn However, the largest budgeted increase is for the Department of Commerce, where IT spending is set to increase from US$3.6bn to US$6.4bn in 2010

Healthcare IT

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

be Healthcare IT The Stimulus Bill, which required the use of electronic healthcare records (EHS) by

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

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