United states information technology report q3 2011

Computer Sales ƒ The US addressable market for PCs and accessories is estimated by BMI at US$121.3bn in 2011, with single-digit growth compared with 2010.. In 2011, Brazilian consumer

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INFORMATION TECHNOLOGY REPORT Q3 2011

INCLUDES 5-YEAR FORECASTS TO 2015

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: July 2011

Business Monitor International

85 Queen Victoria Street

London, EC4V 4AB

© 2011 Business Monitor International

All rights reserved

All information contained in this publication is copyrighted in the name of Business Monitor International, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher

DISCLAIMER

All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as

INFORMATION TECHNOLOGY REPORT Q3 2011

INCLUDES 5-YEAR FORECASTS TO 2015

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: July 2011

CONTENTS

Executive Summary 5

Market Overview 5

Industry Developments 5

Competitive Landscape 6

Computer Sales 6

Software 6

IT Services 7

SWOT Analysis 8

US IT Sector SWOT 8

US Political SWOT 8

US Economic SWOT 9

US Business Environment SWOT 9

IT Business Environment Ratings 10

Americas 10

Table: Regional IT Business Environment Ratings 10

Americas IT Markets Overview 14

IT Penetration 14

United States Market Overview 22

Government Authorities 22

Overview 23

Hardware 25

Software 29

Services 33

Industry Developments 35

Industry Forecast Scenario 37

Table: US IT Sector Overview, 2007-2014 39

Internet 40

Table: Telecoms Sector - Internet - Historical Data & Forecasts 40

Macroeconomics Forecast 42

United States – Economic Activity 45

Competitive Landscape 46

Hardware 46

Software 49

Company Profiles 55

HP 55

Dell 57

Microsoft 59

IBM 60

BMI Methodology 61

How We Generate Our Industry Forecasts 61

IT Industry 61

IT Ratings – Methodology 62

Table: IT Business Environment Indicators 63

Weighting 64

Table: Weighting Of Components 64

Sources 64

Executive Summary

Market Overview

ƒ US spending on IT products and services is forecast to reach US$643bn by 2015

US spending on IT products and services is forecast to reach US$529bn in 2011 PC sales contracted again in Q111, after strong growth in the first half of 2010 The commercial segment showed signs of vitality, but consumers were spending less Overall moderate growth in IT spending is expected in 2011, with the public sector in retrenchment mode and the private sector relatively stronger

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

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

Other key market drivers are expected to include:

ƒ Growing fixed and mobile broadband penetration

ƒ Data centre consolidation and virtualisation

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

ƒ Technology innovation such as GPS and services

ƒ Economic recovery

Industry Developments

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

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

In 2010, budgeted federal IT spending was set to rise to US$78.4bn, from US$74.2bn in 2009.In 2010, the Obama administration called on federal agencies to develop strategies to simplify and where possible

combine often sprawling IT operations so as to reduce costs Guidelines published in 2010 by the Office

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

Competitive Landscape

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

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

In the first quarter of Q11 several vendors suffered from the sharp slowdown in the US market, which was caused by lacklustre consumer demand Acer, whose traditional strength is in the consumer segment, was hit the hardest by the market contraction Meanwhile Apple continued to profit at the expense of the number one and two PC vendors

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

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

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

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

30,000 city employees

Computer Sales

ƒ The US addressable market for PCs and accessories is estimated by BMI at US$121.3bn in

2011, with single-digit growth compared with 2010

US PC sales contracted in Q111 but BMI estimated that the market was on course for full-year total

shipments of around 85mn units US PC sales had slipped into negative y-o-y growth territory in the final quarter of 2010, dragging down the growth rate for the year as a whole The commercial refresh segment showed signs of vitality, with steady growth in replacement purchases, but consumers were spending less

