United states information technology report q3 2015

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

Q3 2015 www.bmiresearch.com

UNITED STATES

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2019

Report Q3 2015

INCLUDES 5-YEAR FORECASTS TO 2019

Part of BMI’s Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: June 2015

BMI Research

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BMI Industry View 7

SWOT 9

IT SWOT 9

Political 11

Economic 12

Operational Risk 13

Industry Forecast 14

Table: IT Industry - Historical Data And Forecasts (United States 2012-2019) 14

Macroeconomic Forecasts 20

Economic Activity 20

Industry Risk Reward Index 25

Table: Americas IT Risk/Reward Index, Q315 28

Market Overview 29

Hardware 29

Software 37

Services 43

Industry Trends And Developments 48

Regulatory Development 54

Table: IT Regulatory Authorities 54

Competitive Landscape 56

Local Companies 56

Table: CA Technologies 56

Table: EMC Corporation 57

Table: Splunk 58

Table: Symantec 59

Company Profile 60

Demographic Forecast 88

Table: Population Headline Indicators (United States 1990-2025) 89

Table: Key Population Ratios (United States 1990-2025) 89

Table: Urban/Rural Population & Life Expectancy (United States 1990-2025) 90

Table: Population By Age Group (United States 1990-2025) 90

Table: Population By Age Group % (United States 1990-2025) 91

Methodology 93

Industry Forecast Methodology 93

Sources 94

Risk/Reward Index Methodology 95

Table: It Risk/Reward Index Indicators 96

Table: Weighting Of Components 97

BMI Industry View

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

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

spending is expected to reach USD680.7bn in 2015, up 4.8% from 2014, and grow at a CAGR of 3.4% 2015-2019.

Headline Expenditure Projections:

■ Computer Hardware Sales: USD216.3bn in 2014 to USD222.9bn in 2015, an increase of 3.0% Tablet

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

■ Software Sales: USD181.2bn in 2014 to USD190.6bn in 2015, an increase of 5.2% Enterprise

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

■ IT Services Sales: USD251.9bn in 2014 to USD267.3bn in 2015, an increase of 6.1% Cloud computing

adoption is already high in the US but we expect strong growth to continue over the medium term despitesecurity concerns following on from the National Security Agency (NSA) Prism debacle

Key Trends And Developments: One major development with only limited importance for the US IT

market but huge ramifications for US cloud providers was the New York District Court ruling in August

2014 that Microsoft must hand over customer data stored in its Dublin datacentre due to the fact it is a US

company Microsoft refused and is challenging the ruling for fears it would undermine confidence in USproviders, which is already fragile following the overreach of the Patriot Act and Edward Snowden

revelations about NSA activities Microsoft's case argues US government cannot reach across internationalborders and retrieve data without respecting local privacy laws The position held by Microsoft has beenshown to be supported by local populations outside the US, leaving difficult questions about the case

unanswered at the time of writing BMI believes a large number of US vendors with international

operations will be concerned with the case due to the large loss of confidence in the US legal system andforeign policy in the past two years

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

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

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

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

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

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

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

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

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

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

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

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

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

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

■ Potential for growth in the hardware market through form factor evolution; ie, thin notebooks, hybrids/convertibles and tablets

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

SWOT Analysis - Continued

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

Threats ■ Privacy and cybersecurity 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

Political SWOT Analysis

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

international diplomacy

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

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

and divisive

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

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

may encourage both major parties to experiment with more consensual approaches

to certain policy areas

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

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

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

a default on its debt

Economic SWOT Analysis

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

and innovation, and high research and development spending

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

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

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

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

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

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

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

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

the loss of manufacturing jobs

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

Operational Risk

SWOT Analysis

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

tremendous opportunities for businesses of all types and sizes

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

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

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

and airways

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

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

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

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

effective corporate tax rates, following a multi-decade downtrend

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

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

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

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

IT market value, % of

GDP 3.7 3.7 3.7 3.7 3.7 3.7 3.7 3.7

e/f = BMI estimate/forecast Source: BMI

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

USD680.7bn as stronger economic growth raises enterprise and consumer confidence We expect IT marketgrowth will remain robust considering the maturity of the US market, with a compound annual growth rate(CAGR) of 3.4% forecast for 2015-2019, and total spending expected to reach USD805.4bn in 2019

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

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

2015 Outlook: IT market spending growth in 2014 was limited by economic conditions and a decline in

tablet volumes due to market saturation after large numbers of first-time buyers entered the market

growth for 2015 is forecast at 2.9% in real terms (up from 2.3% in 2014), while private final consumption isalso forecast to grow slightly faster at 2.6% (up from 2.5% in 2014).

