United states information technology report q3 2012

In 2012 there are expected to be many more contracts for provision of cloud services, following contracts awarded in 2011 by New York and Los Angeles, and the General Services Administra

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INFORMATION TECHNOLOGY REPORT Q3 2012

INCLUDES 5-YEAR FORECASTS TO 2016

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: July 2012

CONTENTS

Executive Summary 5

SWOT Analysis 7

US IT Sector SWOT 7

US Political SWOT 7

US Economic SWOT 8

US Business Environment SWOT 8

IT Risk/Reward Ratings 9

Regional IT Business Environment Ratings Q312 12

IT Markets Overview 13

IT Penetration 13

Market Growth And Drivers 15

Sectors And Verticals 17

Market Overview 21

Government Authorities 21

Overview 22

Tablet Notebooks 25

Software 27

Services 30

Industry Developments 31

Industry Forecast 35

Table: USA IT Industry - Historical Data And Forecasts 37

Industry Forecast Internet 38

Table: Telecoms Sector - Internet - Historical Data & Forecasts 38

Competitive Landscape 40

Hardware 40

Tablets 41

Software 44

IT Services 47

Macroeconomic Forecast 50

Table: United States - GDP By Expenditure, Real Growth %, 2008-2016 53

Company Profiles 54

Hewlett-Packard 54

Dell 60

Table: Selected Dell Mergers And Acquisitions 63

Microsoft Corporation 66

IBM 71

Country Snapshot: United States Demographic Data 76

Table: The United States' Population By Age Group, 1990-2020 ('000) 77

Table: The United States' Population By Age Group, 1990-2020 (% of total) 78

Table: The United States' Key Population Ratios, 1990-2020 79

Table: The United States' Rural And Urban Population, 1990-2020 79

BMI Methodology 80

How We Generate Our Industry Forecasts 80 Transport Industry 80 Sources 81

Executive Summary

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

revising its forecast due to macroeconomic factors Overall moderate growth in budgets is expected but much depends on the economic situation Despite a drive to cut expenses across government, many public sector organisations have appeared willing to continue to spend on IT US businesses remain cautious, but there is pent-up demand from projects delayed as a result of the economic situation and cloud

computing is expected to be increasingly important

Headline Expenditure Projections

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

Forecast in US dollar terms unchanged, but parts shortages could continue to restrain growth in H112

Software sales: US$153bn in 2011 to US$163bn in 2012, +6.4% in US dollar terms Forecast in US

dollar terms unchanged, but more investment is expected in utility software and serviced-orientated architectures rather than traditionally packaged PC software

IT services sales: US$235bn in 2011 to US$249bn in 2012, +6.0% in US dollar terms Forecast in US

dollar terms unchanged with an increasing share of IT budgets being earmarked for newer solutions such

as virtualisation and cloud computing

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

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

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

Key Trends & Developments

ƒ In December 2011, the federal Office of Management and Budget officially launched a programme, which will enable contractors to sell cloud solutions to the federal government, starting in June 2012 In 2012 there are expected to be many more contracts for provision of cloud services, following contracts awarded in 2011 by New York and Los Angeles, and the General Services Administration (GSA) of the federal government The recession may have had

a lasting effect on the IT market by encouraging consideration of cloud computing models such

as SaaS

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

ƒ US PC sales are forecast to report single-digit growth in 2012, after a further annualised contraction in Q112 The market slowdown was due in part to supply shortages linked to the Thailand floods of late 2011, but a contributory factor was disappointing sales in the consumer segment, particularly notebooks Vendors will look to the release of lower-cost ultrabooks, and Microsoft's Windows 8 operating system, as potential growth drivers

SWOT Analysis

US IT Sector SWOT

2011

ƒ Despite the challenging trading conditions, overall IT spending is still expected

to remain in positive growth territory

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

virtualisation, data centre consolidation, and cloud computing

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

manufacturing

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

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

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

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 President Barack Obama's), and the widespread dissatisfaction of the voting public, may encourage both major parties to experiment with more consensual approaches

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

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 on a historic basis, 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

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

congested roads and airways

ƒ US corporate tax is, on average, among the highest in the OECD (though effective taxes are much lower)

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

effective corporate tax rates, following a multi-decade downtrend

IT Risk/Reward Ratings

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

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

implementation of government information and communications technology (ICT) projects

