United states information technology report q3 2014

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

Q3 2014 www.businessmonitor.com

UNITED STATES

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2018

Technology Report Q3 2014

INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: June 2014

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BMI Industry View 7

SWOT 9

IT SWOT 9

SWOT 11

Political 13

Economic 14

Business Environment 15

Industry Forecast 16

Table: IT Industry - Historical Data And Forecasts (United States 2011-2018) 16

Broadband 20

Table: Telecoms Sector - Internet - Historical Data & Forecasts 20

Macroeconomic Forecasts 22

Table: United States - Gdp By Expenditure 28

Industry Risk Reward Ratings 30

Table: Americas Risk/Reward Ratings, Q3 2014 32

Market Overview 33

Hardware 33

Software 38

Services 44

Industry Trends And Developments 48

Regulatory Development 52

Table: IT Regulatory Authorities 52

Competitive Landscape 54

Local Companies 54

Table: CA Technologies 54

Table: Splunk 55

Table: Symantec 56

Table: EMC Corporation 57

Company Profile 58

Hewlett-Packard 58

Dell 65

Microsoft Corporation 71

IBM 78

Table: IBM Acquisitions, 2012 (Total Value, USD3.964bn) 81

Table: IBM Recent Acquisitions 81

Regional Overview 85

Demographic Forecast 89

Table: The United States' Population By Age Group, 1990-2020 ('000) 90

Table: The United States' Population By Age Group, 1990-2020 (% of total) 91

Table: The United States' Key Population Ratios, 1990-2020 92

Table: The United States' Rural And Urban Population, 1990-2020 92

Methodology 93

Industry Forecast Methodology 93

Sources 94

Risk/Reward Ratings Methodology 95

Table: It Risk/Reward Ratings Indicators 96

Table: Weighting Of Components 97

BMI Industry View

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

medium term, as a result of stronger economic performance and a greater appetite from enterprises for the latest products and solutions Cloud computing, real-time enterprise software, security and big data are all areas of spending in which we expect to see rapid growth, particularly in the latter years of our forecast the retail hardware outlook is more mixed, as we expect continued demand growth for tablets in the retail market; however, desktop and notebook sales continue to be squeezed There is also potential for deeper fiscal retrenchment to hit government IT spending The NSA PRISM scandal continues to produce fallout amid concerns about data security in the cloud computing market Total spending is expected to reach USD665bn in 2014, up 5.3% from 2013, and grow at a CAGR of 4.4% 2014-2018.

Headline Expenditure Projections

■ Computer Hardware Sales: USD217bn in 2013 to USD225bn in 2014, an increase of 3.8% Booming

tablet sales are driving growth, but there is a boost to desktop sales in 2014 due to the withdrawal ofofficial support for XP in April 2014, pushing upgrades

■ Software Sales: USD173bn in 2013 to USD184bn in 2014, an increase of 6.2% Emerging technologies

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

■ IT Services Sales: USD242bn in 2013 to USD257bn in 2014, an increase of 6.4% Cloud computing

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

Key Trends & Developments

In 2014 IBM reaffirmed its commitment to a strategy that will see it focus on higher value software and services In January 2014 IBM agreed the sale of its x86 server business to Chinese PC vendor Lenovo for

USD2.3bn The deal includes System x, BladeCenter and Flex System blade servers and switches, based Flex integrated systems, NeXtScale and iDataPlex servers and associated software, blade networkingand maintenance operations The deal is expected to close in 2014, subject to regulatory approval, and

x86-and Windows software The deal comes despite Microsoft also selling its own enterprise software servicesthrough the Azure brand, reflecting the new direction taken after the departure of Steve Ballmer as CEO.Under the terms of the deal, both the firms intend to offer various services, such as Salesforce1 for

Windows and Windows Phone 8.1, and Salesforce for Office 365 The financial terms of the deal have notbeen released

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

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

■ PC shipments have held up better than in other developed markets in 2013 and areforecast to do so in 2014