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

2015 The maturity of the market in terms of desktop, notebook and tablet penetration means first-timebuyer opportunities are scarce for vendors, and sales are concentrated in the replacement market Further,due to the rapid diffusion of tablet ownership and subsequent lengthening of replacement cycles in 2014, weexpect volumes will once again decline in 2015, down from a peak in 2013 when there were more than50mn first-time buyers However, areas of growth in 2015 are expected to be demand for hybrid notebooksand Chromebooks

e/f = BMI estimate/forecast Source: BMI

Overall, there will continue to be a squeeze on public sector IT spending, but growth will continue for cloudservices, for which there are expected to be many more contracts with the continued implementation of thefederal government of its Cloud First cloud migration strategy Departments such as the US GeneralServices Administration are already making significant use of cloud services, as the government seeks to

make savings in its USD80bn IT budget The recession may have had a lasting impact on the IT market byencouraging consideration of cloud computing models such as software-as-a-service (SaaS).

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

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

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

opportunities to vendors

Drivers: The economy will be generally supportive over the medium term, particularly when compared to

other developed markets Real GDP growth is forecast to average 2.5% annually 2015-2019, with

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

team's income stratification forecast for the US shows that the gains will largely be captured by the highestearning 10% of the population, while incomes for the remaining 90% are expected to see only slow growth

This bodes well for vendors of premium hardware including Apple, which targets its PC devices at the

highest earners, but the outlook for sales growth of mid-range devices is mixed, particularly in the context

of market maturity

Income Per Capita Breakdown

(2012-2019)

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

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

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

e/f = BMI estimate/forecast Source: BMI

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

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

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

machine-to-machine communications (M2M) market, or IoT, which is a medium-/long-term opportunity for

IT software and service providers to partner with telecoms operators In 2013, leading software and services

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

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

Another technology trend is the adoption of cloud computing services, with surveys showing high levels ofsatisfaction with cloud services among US chief information officers, reflecting the fact it is already theworld's leading cloud market This means growth opportunities are relatively diminished compared toemerging markets, but vendors will drive value growth by rolling out more customised solutions andtargeting SMEs.

Segments: The government remains a key consumer despite pressure on expenditure New government

programmes, including the expansion of healthcare, should generate lucrative new opportunities for ITvendors, although there will be increased pressure to reduce costs because of the budget deficit

US GVA By Vertical (%)

2015f

f = BMI forecast Source: National statistics, World Bank, UN, BMI

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

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

Summary: The hardware market is predicted to grow from USD216.3bn in 2014 to USD242.1bn in 2019.

Software spending should rise from USD181.2bn to USD231.8bn, and IT services from USD251.9bn toUSD331.4bn, over the forecast period (2015-2019)

Macroeconomic Forecasts

Economic Activity

BMI View: Real GDP growth in the US will accelerate in the coming years, on the back of stronger private

consumption and low borrowing costs We forecast headline growth of 2.9% in 2015 and 2.6% in 2016, up from 2.4% in 2014.