There has been little movement in this quarter's Risk/Reward Ratings, with Mexico and Chile swapping places, but other countries remaining in their Q411 positions The US tops the ratings once again, with the largest IT market worldwide, accounting for 25% of global IT spending We believe that the US IT market will expand strongly through to 2016, driven by growth in the private and public sector

organisations looking for help to utilise efficiencies from cloud computing models such as Service (Saas) and Infrastructure-as-a-Service This country did not experience any adjustment in ratings

Software-as-a-as our sanguine view of the market is likely to continue

BMI believes that the US will remain in first place for the medium term, and probably longer, given the

size and advanced nature of its market Despite cuts to federal IT expenditure announced in February

2012, which will total 1.2% - from US$79.8bn to US$78.9bn - thanks to military spending reductions, we believe that overall demand for IT infrastructure will continue to expand strongly

Canada, also with unchanged scores, remains in second place The country's IT market is reporting steady growth, as the government's digital economic strategy unfolds, with a number of two-year programmes

being implemented BMI expects Canada's IT market to continue to report moderate overall growth in

2012, although much of this will depend on the overall business environment

In March 2012 the federal government pledged to invest CAD1bn in science and technology, and BMI

believes it will maintain this steady level of growth through 2012 We believe that, over the period

2011-2016, the IT market will expand at a compound annual growth rate (CAGR) of 3.9% The majority of Canada's growth will be driven by computer hardware, expected to be worth around one half of total IT revenues Software and services combined will account for around 50% also

Brazil is the third country in our ratings - the highest out of the Latin American nations BMI continues to

estimate double-digit growth in IT spending for Brazil, the biggest IT market in the region We believe the market will continue to grow strongly, as macroeconomic outlook remains sanguine Our Country Risk score remains unchanged, as we continue to be above consensus on GDP growth

However, we have downgraded the IT Market score from Q212 While we still believe growth will remain strong, IT spending as a percentage of revenues is only estimated to be around 5.5%, well below the market average of 7.0% The market also suffers a dearth of professionals with the correct skills - it has an estimated shortage of 17,000 professionals

Demand for IT products and services is projected to increase at a compound annual growth rate (CAGR)

of 6% over the forecast period, making Brazil one of the best-performing global IT markets A national broadband plan (PNBL), and modernisation ahead of Brazil's hosting of the 2014 FIFA World Cup and

2016 Olympics, should drive demand for IT products and services

In 2011, consumer PC sales were expected to have continued to be a major IT market driver, owing to economic growth and low unemployment fuelling consumer confidence Brazil is believed to be one of the most promising regional markets for cloud computing, with growing demand in sectors such as retail, finance and healthcare

Chile overtakes Mexico in our Q312 ratings The market enjoyed gains as BMI revised up its forecast for

the PC market in H112 Chile's IT market is one of the most developed in Latin America and the Chilean government's commitment to high growth should continue to keep IT spending on an upwards trajectory,

with BMI envisaging that Chilean GDP per capita will double in US dollar terms by 2019 We also

revised upwards our growth forecasts for the software industry, although we note that this is strongly dependent on success in bringing down illegal software usage

Chilean IT spending is projected to grow strongly through to 2014 The government's plan to increase the use of ICT in government, healthcare and education will encourage IT investment The 2010 earthquake diverted consumer funds from technology to other priorities, but reconstruction offers opportunities for government agencies to advance IT modernisation

Mexico falls to fifth place given Chile's strong gains - its own scores are unchanged from Q212 PC sales were boosted in 2011 by a 4.1% increase in the minimum wage, the first above-inflation increase for five years While worries over consumer credit may negatively impact on private consumption of IT products, government spending in this election year will be one vendor focus The country enjoys a substantial information society budget and the roll-out of national and local projects that were previously delayed because of the economic situation

Mexico City and its surrounding area will remain the mainstay of the market However, 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 IT penetration in the public sector remains

relatively low in the region and larger Mexican IT distributors have now taken notice of latent demand in this area

Mexican interest in cloud computing should continue to grow in 2012 The economic crisis encouraged many organisations to look closer at cloud computing models such as SaaS, and there are estimates that the majority of Mexico's large companies have conducted cloud pilots Vendors have reported faster-than-expected growth in demand for cloud services in some IT verticals such as finance