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

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

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

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

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

■ As economic woes ease, IT vendors should see more growth from traditional

big-SWOT Analysis - Continued

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

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

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

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

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

SWOT Analysis

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

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

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

■ Connect America Fund is seeking to expand coverage

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

than anticipated and no real respite is expected

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

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

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

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

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

making it more attractive prospect for many clients

■ Broadband growth remains steady, if unspectacular, and the relatively low

SWOT Analysis - Continued

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

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

■ LTE means the fixed broadband market will become increasingly redundant

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

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

Political SWOT Analysis

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

international diplomacy

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

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

and divisive

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

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

may encourage both major parties to experiment with more consensual approaches

to certain policy areas

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

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

Economic SWOT Analysis

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

and innovation, and high research and development spending

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

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

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

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

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

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

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

to the US's external imbalances

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

the loss of manufacturing jobs

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

Business Environment

SWOT Analysis

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

tremendous opportunities for businesses of all types and sizes

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

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

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

and airways

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

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

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

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

effective corporate tax rates, following a multi-decade downtrend

sales, USDmn 201,388.7 206,837.6 216,753.9 225,021.5 232,352.6 238,422.6 244,035.9 249,871.6Personal computer

sales, USDmn 163,527.7 169,606.8 179,472.2 186,317.8 192,387.9 197,413.9 202,061.7 206,893.7Software sales,

USDmn 153,780.6 161,573.3 173,236.1 184,029.6 194,476.8 204,264.5 214,033.2 224,381.2Services sales,

USDmn 216,505.7 226,702.7 242,258.7 256,517.2 270,220.2 282,941.6 295,568.8 308,927.7

e/f - BMI estimate/forecast Source: BMI.

BMI forecasts the US IT market will expand by 5.3% in 2014 to reach a value of USD665.6bn Our

positive outlook extends over the medium term and we forecast a CAGR of 4.4% 2014-2018, with totalspending expected to reach USD783bn in 2018 Despite the maturity of the IT market in the US, we believethere is medium-term growth potential in sales of tablets and hybrid notebooks in the retail market, while inthe enterprise market adoption of cloud computing, big data and machine-to-machine (M2M)

communications will drive growth

2014 Outlook

US IT market growth will be sustained in 2014 by

the supportive economic environment When

compared with its developed market peers, the US

market is expected to continue to perform well US

economic growth for 2014 is forecast at 2.4% in real

terms, while private final consumption is forecast to

increase even faster at 2.9% These growth rates are

a positive for the retail hardware market as rising

incomes and progress made by consumers in

deleveraging boosts confidence

One area to watch in 2014 is the competition

between hybrid notebooks running Microsoft

Windows 8/8.1 and tablets, lead by Apple's iPad

The US market is dominated by Apple's advertising,

store and brand reach, with the iPad a must-have

item among affluent consumer groups However,

with hybrid prices declining there is potential for Microsoft to make some in-roads in the ultra portable

market There may also be a boost to desktop sales after Microsoft ceased support for Windows XP in

Q214 Traditionally conservative business consumers will be forced to undertake operating system

upgrades

In contrast to a recovery in consumer and enterprise spending government expenditure is forecast to

contract 0.5% in real terms in 2014 However, one area of public sector spending that will continue to grow

is cloud services, for which there are expected to be many more contracts with the continued

implementation of the federal government of its Cloud First cloud migration strategy Departments such asthe US General Services Administration are already making significant use of cloud services, as the

Industry Trends - IT Market

2011-2018

e/f - BMI estimate/forecast Source: BMI.

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

The economy will be generally supportive over the

medium term, particularly when compared against

other developed markets Real GDP growth is

forecast to average 2.4% annually 2014-2018, with

consumption growth expected to be slightly slower

at 2.2% However, BMI's in-house Country Risk

breakdown of income growth by income level shows

that the gains will largely be captured by the highest

earning 20% of the population This bodes well for

vendors of premium hardware, for instance Apple,

but the outlook for sales growth of mid-range

devices is less positive

Investments in supporting infrastructure will boost

IT market spending over the medium term Telecom

operator investments in mobile and fixed broadband

infrastructure will help to boost retail sales of

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

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

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

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

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

Income Per Capita Breakdown

(2011-2018)

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

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f 20,000

40,000 60,000

0

e/f - BMI estimate/forecast Source: BMI, National Sources

Another technology trend is the adoption of cloud computing services, with surveys showing high levels ofsatisfaction with cloud services among US CIOs, reflecting the fact it is already the world's leading cloudmarket This means growth opportunities are relatively diminished compared to emerging markets, butvendors will drive value growth by rolling out more customised solutions and targeting SMEs Howeverthere is some uncertainty, with the enterprise response to the fallout from the NSA Prism scandal not yetclear.