The US economy will grow at a faster pace in 2015 and 2016, with real GDP expanding by 2.9% and 2.6%over those two years respectively, compared to the 2.4% seen in 2014 The main driver of this growth will

be the private sector, with household consumption bolstered by lower inflation, improved labour market,and low borrowing costs Investment will be bolstered by low interest rates, and by government initiatives

to expand transport infrastructure These factors will help to offset the headwinds associated with a strong

US dollar, which will weigh on net exports

Growth To Pick Up

Real GDP Growth, % chg y-o-y

-2 0 2 4

Expenditure Breakdown

Private Consumption: The outlook for the consumer sector continues to improve, as unemployment

maintains its broad downward trajectory (coming in at 5.5% in March) Although other indicators have beenless encouraging (nonfarm payrolls increased by only 126,000 in March, while labour force participationremains at multi-decade lows), overall we expect that compared to 2014, the labour market will be

significantly improved Household consumption levels will be further supported by an uptick in personalincome levels, which have grown by an average of 4.5% year-on-year (y-o-y) over the first two months of

2015, compared to an average of 3.9% over the course of 2014

Perhaps even more significantly, consumer price inflation has fallen to the lowest levels seen since 2009,due in large part to the collapse in the price of oil, which has contributed to much lower fuel costs Asconsumers spend less at the fuel pump, they will benefit from greater discretionary income for other goods,leading to an increase in consumption in real terms Furthermore, following a major deleveraging cycle inthe wake of the financial crisis of 2008-2009, consumers are beginning to borrow to a greater extent Withborrowing costs likely to remain extremely low over the coming quarters, we expect this trend to remain inplace

Low Price Growth Will Support Consumption

US - Inflation, % chg y-o-y

Source: Bloomberg

Gross Fixed Capital Formation: Private fixed investment was among the strongest drivers of growth in

2014, expanding by 5.3% in real terms, and we expect that amid low interest rates and broadly improvingeconomic conditions, this trend will continue in 2015 and 2016, particularly for long-term investments.Indeed, non-residential structures grew by 8.1% in real terms in 2014, among the strongest growth ratesseen across all segments of the economy, due to fundamental factors we believe will remain in play over thecoming quarters Residential investment growth rates were more subdued, but we ascribe this to statisticalbase effects, due to double-digit expansion in both 2012 and 2013

the pace of domestic energy production expansion over the next several quarters, potentially requiringgreater volumes of fuel imports As a result, although the nominal trade balance will improve, the real tradebalance faces headwinds.

Government Consumption And Investment: We anticipate that lawmakers will seek to relax the

constraints on expenditures put in place following the 2011 debt ceiling debate As a result, spending willbegin to pick up in 2015, following four consecutive years of spending declines, although, political pressure

to maintain fiscal discipline will limit the scope of this change We expect that defence expenditures willpick back up, as President Barack Obama's efforts to address threats in Iraq and other parts of the MiddleEast are accommodated by Republicans' efforts to restore military spending

Transport Investment Expansion To Continue

US - Transport Construction Spending, Public And Private, USDbn

Source: US Census Bureau

Meanwhile, we expect a revival in public sector investment into transport infrastructure, a key component

of our generally constructive view towards US infrastructure In 2014, transportation spending from federal,state, and local sources increased by 4.0% y-o-y, a significant figure considering 90% of US transport

investment comes from public sources With growing bipartisan support for infrastructure spending, weexpect this trend to continue in the years ahead.

Risks To Outlook

Our growth outlook assumes low borrowing costs, low oil prices, and a strong dollar, all of which willsupport private consumption in the coming quarters If any of these assumptions do not play out (forexample, due to a more aggressive tightening cycle by the Fed than expected, or a significant escalation ofviolence in oil-producing regions in the Middle East), we would have to revisit our forecasts Furthermore,

if low job creation data in March proves the beginning of a longer-term trend of slack in the labour market,

we would likely revise our view on household spending

Industry Risk Reward Index

BMI View: The medium-term outlook for the Americas' IT market has stabilised in the wake of telecoms

and business environment reforms that benefit Mexico and Argentina in particular These two countries rapidly ascended our IT Risk/Reward Index for Q315, overtaking politically and economically challenged Brazil The bigger picture reveals similar headwinds that will further separate the highest and lowest scoring markets

Strong GDP and GDP growth support the USA and Canada's leadership positions and the 10 points betweenthese markets and third-ranked Mexico highlight the distinction between IT prospects across the Americasregion Although Mexico's position has improved, its businesses and households are less likely to beconnected or make regular use of technology than seen in the developed IT markets in North America.These two markets pull up the regional average for the IT Index The average for the Latin Americanmarkets alone is 55.5, a full 4.3 points below the total region