Peru is next in our rankings, also unchanged on last quarter Peru enjoys a robust economy and

government spending lifting IT investment, despite some business environment concerns Peru has one of the smaller IT markets in the Latin American region, but it is one of the highest growth global IT markets

in the region Despite strong growth in recent years, a low PC penetration rate of around 20% indicates there remains plenty of potential for further development

Argentina is in seventh place in our RRRs, with its IT market forecast to increase around 9%, a

moderation compared with 2011 in 2012, when the PC market was boosted by the government's

education PC procurement As well as growing interest in cloud computing, the second largest IT market

in the region has strong growth fundamentals, including rising PC penetration, rising incomes and a tech-focused national development plan

high-However, there are threats to this view There are strong doubts that the expansionary fiscal policy eagerly pursued by the government is sustainable This may pose a serious threat to public expenditure on

IT over the coming years, despite government tenders appearing to dominate the market in 2012 Further, private investors are increasingly deterred by the country's precarious fiscal position and concerning policy mix Increasing government intervention in the activities of private firms, as has been seen in the oil and telecoms sectors, will deter foreign investment Capital controls and also import restrictions will further prove detrimental to the industry

In eighth place is Colombia All of Colombia's RRR scores are also unchanged on last quarter, with IT spending driven by government ICT initiatives and improving infrastructure While consumer-driven economic growth is slowing, rising incomes and more affordable computers on the market will result in more spending on IT products and services

At the bottom of our ratings for another quarter is Venezuela, which enjoyed slight gains in Q312 as BMI

made upwards adjustment to its 2012 IT spending forecast As 2012 is an election year, the government is increase spending on IT, which will positively impact our growth figures While Venezuela is one of the smaller markets in its region, and therefore its size limits growth potential, it has a low PC penetration rate of less than 12% - this indicates potential for growth There are still areas of opportunity with

continued investment by small- and medium-sized enterprises, due in part to a government tax subsidy, and spending by the energy, retail and financial services sectors

Despite this, the country suffers severe balance of payments problems, with rising concern over

government appropriation and potential devaluation of the fixed exchange rate a mounting possibility Like Argentina the government is doing its best to avoid capital flight and devaluation The financial

account deficit continues to grow and poses an ever greater threat to the stability of the bolivar This

serves to deter investors from Venezuela, and the IT market will be reliant on public programmes to sustain it Further, the uncertainty over President Hugo Chávez's health, and the possibility of a regime change in October, means Venezuela lags behind its regional peers in our Q312 RRRs

Regional IT Business Environment Ratings Q312

Industry Rewards

Country

Industry Risks

Country

Regional Ranking

Canada 65.83 90.00 74.29 50.00 70.31 62.19 70.66 2 Brazil 71.67 70.00 71.08 45.00 43.67 44.20 63.02 3 Chile 55.83 75.00 62.54 50.00 73.49 64.10 63.01 4 Mexico 65.83 60.00 63.79 52.50 60.47 57.28 61.84 5 Peru 55.00 50.00 53.25 45.00 67.85 58.71 54.89 6 Argentina 46.67 70.00 54.83 45.00 53.39 50.03 53.39 7 Colombia 53.33 50.00 52.17 47.50 56.25 52.75 52.34 8 Venezuela 38.33 75.00 51.17 40.00 47.56 44.53 49.18 9

Scores are weighted as follows: 'Rewards': 70%, of which Industry Rewards 65% and Country Rewards 35%; 'Risks': 30%, of which Industry Risks 40% and Country Risks 60% The 'Rewards' rating evaluates the size and growth potential

of a telecoms market in any given state, and country's broader economic/socio-demographic characteristics that impact the industry's development; the 'Risks' rating evaluates industry specific dangers and those emanating from the state's political/economic profile, based on BMI's proprietary Country Risk Ratings that could affect the realisation of

anticipated returns Source: BMI

IT Markets Overview

IT Penetration

A mixed regional picture is found with

relation to internet penetration In the US

and Canada, internet penetration in 2012

is estimated at 83.4% and 88.1%

respectively In Latin America, the

highest rate in 2012 is in Colombia

(57.1%), 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 Data from Peru suggest

nearly 75% of internet users use a public

Canada is estimated to have the region's highest broadband penetration in 2012, of 79.3%, which should rise to 96.6% by 2016 Broadband penetration in the United States is estimated at 29.4% in 2012, and is forecast to reach 35.8% by 2016