Segments

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

a level of around USD80bn as departments continue to issue IT tenders despite a drive to make savingsthrough closing hundreds of federal datacentres in 2012-2015 New government programmes, including theexpansion of healthcare, should generate lucrative new opportunities for IT vendors, although because ofthe ever-growing budget deficit, there will be increased pressure to reduce costs

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

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

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

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

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

Summary

Table: Telecoms Sector - Internet - Historical Data & Forecasts

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

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

No if Internet Users/100 Inhabitants 69.53 74.49 77.92 79.39 82.06 82.86 82.96 82.97

No of Broadband Internet Subscribers

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

No of Broadband Internet Subscribers/100

Inhabitants 26.95 28.87 30.32 30.89 31.93 32.37 32.40 32.41

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

New data from the FCC show there were 91.668mn fixed broadband subscribers in the US at the end of

2012, alongside 170.076mn mobile broadband subscribers The FCC's definition of broadband uses datatransfer rate benchmarking that is not wholly consistent with that employed elsewhere in the world

Nevertheless, it is clear from the FCC's data that the most significant growth in broadband is in the wirelessarena and that, as has been seen in other mature markets worldwide, the greater flexibility of mobile relative

to fixed connections is causing some xDSL customers to 'cut the cord'

The fixed broadband market remains buoyant mainly due to cable and fixed wireless usage, which remains

strong, as well as to a small but growing base of fibre accesses BMI forecasts the number of fixed

broadband connections to reach 99.6mn by the end of 2014, rising to 107.9mn by 2018

High-speed internet is central to the marketing strategies of telecoms operators, with cable companies andmobile operators pursuing the high revenue area At the same time, the sheer popularity of internet-basedservices means that the point is fast approaching when most Americans will view such services as beingessential to their daily lives The Broadband Technologies Opportunities Program backs up this view andefforts to extend broadband services into rural areas will ensure that this trend continues, particularly asservice providers and content developers/vendors grow their product portfolios and become more adept atmarketing and pricing content that appeals to a broad range of consumers Similarly, the FCC's NationalBroadband Plan aims to ensure universal access, competition and the efficient allocation of spectrum tobenefit the broadband sector Increased revenue derived from such activities will allow operators to expandinto new markets and it seems increasingly likely that fixed-line operators will need to become broadband-focused in order to survive

Industry Trends - Internet

2011-2018

Internet users, '000 Broadband internet subscribers, '000

2011 2012

2013e 2014f 2015f 2016f 2017f 2018f0

100,000 200,000 300,000

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

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

Macroeconomic Forecasts

BMI View: We expect a strengthening US consumer and stronger fixed investment growth this year to boost

real GDP growth to 2.8% from 1.9% in 2013 While high frequency data suggest economic growth slowed

in Q114, we expect that the slowdown was largely weather-related, with signs suggesting that its impact on the economy has already begun to dissipate.

Macro Outlook: Despite a fairly weak start to the year across a range of macroeconomic indicators, we

maintain our forecast for US real GDP growth to accelerate to 2.8% in 2014 from 1.9% in 2013 We seemuch of the slowdown recorded in the early months, when the Institute for Supply Management's (ISM)Manufacturing Index took a decided turn lower, as attributable to extreme cold weather conditions in much

of the country, rather than the beginning of a major slowdown in economic activity across the US While weacknowledge that Q114 real GDP growth may be quite weak, we expect that particularly strong householdspending at the end of 2013 will carry into this year, spurring fixed investment growth, while strongerexternal demand buoys net exports, and the drag from government fiscal retrenchment dissipates

Slowdown Will Prove Temporary

US - Real GDP Growth, SAAR % chg & ISM Manufacturing Index (3-Month MA)

Source: FRED, BMI

Expenditure Breakdown:

Private Consumption: We expect several factors to coincide this year, resulting in personal consumption

expenditure (PCE) growth being the primarily driver of US growth First, we expect further tightening in

the labour market this year (see 'Additional Gains For Labour Market In 2014', April 1) and sustained home

price increases to buoy consumer confidence, ensuring it remains at or near post-financial crisis highs TheConference Board Consumer Confidence Index hit 82.3 in March, the highest level since January 2008,while the University of Michigan Index of Consumer Sentiment came in at 80.0, fairly elevated compared

to recent years and consistent with strong PCE growth in the months ahead

High Confidence Levels Will Support Spending Growth

US - Consumer Confidence Indicators

Source: Bloomberg, BMI

Q109 to 91.6% in Q413, the lowest level since Q302 As a result of these factors, we forecast real PCEgrowth will accelerate to 2.5% in 2014 from 2.0% last year.

Consumer Credit May Make Up For Lower Trending Income Growth In

Recent Years

US - Personal Income Growth, % chg y-o-y (LHS) & Household Debt, % Of Personal Income (RHS)

Source: Bloomberg, BMI

Fixed Investment: A downturn in capital goods orders suggests that Q114 may see a fairly weak real fixed

investment growth print (see chart below), but we generally view this as a temporary disruption that will

yield to accelerating fixed investment in the remainder of the year While our infrastructure team expects tosee a slowdown in residential construction growth, we believe that non-residential fixed investment willmore than pick up the slack Mainly, we believe that signs of resurgent US consumer demand will drivebusiness investment substantially higher, as will a more supportive external environment Additionally, webelieve greater clarity regarding fiscal and debt policy in 2013 will allow the private sector to make

investments that they likely put on hold last year amidst a highly contentious policy debate that led to theshutdown of the federal government in October 2013 We forecast real fixed investment growth of 6.5%this year, up from 4.5% in 2013

Consumer & External Demand Will Bolster Investment After Q1 Slump

US - ISM Manufacturing Capital Goods Orders (3-Month MA) & Real Non-residential Fixed Investment

Growth, SAAR % chg

Net Exports: While both real exports and imports of goods and services grew by less than forecast last

year, the general trend of exports growing faster than imports was in line with our expectations, resulting innet exports adding 0.1 percentage points (pp) to headline growth In 2014, we anticipate that strongereconomic activity in developed markets, particularly in Europe and Canada, will increase demand for USgoods and service exports, which we forecast will post real growth of 3.6% this year after 2.5% in 2013.While strong real PCE growth will increase import demand, we expect that this will be tempered a

structural reduction in demand for energy imports, the result of several years of massive crude oil

production increases in the US that our Oil and Gas team believes will continue this year, albeit at a slowerpace We forecast real growth of goods and services imports will tick up to 1.8% this year after growth ofjust 1.4% in 2013 As a result, we forecast net exports to contribute 0.2pp to real GDP growth this year

Net Export Contribution To Remain Positive In 2014

US - Contribution To Real GDP Growth, pp (4-Quarter MA)

Source: BEA, BMI

Government Consumption And Fixed Investment: The public sector has had a net negative impact on

real GDP growth for the past three years, but we forecast this will reverse in 2014 First, we expect

accelerating real GDP growth will, on the whole, support state and local government revenue and

expenditure growth this year, and the substantial fiscal retrenchment that occurred at these lower levels ofgovernment in 2010 and 2011 is unlikely to be repeated any time soon Additionally, we believe that themajor drag from the federal level in 2012 and 2013 is set to be reduced, too, as the negative growth effects

of scaling down military operations in Iraq and Afghanistan begin to wane Furthermore, the fiscal

legislation passed earlier this year to reduce the severity of the federal budget sequester in 2014 will result

in federal government spending weighing less heavily on GDP growth We forecast that all levels ofgovernment combined will contribute 0.1pp to real growth, after knocking 0.4pp from growth in 2013

Public Sector To Turn Positive In 2014

Contribution To Real GDP Growth, pp (4-Quarter MA)

Source: BEA, BMI

Risk To Outlook

We see risks weighted as slightly to the upside this year, with the potential for real PCE growth in particular

to surge higher amidst labour market tightening and improving confidence levels However, we

acknowledge that economic weakness globally or a resurgence of concern over lingering eurozone

government debt and fiscal issues could weigh on US exports, and depress business investment