The US and Canadian markets are particularly reliant on the services industries to drive economic growth.These industries are increasingly reliant on IT services and platforms to improve efficiencies and willcontinue to generate strong opportunities Economic and political turmoil arguably has less of an influence

in these developed markets as services are already online and used by the majority of the population

Mexico has always outperformed the Latin America Risk/Reward Index (RRI) average principally due to itssize Its greatest weakness has been the dominance of a few players in the telecoms market that have madeonline access very difficult However, reforms offer long-term potential as connectivity is fundamental tothe expansion of the IT market As it pushes above the regional average and overtakes Brazil and Chile(previously the top markets in the region), the opportunities in Mexico are highlighted, particularly as itcatches up to its more developed rivals While we do not expect Mexico to match the scores of the top twomarkets, wider improvements across the region will result in a narrowing of the divide

Mexico Pulling Ahead

Mexico Vs Americas Average IT Risk/Reward Index Score

Note: Scores out of 100 Source: BMI IT Risk/Reward Index

Opportunities for companies across the IT industry in Latin America will rely on greater spending bycompanies Key industries include financial service providers, health services and manufacturing Theopportunities by country differ greatly Argentina and Mexico count manufacturing as a major contributor

to economic performance and supporting growth Increasing access to financial services will provide newopportunities although these will not use traditional platforms We maintain a positive outlook for thegrowth of mobile financial services (MFS) that will bring more consumers into a formalised financialsector Peru and Colombia, in particular, have strong opportunities in this sector as a result of multipleproduct launches across a diverse set of mass-market platforms

Opportunities In Automation

Manufacturing Nominal GVA, % of Total

Argentina Brazil Chile Colombia Mexico Peru Venezuela Canada United States

2013 2014 2015f 2016f 2017f 2018f 2019f

5 10 15 20 25

f = BMI forecast Source: National sources, BMI

Greater access to financial tools will also encourage greater spending and we expect platforms for commerce and m-commerce to provide a small, but increasingly significant, boost to growth over our long-term outlook In this area Chile and Argentina stand out, with consumer and household spending remainingstrong over our forecast period Chile in particular is a key market for developments as many companieslaunch services first to the Chilean market before expanding elsewhere in the region Coupled with higher

e-PC penetration than the regional average, Chile punches above its weight with its more tech-savvy

population As more consumers gain access to internet services over PCs or mobile devices, online spendingwill increase and companies will need to invest in the online platforms to support this growth

While Brazil faces both economic and political turmoil, its position as a regional powerhouse cannot beunderestimated Although we have lowered our IT and economic outlook for Brazil, it remains the largest

IT market in value outside of the two developed states in our Index, almost twice the size of Mexico, thenearest rival While we see a rocky road in the medium term, our forecasts show faster growth from

2017-2019, which will keep Brazil pulling ahead of its larger rivals Lower oil prices have offered somerespite, but greenfield oil production opportunities are diminished, clouding the overall picture

IT spending across all countries will continue to grow although at differing rates The head start held by the

US and Canada will be insurmountable for Latin American markets even though growth rates may be faster

We expect Latin American markets to leapfrog certain developments, moving to the cloud more quickly andkey industries such as finance and healthcare to adopt IT-based solutions more quickly than their developedneighbours

Table: Americas IT Risk/Reward Index, Q315

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

USA 82.5 90.0 55.0 66.8 78.2 1 1 Canada 65.8 90.0 65.0 66.7 71.8 2 2 Mexico 67.5 60.0 52.5 48.1 60.4 3 4 Chile 54.2 70.0 50.0 68.2 60.1 4 3 Argentina 56.7 75.0 40.0 52.1 58.3 5 6 Brazil 63.3 60.0 45.0 50.8 58.1 6 5 Peru 53.3 55.0 45.0 55.1 53.1 7 7 Colombia 50.0 55.0 47.5 46.8 50.3 8 8 Venezuela 45.0 70.0 35.0 34.6 48.1 9 9