One additional driver of increased sales and lower prices is the move of telecoms operators into the PC retail space Notebooks are the fastest-growing PC market segment and are estimated to have accounted for more than 60% of unit sales in 2010 However, netbooks and notebooks face competition from other formats such as tablets, which appear to have growing traction in the enterprise segment

Software

ƒ The US software market is estimated at US$152.4bn in 2011, with single-digit growth from

2009

Software CAGR for 2011-2015 is projected at around 5.9%, as the addressable market grows to around US$191.7bn A combination of enterprise objectives such as cost reduction and greater efficiency should combine to encourage the adoption of cloud services in 2011

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

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

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

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

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

In H111, Microsoft's dominance with its Windows software appeared to be under threat of erosion from the surge in demand for non-Windows tablets Analysts have long worried about Microsoft's potential over-reliance on Windows to drive its revenues, and the vendor's Q111 sales of Windows fell short of expectations However Microsoft's overall revenues actually rose 13% in Q311, thanks mainly to strong sales of Microsoft Office

SWOT Analysis

US IT Sector SWOT

Strengths ƒ The largest IT market in the world, with spending forecast to pass US$552bn in 2011

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

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

spending, particularly in areas such as consulting and software development

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

data centre consolidation, and cloud computing

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

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

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

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

technology could have another hard year

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

US Political SWOT

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

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

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

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

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

candidates in the 2008 presidential election, including Obama's), and the widespread dissatisfaction of the voting public, may encourage both major parties to experiment with more consensual approaches to certain policy areas The current budget debates will provide a pertinent test of the degree to which bipartisan cooperation is possible

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

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

US Economic SWOT

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

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

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

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

US households on a historic basis, although this has begun to reverse

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

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

to the US' external imbalances

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

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

US Business Environment SWOT

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

tremendous opportunities for businesses of all types and sizes

ƒ Few countries offer better environments for entrepreneurial activity, with a highly flexible labour force, a legal system that is friendly to business, and significant centres

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

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

congested roads and airways

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

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

stimulus package funds being dedicated to that purpose

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

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

enterprise at risk

IT Business Environment Ratings

Americas

Table: Regional IT Business Environment Ratings

Limits Of Potential Returns

Risks To Realisation Of

Returns

IT Market

Country Structure Limits

Market Risks

Country Risk Risks

IT BE Rating

Regional Ranking

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

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

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

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

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

implementation of government information and communications technology (ICT) projects

In Q311, for the first time we have added Canada to our regional BER analysis, where it makes its entry

at second place in our rankings table Despite current fiscal constraints, the Canadian government's digital economic strategy provides a framework for IT market growth, with a number of programmes being implemented One key initiative is Broadband Canada, which has a mandate to expand broadband

coverage to underserved areas

Despite Canada being a relatively mature market, there still remains plenty of potential for software vendors in industries such as consumer products, telecommunications, energy, engineering, construction, transport, food and beverage as well as retail Growing interest in cloud computing is expected, with Canada currently lagging the US and some other advanced markets

However, the US retains its top position in our regional rankings as by far the largest IT market in the region and the world, accounting for about 25% of global IT spending Despite a sluggish economic recovery and the challenge from faster-growing IT markets such as Brazil, the US is forecast to maintain its global IT market leadership position

In Q111 the US commercial PC segment showed signs of vitality, particularly small and medium-sized enterprises (SMEs), but there was a sharp dip in consumer sales During the next few years, across consumer and business segments, US IT spending is expected to be driven by a number of factors

including product and technology innovation, and investment in fixed and mobile broadband

infrastructure as well as economic recovery

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

The Latin American IT market outlook remains positive in Q311, with BMI retaining its IT business

environment ratings Low PC penetration means continued growth potential in a region characterised by significant income and geographic disparities In many markets, increased penetration of credit cards and credit availability from stores, as well as a growing organised retail sector, should contribute to growth

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

period, with double-digit growth The government's launch of a US$344mn modernisation strategy in late