Meanwhile, in Latin American markets, broadband penetration is on course to reach as high as 32.5% in Argentina and 23.3% in Mexico, and has already passed 10% in Brazil, Chile, Colombia and Venezuela 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

Narrowband Internet Penetration

Per 100 Inhabitants

f = BMI forecast Source: BMI

However, government initiatives and growing PC affordability are now driving improvements on many ICT indicators In Brazil, a National Broadband Plan, 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 2016, while

Argentina is forecast to progress from a

current rate of 25% to around 35% in

2016 A similar situation prevails in

Chile and Mexico, where PC penetration

is estimated to be below 25% Colombia's

PC penetration reached around 15% in

2010, surpassing the government's

previous 2010 target of 10.8% BMI

estimates PC penetration in Peru could

reach 28% within the forecast period,

from less than 20% currently

ICT initiatives are central to the development plans of many regional governments The Argentine

government has 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 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

Broadband Penetration

Per 100 Population

f = BMI forecast Source: BMI

Market Growth And Drivers

Across the Americas, in 2012-2016,

external economic headwinds are likely

to mean slower growth in IT spending,

compared with the previous five-year

period In Canada and the United States,

consumers remain in a phase of

retrenchment thanks to the often stretched

state of household balance sheets

However, the fundamentals of rising

computer penetration and growing

affordability are expected to keep Latin

American markets on an upward path

Meanwhile, key pan-regional drivers of

IT spending will include growing mobile

and fixed broadband penetration, cloud computing, product innovation and new form factors such as tablets and ultrabooks, technology innovation and economic recovery

US PC market commercial and consumer segments remain restrained, as a result of the economic

uncertainty, which is expected to persist in 2012, an election year IT vendors will also be concerned when it comes to the effect of the ongoing US federal deficit issue and the failure of politicians to agree a deficit reduction programme In Canada, government spending will continue to be constrained by a focus

on cutting costs, with cost reviews being conducted by Toronto and Ontario, but there have been a spate

of large tenders, highlighting continued opportunities within the sector The Brazilian government's US$344mn modernisation strategy will very likely mean enhanced IT spending over the next few years

Despite the return of economic growth, many US and Canadian businesses also remain cautious There is pent-up demand from projects delayed as a result of the economic situation, but some of this may not be realised However, the tough trading conditions for many businesses have strengthened the need to reduce costs through improved data management and other efficiencies Commercial segment IT spending should be driven by hardware refreshes, datacentre consolidation and a growing interest in cloud

Meanwhile, around the region in markets

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 level were bid on

ahead of October's presidential elections

The Brazilian government's US$344mn

modernisation strategy should mean

enhanced IT spending 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

IT Market Size

As % Of National GDP

f = BMI forecast Source: BMI

IT Market Compound Growth

2012-2016 (%)

Source: BMI

Meanwhile, Chile retains some strong IT market fundamentals including consumer affluence and a relatively favourable business environment Mexican government spending in an election will be one vendor focus, with a substantial information society budget and the roll-out of national and local projects that were previously delayed because of the economic situation

Aside from regional trends, particular factors are forecast for 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 In Argentina the introduction of new regulatory

compliance laws for electronic invoicing, which took effect for some industries in 2011, provided a boost

to enterprise investment in software platforms

The largest IT market in the region is, by a distance, the United States, with spending estimated at

US$558.4bn in 2012, while Canada is a distant second with US$47.4bn Brazil 's IT spending is estimated

at US$29.8bn in 2012, 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

2012 of US$16.6bn Peru and Colombia are set to be the fastest-growing markets with projected

2012-2016 compound growth of 56% and 49% respectively This compares with a compound growth rate for the United States over the same period of 20% The slowest growing market is forecast to be Venezuela, with a 0% growth rate in US dollar terms

Sectors And Verticals

Hardware accounts for less than one-third of IT spending in the United States (26%) In contrast, Latin American IT markets remain hardware centric, with hardware accounting for between 42% (in both Brazil and Chile) and 67% (in Venezuela) of the total spending in these markets