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

Market Overview

Hardware

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

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

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

but we expect slower growth due to tablet market saturation We estimate 2013 was the peak year for time tablet buyers in the US, and the market shifted rapidly to replacement/upgrade sales in 2014 as a result

first-of the rapid initial diffusion first-of ownership As a result, tablet shipments contracted in 2014, and we forecastanother year of decline in 2015 as the market adjusts towards the replacement rate

We forecast total US IT hardware sales will increase 3.0% to USD222.9bn in 2015, while PC sales areexpected to increase to USD182.6bn Meanwhile, datacentre construction is helping to boost server sales.The IT hardware market's 2015-2019 compound annual growth rate (CAGR) is projected at 1.7% and themarket value should reach USD242.1bn by 2019

Market Trends: Although PC sales have held up better in the US than in Europe, the desktop and notebook

markets have both still declined, as consumers increasingly opted for tablets Despite the decline, the marketstill remains huge, with around 100mn units shipped in 2013 (excluding tablets) Although vendors oftraditional form factors are experiencing a difficult market, the new categories of ultrabooks, as well asultra-thin notebooks and hybrids/convertibles, offer avenues for growth but remain under pressure fromTablets

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

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

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

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

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

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

tablets, with average prices and margins declining further to fight off cannibalisation However the rate of

decline is expected to continue to diminish in 2015 as demand stabilises with core users still requiring theadditional productivity features offered by notebooks and desktops versus tablets.

Hardware Market

(2012-2019)

Personal computer sales, USDmn Servers sales, USDmn

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

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

e/f = BMI estimate/forecast Source: BMI

Servers And Storage: The US datacentre market has become very competitive in recent years as real estate

investment trusts (REITs) join IT companies, telecoms operators, internet content providers and pay-TVcompanies in building high-capacity facilities to service their own needs as well as those of local and

multinational businesses This has attracted the attention of vendors; for example, Lenovo announced in

May 2013 that it would release a rebranded version of its LenovoEMC storage solutions in North America

In December 2013, IBM announced that it intended 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 12global datacentres from SoftLayer and IBM respectively The US Department of Energy awarded IBM aUSD325mn contract in November 2014 to develop two supercomputers, to be named Sierra and Summit, aspart of the Coral project The purpose of the supercomputers will be to calculate car aerodynamics, forecastthe performance of new drugs and to find structural weaknesses in airplane designs

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

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

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

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

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

for the facilities, most likely on a site-by-site basis rather than as a complete package, as they will belooking to fill gaps in their footprints

Desktops And Notebooks: The US continues to be the second largest PC market globally, having been

surpassed by China in 2012 However, high household penetration means there is only limited scope forsales to first-time buyers, and as a result the market is predominantly based on personal devices and

upgrades/replacement purchases and will exhibit slower growth over the medium term compared to

emerging markets

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

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

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

upgrades/replacement purchases

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

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

Toshiba announced that it was following Dell and Lenovo in withdrawing from the segment in the US Hewlett-Packard (HP) and ASUS continued to compete in the netbook segment, but Asian giants Sony and Samsung did not release new models in the US market in 2012, and all vendors were focused

elsewhere by 2013

Notebook sales have also been hit by a shift to tablets, before staging a small recovery from 2014, whiledesktops are increasingly being run as utility machines and being overlooked for upgrades as householdsopt for mobile devices as a way into the latest technology The latest data from Gartner show total PCshipments increased 13.1% y-o-y to almost 18.1mn in Q414, and the fourth successive quarter of unitgrowth The data show that HP leads the market, with a share of 29.2% and shipments growth of 26.2% y-o-

y Second-placed Dell managed to increase shipments in the US by 13.5% y-o-y to Q414, falling furtherbehind HP Another notable success was Apple, which achieved a 11.7% market share with its high pricedMac devices, meaning its share of profit is likely to markedly exceed its share of sales

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

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

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

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

Device Penetration* (%)

2006-2013

*age 18+ Source: Pew Research Centre, BMI

Tablets: The US has been one of the fastest tablet adopting nations, trailing only high income markets such

as Hong Kong, Norway and Singapore The tablet market is centred on Apple's iPad, but 2014 saw a more

complex competitive environment emerge, with Apple facing competition from vendors producing devices