2010 should mean enhanced IT spending over the next few years A National Broadband Plan was

announced in 2010 and modernisation, ahead of Brazil's hosting of the 2014 FIFA World Cup and 2016 Summer Olympics, should also help to drive demand for IT products and services

In 2011, Brazilian consumer PC sales are expected to continue growing, due to economic growth and low unemployment fuelling consumer confidence In 2010, shipments growth was boosted by major

government procurements at national, provincial and municipal levels, and this should continue

Meanwhile, a PC penetration rate of less than 25% indicates there is plenty of room for market growth

Brazil is our third highest ranked market in North and South America, ahead of Mexico, which drops back one place into fourth position Brazil scores higher than Mexico on market and country structure factors, but both have strong growth drivers Mexican IT spending is expected to grow at a double-digit

compound annual growth rate (CAGR) over BMI's five-year forecast period

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

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

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

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

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

outsourcing hub

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

Meanwhile, Chile's fifth place in our table reflects its status as one of the most developed markets in the region Chilean IT spending is projected to grow at a CAGR of 8% over 2011-2015 A wide-ranging government plan to increase ICT utilisation in government and other sectors such as healthcare and education will encourage IT investment The 2010 earthquake may have diverted consumer funds from technology to other priorities, but reconstruction offers opportunities for government agencies to advance

IT modernisation

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

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

in Argentina, so there is considerable room for growth in both countries

In seventh place, Argentina's IT spending is projected by BMI to grow at a CAGR of 15% in 2011-2015

Recovery will be driven by rising incomes, expanding retail channels and a high-tech-focused national development plan The Argentine market is dominated by the capital Buenos Aires, which accounts for about one-quarter of computer sales Continued growth in PC sales is expected and IT spending is driven

by factors such as greater credit availability and growing broadband penetration

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

be the introduction of new regulatory compliance laws for electronic invoicing

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

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

telecoms, retail, and mining sectors as well as SMEs

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

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

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

consumers grapple with the erosion of real wages

BMI expects flat or negative IT market growth in US dollar terms over our five-year forecast period, but

there will be areas of opportunity The Venezuelan government's 2007-2012 economic plan has a key role for technology in development and various public bodies are launching e-infrastructure projects

Meanwhile, the government's affordable computer programmes have encouraged more local production

of computers

Americas IT Markets Overview

IT Penetration

A mixed regional picture is found with

relation to internet penetration In the US

and Canada, internet penetration in 2011

was estimated at 83.4% and 85.5%

respectively In Latin America, the highest

rate in 2011 was in Colombia (53.2%),

having experienced solid recent progress

on this indicator One feature of Latin

America is that a large amount of internet

access occurs outside the home For

example, data suggest 68% of Mexican

internet users go online from places such

as schools, workplaces and internet cafés

Recent data from Peru suggest nearly 75%

of internet users use a public access point

The fastest growth in internet penetration

is expected in Peru, while Brazil and

Colombia will also see a solid advance

Dial-up technology is still the dominant

access method However, the number of

broadband subscribers continues to

increase, with progress expected in all

markets Brazil's National Broadband Plan

announced in May 2010 should help to

drive future growth in demand for IT

products and services

Canada was estimated to have the region's

highest broadband penetration in 2011, of

42.8%, which should rise to 58.5% by

2015 Broadband penetration in the United States was estimated at 28.1% in 2010, and is forecast to reach 32.5% by 2015

Narrowband Internet Penetration

Meanwhile, in Latin American markets, broadband penetration is on course to reach as high as 23.1% in Argentina and 18.7% in Mexico, and to pass 10% in Brazil, Chile, Colombia and Venezuela within our forecast period However, much broadband penetration growth is now being driven by mobile broadband users, thanks to the continued expansion of 3G mobile services across the region

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

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

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 In Brazil, a National Broadband Plan announced in May 2010, and modernisation ahead