Additionally, it is possible that the increase we forecast in real PCE growth will lead to stronger importgrowth than we currently anticipate, a risk scenario that would lead to lower headline growth than we nowforecast

Table: United States - Gdp By Expenditure

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

Real GDP growth,

% y-o-y 1 1.8 2.8 1.9 2.8 2.6 2.4 2.4 2.4 Private final

consumption,

USDbn 1 10,711.80 11,149.60 11,501.50 12,313.40 12,836.00 13,354.60 13,894.10 14,455.50 Private final

consumption,

USDbn 1 10,711.80 11,149.60 11,501.50 12,313.40 12,836.00 13,354.60 13,894.10 14,455.50 Private final

consumption, real

growth % y-o-y 1 2.5 2.2 2.0 2.5 2.2 2.0 2.0 2.0 Government final

consumption,

USDbn 1 3,158.70 3,167.00 3,125.50 3,380.40 3,513.00 3,643.60 3,778.90 3,919.40 Government final

consumption,

USDbn 1 3,158.70 3,167.00 3,125.50 3,380.40 3,513.00 3,643.60 3,778.90 3,919.40 Government final

consumption, real

growth % y-o-y 1 -3.2 -1.0 -2.2 0.3 0.7 0.5 0.5 0.5 Fixed capital

formation, USDbn 1 2,195.60 2,409.10 2,564.00 2,742.80 2,917.10 3,102.40 3,299.50 3,509.10 Fixed capital

formation, USDbn 1 2,195.60 2,409.10 2,564.00 2,742.80 2,917.10 3,102.40 3,299.50 3,509.10 Fixed capital

formation, real

growth % y-o-y 1 6.2 8.3 4.5 6.7 5.3 5.3 5.3 5.3 Exports of goods

and services,

USDbn 1 2,101.20 2,195.90 2,259.90 2,464.50 2,648.10 2,845.50 3,057.70 3,285.90 Exports of goods

and services,

USDbn 1 2,101.20 2,195.90 2,259.90 2,464.50 2,648.10 2,845.50 3,057.70 3,285.90 Exports of goods

and services, real

growth % y-o-y 1 7.1 3.5 2.7 3.5 5.1 5.0 5.0 5.0 Imports of goods

and services,

USDbn 1 2,669.90 2,743.10 2,757.20 2,940.70 3,129.40 3,330.30 3,544.50 3,772.70 Imports of goods

and services,

USDbn 1 2,669.90 2,743.10 2,757.20 2,940.70 3,129.40 3,330.30 3,544.50 3,772.70 Imports of goods

and services, real

growth % y-o-y 1 4.9 2.2 1.4 2.0 4.2 4.0 4.0 4.0 Net exports of

goods and

services, USDbn 1 -568.7 -547.2 -497.3 -476.3 -481.3 -484.9 -486.8 -486.8

United States - Gdp By Expenditure - Continued

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

Net exports of

goods and

services, USDbn 1 -568.7 -547.2 -497.3 -476.3 -481.3 -484.9 -486.8 -486.8 Net exports of

Industry Risk Reward Ratings

BMI View: the Americas region is one of great diversity, from the highly developed markets of the US and

Canada to the less developed markets of Peru, Colombia and Venezuela, with middle income Latin

American markets such as Chile and Brazil in between Our ratings reflect this variety of markets in the region, with the developed markets scoring highly on market value and regulatory environments However,

in terms of growth it will be the less developed markets that outperform as they embark on catch-up growth.

We believe emerging markets will see rapid growth as technologies leapfrog older iterations seeing a strong appetite for new developments such as cloud computing, smart infrastructure investment and the internet of things.