In general, PC shipments are expected to report stronger single-digit growth in 2012 Due to factors such

as parts shortages resulting from the Thai floods in H211, the full recovery may be deferred until the second half of 2012 However, in all markets spending on software and services is projected to increase its share of the IT spend by 2016

US PC sales recorded negative growth again in Q411, with one contributory factor being disappointing sales in the consumer segment, particularly of notebooks The surge of demand for tablets also hit sales of

traditional PCs, and led to below-expectation sales for Microsoft's Windows operating system Canadian

consumers also remain in a phase of retrenchment thanks to the increasingly stretched state of household balance sheets The growing market for cloud solutions and virtualisation will constrain demand for on-premises computer networks

Growth is expected to be much faster in Latin American market Notebook sales are outpacing the PC market as a whole, but there is also intensifying competition for PCs from tablets and smartphones, and a fall-off in netbook demand 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 2012, with robust sales of the iPad2 following 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 Tablets, at prices of US$400-800, are expensive relative to average salaries in most Latin Americas countries, but demand should receive a boost from expanding locally based production in Argentina, Brazil and elsewhere A number of major Brazilian organisations have already purchased thousands of tablets The Brazilian Ministry of Communications has also suggested the inclusion of tablets in digital inclusion programmes Meanwhile, the average price of a PC has continued

to fall after the economic slowdown sparked new rounds of price cutting

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 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 small and medium-sized enterprises (SMEs), which have to deal with increasing data flow Migrations to Microsoft's Windows 7 operating system will continue to drive revenues in 2012

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, 2011 saw many 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 adoption of cloud services in 2012

Verticals such as financial services, government and telecoms are emerging as strong adopters of hosted software However, SaaS has also won greater 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 16% to 42% 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

Market Structure

% Of Total IT Market

f = BMI forecast Source: BMI

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

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

In more developed markets such as the US and Canada, a major demand driver will be organisations looking for help to utilise efficiencies from cloud computing models such as SaaS and infrastructure-as-a-service The US is a key hub of the emerging market for cloud solutions, which is set to transform the way IT products and services and sold and procured Research indicates that the US will account for

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

cloud computing spending being software-oriented In the US in 2012 there are expected to be many more contracts for provision of cloud services, following on contracts awarded in 2011 by the cities of New York and Los Angeles There are estimates that a majority of Mexico's large companies have conducted cloud pilots The Canadian cloud market remains relatively small A 2011 survey commissioned by

Microsoft Canada found that nearly 73% of Canadian SMEs understood that cloud-based services was a

cost-effective delivery model, but that just 30% were currently investing in such services

Market Overview

Government Authorities

(NTIA), Department of Commerce

Assistant Secretary for Communications and

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

ƒ NTIA itself has several sub-bodies including:

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

ƒ The Office of Policy Analysis and Development

ƒ The Office of Telecommunications and Information Appliances (OTIA)

Major programmes run by the OTIA include:

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

ƒ A programme to drive the transition to digital TV

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

Various other federal government ministries are also relevant to IT vendors

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

BMI forecasts that the US computer and accessories market value will grow about 3.7% in 2012 We

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

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

manufacturer, had a relatively limited contribution to the sluggish market in Q411, but an impact was felt

in Q112 and could persist into Q212

PC sales endured a year of overall stagnation in 2011, although there were growth areas such as tablets The market continued to contract in H111 y-o-y and remained flat in Q311 In Q411 and Q112, vendors reported a further annualised dip in shipments Vendors will look to factors such as the release of

Microsoft's Windows 8 Operating System, and the availability of lower-cost ultrabooks based on the Sandy Bridge processor, to drive growth amid difficult trading conditions

A number of factors dragged down the US PC market in 2011, including the sluggish economic recovery and competition from other form factors, particularly tablets Vendors also pointed to a lack of

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

at least manage positive growth in Q311 in contrast to negative growth in Canada, but the first increase for three quarters was followed by two negative quarters in Q411 and Q112

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

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

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

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

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

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

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

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

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

The stagnant growth in 2011, which began with a PC market contraction in Q410, halted the robust growth trend previously established 2010 The commercial refresh segment showed signs of vitality, with steady growth in replacement purchases, but consumers were spending less Shipments were down by around 5% compared with the same period of 2009, as holiday season sales failed to meet expectations