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

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

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

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

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

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

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

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

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

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

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

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

Market Growth And Drivers

Across the Americas, in 2011, a greater

range of financing options for consumers

and more flexible terms from retailers will

be the main drivers of consumer IT

spending growth Key IT market drivers

will include growing mobile and fixed

broadband penetration, product innovation

such as feature-rich netbooks, technology

innovation such as 3G technology and

services, and economic recovery

However, in Canada and the United States

consumers remain in a phase of

retrenchment thanks to the often stretched

state of household balance sheets

Businesses are expected to increase their

IT investments in 2011 thanks to a general

economic recovery and improved credit

availability There will be a boost from

tenders previously delayed as a result of

the economic situation Meanwhile,

improved bank profitability should support

more demand from this key IT-spending

vertical Migrations to Microsoft's

Windows 7 operating system, and new

Intel core technology, should help to

trigger new cycles of hardware upgrades,

but in the US and Canada, some of this

pent-up demand may not be realised in

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

medium-In some countries such as Colombia, government programmes and growing computer affordability will support more spending on IT products and services In Argentina in 2011, a number of IT tenders at both federal and provincial levels were expected to be bid on ahead of October's presidential elections The

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

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

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

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

education levels compared with the rest of

the country

Brazil's IT market also has a distinct

regional structure, with most spending

accounted for by the south east region,

which includes São Paulo as well as Rio de

Janeiro São Paulo alone accounts for

around 35% of spending and Rio de

Janeiro, Espírito Santo and Minas Gerais

for 25% Brazil remains on course to

become one of the top four computer

markets as an expanding economy lifts

millions into a middle class The

fundamentals of rising computer

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

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

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

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

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

rebuilding began apace in H210

IT Markets Compound Growth

2011e-2015f (%)

e/f = estimate/forecast Source: BMI

The largest IT market in the region is, vastly, the United States, with spending estimated at US$529.3bn

in 2011, while Canada is a distant second with US$44.7bn Brazil is estimated at US$27.8bn in 2011, making it the largest IT market in the Latin American region, and a major global market in its own right Mexico is the second largest Latin American market with an estimated value in 2011 of US$14.4bn Argentina and Brazil are set to be the fastest-growing markets with projected 2011-2015 compound growth of 78% and 66% respectively This compares with a compound growth rate for the United States over the same period of 22% The slowest growing market is forecast to be Venezuela, with a -3% growth rate in US dollar terms

Sectors And Verticals

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

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

increase its share of the IT spend by 2015

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

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

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

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

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

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

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

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

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

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

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

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

compared with 29% in the United States Despite the economic downturn, there are expected to be

opportunities for software vendors in most markets Across the region, companies are investing

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

in the Argentine market

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

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

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

most important open source applications

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

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

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

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

Usage of the cloud for information storage appears relatively low in the US and Canada compared with some other mature markets However, 2010 saw a number of US government agencies at federal and

local level launch cloud strategies and pilot programs A combination of enterprise objectives such as cost reduction and greater efficiency should combine to drive more adoption of cloud services in 2011

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

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

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

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

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

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

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

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

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

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

Market Structure (% Of Total IT Market)

e/f = estimate/forecast Source: BMI

United States Market Overview

Government Authorities

Government Authority National Telecommunications and Information Administration (NTIA),

Department of Commerce

Assistant Secretary for

Communications and Information

NTIA itself has several sub-bodies including:

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

ƒ The Office of Policy Analysis and Development

ƒ The Office of Telecommunications and Information Appliances (OTIA)

Major programmes run by the OTIA include:

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

ƒ A programme to drive the transition to digital television

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

Various other federal government ministries are also relevant to IT vendors

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

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

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

Overview

Source: BMI Source: BMI

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

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

BMI estimated US IT spending at around

US$509bin 2010 As a mature market, BMI

assumes that IT services accounts for around

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

hardware and 29% for software

Each segment comprises several sub-segments

In the hardware segment, notebook computers

now account for around 58% of sales, and this

share is expected to rise to 81% by 2015,

pushing desktops down to less than one-fifth of

unit sales However, rival and even more

portable form factors such as tablets are

expected to restrain growth of traditional

notebooks

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

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

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

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

PC Spending – Segments

2009

Source: BMI

BMI counts most custom-developed software in

IT services Custom-developed software has

declined in importance as packaged software has

become more specialised and customised to

particular industries, and it may now account for

around 10% of commercial software value

The two largest IT spending verticals are

discrete manufacturing and government, which

have typically accounted for around 10% of

total IT spending each Banking has traditionally

also accounted for a similar amount although it

remains to be seen what will happen to bank IT

spending in the wake of the financial crisis

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

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

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

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

Hardware

BMI forecasts that the US computer and accessories market will grow around 3% in 2011, slower than

2010 We have downwardly revised our figures after PC sales contracted in Q111 y-o-y, after strong growth for much of last year The computer hardware market's 2011-2015 CAGR is projected at 3.1% and market value could reach US$161bn by 2015

Market Trends

US PC sales dipped sharply in Q111, after having entered negative growth territory in the final quarter of

2010 Shipments were down by around 8% compared with the same period of the previous year

The weak performance was in contrast to the momentum shown during the market recovery of the three quarters of 2010

The marked slowdown was largely attributed to disappointing sales in the consumer segment, particularly

of notebooks, which was partly caused by a surge in demand for tablets Public sector spending was also weaker than usual, due to the current fiscal constraints In contrast, business segment demand continued

to grow across all segments, although it remains vulnerable to negative sentiment about the economic recovery

Software Spending – Segments

2010

Source: BMI

The PC market contraction in Q410 had dragged down the previously robust growth rate for the year as a whole The commercial refresh segment showed signs of vitality, with steady growth in replacement purchases, but consumers were spending less Shipments were down by around 5% compared with the same period of 2009, as holiday season sales failed to meet expectations

In 2011, BMI expects single-digit overall growth There will be continued restraint in the consumer

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

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

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

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

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

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

2015

The US addressable market for PCs and accessories is estimated by BMI at US$121.3bn in 2011,

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

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

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

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

prices of notebooks into the under US$500 range Average PC selling prices were estimated to have fallen

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

Drivers

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

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

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

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

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

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

Boston, where Wi-Fi is relatively ubiquitous

Segments

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

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

in 2010 Notebook sales were estimated at around 53mn units in 2010 and could pass 88mn by 2015 The popularity of netbooks was a big factor keeping notebook sales in positive territory during the recession

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

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

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

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

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

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

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

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

solutions and often include a Wi-Fi option

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

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

inconvenient for watching videos or using the internet, but for whom a netbook is still too big or heavy The much-hyped iPad2 was due to be released in March 2011.Other vendors have followed Apple in releasing net tablet devices, which have a form factor between the size of a smartphone and a netbook The arrival of Android-based tablets like the Samsung Galaxy Tab should find a market among those who wish to share their Wi-Fi connection with other devices, something not permitted by the iPad

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

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

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

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

as smartphones, which are being offered by vendors as alternative connectivity solutions and often include a Wi-Fi option

Most tablets are expected to be significantly more expensive than smartphones, however, at between US$400-800 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 previously mixed track record, this format is seen as a growth area in

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

E-Readers

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

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

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

It is forecast the US software market will be worth US$152.4bn in 2011, with single-digit growth from

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

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

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

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

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

Operating Systems

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

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

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

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

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

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

departments to be run more efficiently

Windows 7 is better suited to virtualisation than XP or Vista Virtualisation looks set to become an important trend in IT in the next few years and allows businesses to simplify the management of desktop

PCs by running desktop applications and storing user data within the data centre Given the current economic climate, however, IT directors will need to justify any upgrade in terms of cost savings

Open Source

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

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

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

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

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

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

most important open source applications

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

Business Software

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

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

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