The top position in the Q3 2014 Risk Reward Ratings continues to be occupied by the US, which is theglobal leader in terms of market value and adoption of emerging technologies It is also home to the largestpool of IT enterprises and expertise, meaning it remains on a strong footing for further growth There arehowever downside risks to our outlook for the US IT market, including disruption from further economicshocks, weakening consumer hardware demand and potentially most damaging, the ongoing controversy

surrounding the NSA's PRISM surveillance program BMI does not expect the NSA controversy to be a

major disruptive factor in the short term, but with the potential for further information to emerge, and trust

in US vendors at a low point there is downside

Canada sits in second the rankings, with a score of 70.3 in Q3, down 0.8pps q-o-q The downgrade is theresult of a weaker outlook for hardware sales due to saturation in the retail market and cost saving initiatives

in the public sector This increased the gap between Canada and the US in our ratings, but the main factorseparating the markets is population size, reflected in the lower industry risk score Nonetheless Canada'slocation and strong ties with the US market make it a strong market with steady growth potential, withdomestic cloud computing services expected to see strong growth as vendors tap demand previously served

by US firms

With the exception of emerging technologies such as real-time enterprise software deployments, big dataand telecare, growth rates for IT spending in developed North American markets will significantly

underperform Latin America Lower cost devices and rising incomes have enabled increases in PC

penetration across the region - bringing more Latin Americans into the consumer IT market than ever before

- but companies and governments still account for the bulk of IT spending As the markets mature andaccess to computing devices increases, IT spending will continue to increase, presenting opportunities forvendors

Brazil is the highest rated Latin American market in the Q3 2014 ratings, moving up to third after

overtaking Chile Brazil's score benefits from the size of the local population, by far the largest in LatinAmerica, as well as a favourable economic outlook and regulatory environment The government haspromoted broadband network investment, both to raise service quality and coverage, which has contributed

to demand growth for retail hardware, as well as IT services among enterprises Meanwhile, a growingeconomy is resulting in new consumers reaching income levels for spending on IT products and solutions,making it one of the global markets heavily targeted by vendors of notebooks and tablets

Chile was finally overtaken by Brazil in our ratings in Q3 as Chile's score declined by 1.2pps Despite thesize of the country being a major factor in the position of the countries in our ratings, Chile led LatinAmerican markets in our ratings, but as Brazil has caught up in terms of incomes and the policy

environment it has inevitably overtaken Chile Nonetheless Chile remains the most technologically

advanced market in Latin America in the region, supported by higher incomes and levels of education and astrong stable government with strong scores in key areas such as investor protection and rule of law Thisoften makes Chile a first stop for newcomers to the region or established players to launch their latestproduct updates

Mexico is another market we expect to ultimately surpass Chile due to its size, but in the short-to-mediumterm there are several roadblocks to further development and it was in fifth place in the Q3 ratings

Telecoms market's regulations have, over several years, weakened the market's growth and meant

broadband growth has not reached the level seen elsewhere in the region In turn this has limited demand forcomputing hardware on which IT services and software market growth depends There is however scope forimproved medium term performance following the announcement of Mexico's National Digital Strategy inNovember 2013 The impact will be determined by the execution of the strategy, but there are promisingtargets in terms of improving connectivity, digital skills, interoperability, legal framework and open datainitiatives

Peru and Colombia both moved up one position in the Q3 ratings to sixth and seventh position respectively

Argentina dropped from eighth to fifth in the Q3 ratings - with its IT Rating declining 7.3pps q-o-q to 53.8.The decline was derived from the industry rewards category as a result of a challenging domestic economicenvironment and political uncertainties Much like Chile, Argentina's population shows a higher level ofeducation, which supports the IT market's growth potential, however in the short-term we expect economicand political downside will continue to dominate the outlook.

Venezuela is unmoved in last position in the Americas Risk Reward Ratings, but its score did declinefurther in Q3 as domestic instability heightened as the country adjusts to a post-Chavez era In addition todomestic dissatisfaction with the government, a hostile business environment, especially to foreign

investors, continues to undermine the attractiveness of investing in the country BMI believes it would take

a significant change in the country's government policy, as well as several years, to move Venezuela higher

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

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

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

Market Overview

Hardware

The US hardware market has not been immune to

the global squeeze on desktop and notebook sales,

but it is in better health compared with other

developed markets where the decline in desktop and

notebook sales has been significantly steeper This is

in part explained by the more severe recession in

Europe, but also the lower PC penetration rate in the

US, allowing vendors to continue to tap first-time

buyers

BMI forecasts continued outperformance for US

hardware spending versus developed markets We

expect US computer and accessories market value

will grow by 3.8% to USD225bn in 2014 Declining

sales of desktops and notebooks are a drag on

growth, but booming sales of tablets is offsetting this

trend Meanwhile, datacentre construction is helping to boost server sales The computer hardware market's2014-2018 compound annual growth rate (CAGR) is projected at 2.9% and the market value should reachUSD249bn by 2018

Market Trends

Despite the decline in the desktop and notebook markets as consumers opted for tablets, the market remainshuge, with around 29mn units shipped in H113 (excluding tablets) Although vendors of traditional formfactors are undoubtedly under pressure, the new category of hybrid notebooks and ultrabooks offer anavenue for growth

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

e/f - BMI estimate/forecast Source: BMI.