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

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

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

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

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

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

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

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

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

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

prices have also been driven from the supply side, with vendors competing fiercely due to the market slowdown, and the disruptive popularity of low-priced netbooks During the recession in 2008-2009 the strong response by consumers in this environment to netbooks and ultra-slim laptops ended up pushing prices of notebooks into the under US$500 range Average PC selling prices were estimated to have fallen

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

Drivers

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

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

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 more than 28mn by

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

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

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

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

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

H112, former netbook leader Toshiba announced that it was following Dell and Lenovo in withdrawing from the segment in the United States HP and Asus are still competing in the netbook segment, but Asian giants Sony and Samsung have not released new models in the US market in 2012

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

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

solutions and often include a Wi-Fi option

Tablet Notebooks

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

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

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

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

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

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

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

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

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

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

Most tablets are expected to be significantly more expensive than smartphones, at between US$400-800 Since the launch, unlocked Wi-Fi-only models of the iPad cost US$499 for a 16GB version and up to US$599 of 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

Ultrabooks

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

MacBooks, are an emerging product category that Intel and certain vendors have backed heavily

However, due to initially high prices, these devices seem unlikely to enjoy the expected success, at least initially Vendors appear to have realised this and are moving ahead with plans to supply low-end

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

attempting to reduce costs by using cheaper Sandy Bridge CPUs and cheap batteries The final products are likely to substantially reduce the price gap between netbooks and currently available ultrabooks Meanwhile, the release of Windows 8 could provide a boost to adoption of ultrabooks as consumers and businesses upgrade to the new operating system

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

Market Trends

It is forecast that the US software market will be worth US$162.8bn in 2012, with single-digit growth from 2011 The economic headwinds has led to client focusing on a clear RoI from software investments and has also given additional momentum to the adoption of cloud computing In H112, the market

outlook for software and IT services appeared to be brighter than that for computer hardware Many US software companies reported positive revenue growth as US companies invested more in utility software and service-orientated architectures, rather than traditionally packaged software

In 2011 more 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 US organisations migrating to new cloud solutions have included government departments and

companies such as office supply retail group Staples

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

Operating Systems

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

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 Windows 7 attracted more support from businesses than the vendor's previous operating system Windows Vista did, largely because Windows XP is now getting old Businesses that declined to upgrade from XP to Vista, due to

reported problems with the latter, will now go straight to Windows 7 Microsoft will still offer reduced support for XP until 2015, but many hardware manufacturers will start to wind down their support from about 2012 This, as much as the lack of support from Microsoft, has been among the factors

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

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

Open Source

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

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

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

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

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

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

most important open-source applications

Most netbook computers originally came with open-source Linux operating systems due to the heavy systems requirement of Windows Vista Netbooks were therefore seen as a threat to Microsoft's revenue 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 revenue Spending on applications such as enterprise resource planning (ERP), customer relationship management (CRM), financial management systems and information software is perhaps around 60% of the sub-category total Middleware, such as database management systems and systems management tools, accounts for around 40%

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

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

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

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

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

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

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

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

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

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

Cloud Computing And SaaS

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

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

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

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

forecast period Most cloud computing currently comprises consumer applications such as webmail, social networking and ecommerce applications Indeed, some vendors are now promoting the idea of Cloud 2, to reference integration of cloud computing with devices such as the iPad, iPhone,

BlackBerry and smartphones

However, a combination of enterprise objectives such as cost reduction and greater efficiency should combine to drive adoption of cloud services in 2012 The biggest software opportunities will be in non-critical file storage, or customer-facing applications such as CRM Opportunities should occur across economic sectors as awareness of cloud computing grows In June 2010, a survey by industry

association CompTia found that 14% of law firms planned to invest in cloud computing over the next

year At the same time, the survey found that only 30% of attorneys had any awareness of cloud

computing, indicating potential for further penetration as awareness increases

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

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

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

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

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

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

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

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

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

Services

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

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

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

Market Trends

It is estimated that the US IT services market will be worth US$249bn in 2012 A major demand driver going forward will be organisations looking for help to utilise efficiencies from cloud computing services such as SaaS and IaaS, Platform-as-a-Service (PaaS) and Communications-as-a-Service (CaaS.)