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

tablets, with average prices and margins declining further to fight off cannibalisation However the rate ofdecline is expected to diminish from 2014 as demand stabilisers with core users still requiring the additionalproductivity features offered by notebooks and desktops versus tablets

Servers

There continues to be significant investment in datacentres in the US to meet growing demand for consumerand enterprise cloud services and storage solutions This has attracted the attention of vendors including the

May 2013 announcement that Lenovo will release a rebranded version of its LenovoEMC storage solutions

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

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

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

includes System x, BladeCenter and Flex System blade servers and switches, x86-based Flex integratedsystems, NeXtScale and iDataPlex servers and associated software, blade networking and maintenanceoperations The deal is expected to close in 2014, subject to regulatory approval, and would dramaticallyincrease Lenovo's exposure to the US server market

In December 2013 IBM announced that it intends to invest more than USD1.2bn to increase its global

cloud footprint The company will unveil 15 new centres globally, in addition to the existing 13 and

12 global data centres from SoftLayer and IBM respectively The new data centres will be in China,

Washington DC, Hong Kong, London, Japan, India, Canada, Mexico City and Dallas

Desktops And Notebooks

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

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

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

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

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

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

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

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

former netbook leader Toshiba announced that it was following Dell and Lenovo in withdrawing from the segment in the US HP and Asus continued to compete in the netbook segment, but Asian giants Sony and

Samsung did not release new models in the US market in 2012, and all vendors were focused elsewhere by

2013

Estimates from IDC and Gartner are for sales of desktops and notebooks to be in decline in early 2013,although the market is faring better than sales in Western Europe IDC estimates that total sales declined1.9% year-on-year (y-o-y) to 15.7mn in Q213, a slightly more pessimistic outlook than Gartner's estimate of

a 1.4% decline to 15.0mn The data show that Hewlett Packard leads the market, although its position isunder threat as its sales declined y-o-y while second placed Dell managed to increase shipments in the US

by around 6% y-o-y to Q213 The only other vendor to achieve an increase in shipments was Lenovo,although it remains some way behind to the two largest vendors by shipments

Tablets

The US has been one of the fastest tablet adopting nations, trailing only high income markets such as HongKong, Norway and Singapore The tablet market is built on Apple's iPad, but 2013 has seen a deeper market

with competition from vendors producing devices running Google's Android OS and Microsoft's Windows

8 Research by the Pew Research Centre indicates that the deepening of the tablet market, with a variety ofmodels available at different price points, has helped to drive penetration rates higher It reported significantincreases in penetration of tablets among US adults, with growth accelerating from mid-2012 as cheaperAndroid devices, and Apple's own iPad Mini, hit the market Pew Research found that more than one-third

of adults owned a tablet by May 2013, but as penetration rises, it is expected that tablet sales will slow Theuncertainty arises from the fact that consumers in the US have so far exhibited a willingness to upgradedevices with a short replacement cycle, a trend that will become harder to sustain as innovation slows

As is the case globally, the US tablet market has been dominated by Apple; however, its position did

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

accounted for just 1.9% of PC browsing traffic (up 0.5pp) y-o-y to June 2014 This recent data reinforcesApple's dominance Unlike the global market, the US has a strong preference for brands, and as such OEMdevices running Android, which are available at much lower price points, have failed to make an impact sofar

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

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

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

Hybrids/Convertibles

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

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

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

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

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

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

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

Envy, Dell's Ideapad Pro range and Lenovo's Yoga and Helix Although design innovation has some way to

go, and prices of hybrids will need to decline, the multi-use device has scope to capture a share of the tabletmarket by offering a stronger value proposition to consumers while not compromising on user experience

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

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

Haswell chipsets released in June 2013 Meanwhile, according to a recent research report, 10% of all

laptops shipped worldwide in Q113 were touchscreen-enabled This figure is expected to grow as more andmore manufacturers develop laptops and touchscreen notebooks.