Particular areas of opportunity for cloud computing include banking and retailing and government

agencies as organisations in those fields look to save money on hardware investments

Segments

In 2012, vendors reported that a large portion of US IT budgets were being earmarked for newer IT solutions such as virtualisation and cloud computing The most severely hit area during the economic slowdown was softer project-type spending such as consulting and software development, and it is project spending which should show the strongest rebound during the recovery Contractors were cut and hiring frozen during the economic slowdown as customers cut back on short-term spending particularly in areas

such as consulting and software development These therefore were always likely to bounce back

strongest

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

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

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

Federal and local governments are among verticals where strong interest in cloud services is being expressed In H112, the federal government released guidelines and security requirements for contractors that wish to sell their cloud solutions to the US government The programme is designed to stimulate the federal government's use of cloud computing, with a target of reducing overall government IT spending

by as much as US$80bn Market research firm INPUT has forecast that the state and local government

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

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

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

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

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

Industry Developments

Government Cloud Strategies

In December 2011, the federal Office of Management and Budget officially launched a programme which will enable contractors to sell cloud solutions to the federal government, starting in June 2012 The government established procedures and security requirements that all participating contractors will have

to meet, as well as an assessment process for authorising these services The Federal Risk and

Authorisation Programme (FedRAMP) will be the body for monitoring the procurement of commercial

and non-commercial cloud services for government departments and agencies Meanwhile, a joint

authorisation board of the Defense and Homeland Security departments and the General Services

Administration will define and update the security authorisation requirements on an ongoing basis

The government hopes that the programme will spur wider adoption of cloud computing within

government, resulting in cost savings of US$80bn in federal IT spending FedRAMP is expected to help deliver 30-40% savings in the process of sourcing cloud solutions, as well as realising more operational efficiency through the elimination of legacy systems In December 2010, the US General Services

Administration (GSA) became the first federal agency to move email to a cloud-based system for its

entire organisation The GSA picked web-based Google Apps to replace IBM Lotus Notes as the

provider of email and collaboration software for its 17,000 full-time employees and contractors As the first transition of its kind, the GSA's move is seen as a landmark decision that could influence other agencies that have previously held back from similar moves due to security or service concerns

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

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

management

Federal IT Spending

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

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

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

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

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

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

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

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

In 2010, the Obama administration called on federal agencies to develop strategies to simplify and where possible combine often sprawling IT operations so as to reduce costs Guidelines published in 2010 by the

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

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

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

In 2010, federal IT spending was increased again to US$78.4bn Defence was expected to spend the most, with a budget of US$33.4bn However, the largest budgeted increase was for the Department of

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

Accountability

The IT Dashboard was launched to monitor IT projects across the federal government This reflects

pressure for cost cutting and increased efficiency in government, as a result of the difficult financial

climate, rising deficit and the ambitious social programmes of the Obama administration The dashboard

is intended to help provide information to improve decision making related to IT projects, from

accountability to personnel and contracting The information will be used to decide which projects should

be cancelled

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 requires the use of electronic healthcare records 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

Industry Forecast

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

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

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

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

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

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

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

Market Trends

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

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

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

In 2012 there are expected to be many more contracts for provision of cloud services, following on contracts awarded in 2011 by the cities of New York and Los Angeles, and the General Services

Administration (GSA) of the federal government The recession may have had a lasting impact on the IT market by encouraging consideration of cloud computing models such as SaaS In light of these and other changes, major vendors have also adjusted their competitive strategies, with the old desktop-centric model of software delivery appearing increasingly outdated

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

In our core forecast scenario, IT market growth will advance at a CAGR of 5.5% over our five-year forecast period Key drivers will include growing mobile and fixed broadband penetration, product innovation and new form factors such as tablets, technology innovation such as GPS technology and

services, and economic recovery PC vendors will focus on tablet notebooks, which are projected to be a growth area as more vendors launch rival models and will appeal to consumers who find that smartphones are not convenient for web surfing or multimedia consumptions

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

Drivers

Across both consumer and business segments, the US IT market is expected to have a number of drivers One is the growing popularity of mobile broadband networks in the US and applications such as location-based-services that are based on these These are boosting demand for netbooks and notebooks, which are increasingly favoured for connectivity

Whereas it was once thought consumers would purchase netbooks or second notebooks as personal mobile devices, it now appears likely that they will purchase tablets and other alternative mobile devices Tablets, originally seen as primarily for consumers, are also forecast to experience increasing take-up in the business segment In the consumer segment, the affordability of netbooks compared with traditional notebooks helped to prevent stagnation in the notebook category during the economic slowdown

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

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

businesses The rollout of more service offerings, including from new market players, will fuel demand Virtualisation is making headway and will continue to do so, and it is proceeding to more and more parts

of the data centre

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

Management in 2010 called for federal agencies to consider such initiatives

Segments

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

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

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

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

Summary

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

Table: USA IT Industry - Historical Data And Forecasts

2008 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f

IT Market (US$ m)

489,500

487,053

508,970

529,329

558,442

583,572

612,750

640,324

669,139

IT Market as % GDP 3.4 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5Hardware (Computer market

sales) (US$ m)

134,613

131,650

139,610

141,478

146,624

150,462

155,081

159,016

162,985 Services (US$ m)

215,380

215,375

224,049

234,875

249,032

261,539

275,989

289,851

304,409 Software (US$ m)

139,508

140,028

145,311

152,976

162,786

171,570

181,680

191,457

201,745 PCs (including notebooks)

(US$ m)

114,421

111,903

118,669

120,256

124,631

127,893

131,818

135,164

138,537 Servers (US$ m)

12,115

11,849

12,565

12,733

13,196

13,542

13,957

14,312

14,669

e/f = BMI estimate/forecast Source: BMI, ITU (internet and broadband penetration)

Industry Forecast Internet

Table: Telecoms Sector - Internet - Historical Data & Forecasts

No of internet users ('000) 239,840 239,893 255,318 265,851 272,097 276,422 278,769 283,924

No if internet users/100

f = BMI forecast Source: BMI, FCC

Internet and broadband penetration

continues to grow, as wireless

technology becomes more widespread

and more popular among subscribers

The fixed broadband market grew 7.5%

y-o-y to Q112, although recorded q-o-q

declines

This may be due to the market reaching

maturity, and also the debt crisis

affecting the expenditure of Americans

on their broadband packages Further,

as wireless broadband becomes a more

popular way to connect to the internet,

fixed-line numbers will inevitably fall

As a result, we have slightly downgraded our broadband forecasts for 2011, although our future growth forecasts stay strong We believe that the market will remain buoyant, and experience strong growth over

our forecast period The overhaul of the USF (see Broadband section) and replacement with the CAF will

lead to increased focus and attention on promoting broadband connectivity and roll-out

We believe that about 81.5% of Americans used the internet by the end of 2011, and there were around 27.1 fixed broadband subscribers per 100 inhabitants If we included mobile broadband in our analysis, however, the figure would be much higher - we estimate around 245mn, or around 77.9% penetration We

Industry Trends - Internet Sector

2009-2016

f = BMI forecast Source: BMI, FCC

continue to expect steady increases in internet users throughout the period, with total internet users reaching 283.9mn in 2016

High-speed internet is central to the marketing strategies of telecoms operators, with cable companies and mobile operators pursuing the high revenue area At the same time, the sheer popularity of internet-based services means that the point is fast approaching when most Americans will view such services as being essential to their daily lives The Broadband Technologies Opportunities Program backs up this view and efforts to extend broadband services into rural areas will ensure that this trend continues, particularly as service providers and content developers/vendors grow their product portfolios and become more adept at marketing and pricing content that appeals to a broad range of consumers Increased revenue derived from such activities will allow operators to expand into new markets and it seems increasingly likely that fixed-line operators will need to become broadband-focused in order to survive

There were 88.7mn fixed broadband connections by the end of Q112, and by December 2012 we believe this will rise to 92.7mn The rise of mobile broadband will slow down fixed broadband growth rates over the coming years, as these are not recorded in our broadband forecasts Especially with the launch of LTE, we expect to see a rising popularity of 4G USB modems, which will impact wireline growth However, there is still some real scope for continued growth, with the fixed broadband market expected

to reach about 107.264mn subscribers by the end of 2016, pushing the penetration rate up to 32.8% by the end of our forecast period