Vendor Developments

Struggling former global PC market leader Hewlett

Packard announced a new line-up of devices in June

2014 as it looks to recover ground on tablet early

movers, and gain traction in the hybrid notebook

market It expanded its line-up of touch convertible

PCs with the launch of a new group of form factors

and multiple operating system (OS) options HP

launched HP Envy x360, equipped with an Intel

Core processor and a 15.6-inch diagonal, full HD

10-point touch screen display The company has also

rolled out HP Pavilion x360, featuring a 13.1-inch

diagonal 10-point touch screen and HP Split x2 with

an Intel core processor and a 10-point touchscreen

display In addition, the company has introduced the

HP Chromebook and the HP SlateBook under its

Chrome and Android offerings

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

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

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

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

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

Device Penetration* (%)

2006-2013

*Age 18+ Source: Pew Research Centre, BMI

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

manufacture outside the US but said 'speed of execution is key' The computers produced from this plantwill have an American flag on the palm rest Lenovo also confirmed plans to increase the scope and scale ofits first US manufacturing site in Whitsett, North Carolina, according to WXII12 The company aims to add

155 new jobs to its Greensboro production line by the end of July 2013

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

available via Dell's Protected Workspace program

Dell's SecureWorks division also launched a new threat-hunting service which will be targeted at enterprisecustomers The Targeted Threat Hunting service has been integrated with SecureWorks' Counter ThreatUnit, and is designed to 'detect the presence of complex cyber attacks inside organisations' The company'schief technology officer, Jon Ramsey, commented that the new service used 'instrumentation, advancedanalytics and visualisation tools', alongside years of collected security threat data and experience to identifyand eliminate targeted threats

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

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

In May 2013, Amazon leaked details of a planned Windows 8 tablet release Details of the product, to be

sold by Taiwanese technology firm Acer, were reportedly listed on the site for a short time on May 6 2013.

The listing indicated that the device would utilise an 8.1-inch screen, which if true would make it thesmallest Windows 8 tablet on the market

Software

BMI forecasts software spending will increase at a CAGR of 5.3% 2014-2018 as the addressable market

reaches USD224bn in 2018 We expect software sales growth will surpass growth in hardware spending as

business software vendors pitch efficiency gains, in line with companies focusing on reducing costs.

Meanwhile, the software market is being influenced by the continued move towards distributed computing,software-as-a-service (SaaS) and service-oriented architectures

Market Trends

The US software market is expected to be

worth USD184bn in 2014, a 6.2% increase over

2013 Economic headwinds have led to clients

focusing on a clear return on investment from

software investments, and has also given additional

momentum to the adoption of cloud computing

-despite fallout from the NSA Prism scandal Many

US software companies reported positive revenue

growth in 2013 as US companies invested more in

utility software and service-orientated architectures,

rather than traditionally packaged software

Cloud computing is now an established technology

in the US, but nonetheless, 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 A wide range of US private and public sector organisations announcedcloud computing strategies and launched pilot projects US organisations migrating to new cloud solutionshave included government departments and companies such as office supply retail group Staples

100,000 200,000 300,000

e/f - BMI estimate/forecast Source: BMI.

The majority of enterprise software demand, in functional terms, is currently for ERP and supply chainmanagement 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 andmodernising logistics and warehouse functions Business intelligence and other information-enablingsoftware 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 areassuch as ERP, CRM and business intelligence, security and supply chain management are increasingly beingdelivered 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 USD8.6mn Companies

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

third-A key area in the business software market is small and medium-sized enterprises (SMEs), where

penetration is generally lower, and as a result, it is becoming an increasingly important focus for vendors InJune 2013, it was announced that Oracle was creating an all-in-one solution for small and medium

businesses (SMBs) The company will combine software, server, storage and networking into an encompassing package called Oracle Database Appliance It is designed to be a cost-effective product thatbrings enterprise class performance to smaller businesses We expect other leading vendors to providestrong competition in the SME market

all-SaaS

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 increasinglyhad 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