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

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

Research by the Pew Research Centre indicates that the deepening of the tablet market occurred rapidlybetween 2011-2013, with a variety of models available at different price points helping to drive penetrationrates higher It reported significant increases in penetration of tablets among US adults, with growth

accelerating from mid-2012 as cheaper Android devices - and Apple's own iPad Mini - hit the market PewResearch found that more than one-third of adults owned a tablet by May 2013, but as penetration rises, it isexpected that tablet sales will continue to slow The uncertainty arises from the fact that consumers in the

US initially showed a willingness to upgrade tablet devices with a short replacement cycle, a trend thatweakened considerably in 2014 as vendor innovation slowed This is a trend observed across mature tablet

markets, and in general we expect volumes will only return to growth once the replacement rate for existingusers is reached.

As is the case globally, the US tablet market has been dominated by Apple; however, it has faced muchstronger competition since 2013 Research from Magid Advisors showed that, in total, Apple's iPad was thedominant device in Q213, present in 59% of tablet-owning households (of which 6% is attributable to the

iPad Mini) This was far ahead of Amazon's Kindle Fire, present in 31% of tablet households, and Samsung

devices, present in 19% of tablet owning households However, data from Statcounter show that Apple'siOS, run on its tablets, accounted for 10.1% of US PC browsing traffic in February 2015 - a figure that was

up by 1.1 percentage points (pp) y-o-y BMI believes this decline reflects the dip in overall tablet sales in

2014, as well as a relative weakening of Apple's dominant position in the tablet market to Android andWindows rivals

Google's Android OS, which is used on Samsung, ASUS and Google's own Nexus range, accounted for just2.7% of PC browsing traffic (up 0.5pp y-o-y to February 2015) These data reinforce Apple's dominance

While Apple's tablet lead in the US seems insurmountable, it is also important to note the gap between thestrategies of some of the leading players On the one hand, Apple and Samsung are hardware vendors andlook to profit from the sale of devices, while on the other side, Google and Amazon are services firms andoffer tablets almost at cost The strategies of services firms, combined with low-cost original equipmentmanufacturer (OEM) tablets from China, will likely put pressure on the margins of hardware-centricvendors in the medium term (2015-2019)

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 OS, Windows vendors were able to introduce touchdevices for the first time

PC Volume Forecast

2012-2019

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

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

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

e/f = BMI estimate/forecast Source: BMI

Hybrids/Convertibles: The current trend in the PC market is defined by the separation of productivity and consumption across desktops/notebooks and tablets However, as tablet penetration rises, BMI believes

there is opportunity for vendors able to produce devices to bridge the divide without eroding the userexperience 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'sOffice Suite ubiquitous There is therefore an opportunity for vendors to leverage this strength over rivaliOS and Android devices by designing tablets with strong productivity functionality alongside the passivemedia consumption features

Early examples have been hybrid devices such as Microsoft's own Surface (RT & Pro), HP's Envy, Dell'sIdea Pro range and Lenovo's Yoga and Helix Dell released its latest hybrid, the Dell Venue 11 Pro tablet, inNovember 2014, which comes pre-approved for use by security-minded contractors, including the

Department of Defense, and is targeted at those working for the government Looking at the hybrid marketmore widely, 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 tablet market by offering a stronger value proposition toconsumers while not compromising on user experience.

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

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

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

Vendor Developments: Struggling former global PC market leader HP 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 notebookmarket It expanded its line-up of touch convertible PCs with the launch of a new group of form factors andmultiple OS options HP launched HP Envy x360, equipped with an Intel Core processor and a 15.6-inchdiagonal, 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

ecosystem section to market Xbox SmartGlass, SkyDrive and other services

In June 2013, Google confirmed its Chromebook laptops would be stocked at US retail chains Walmart

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

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

available via Dell's Protected Workspace program

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

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

In 2015, Samsung will continue to target the notebook market in the US, in contrast to retrenchment in other

regions In January 2015, Samsung Electronics' US-based subsidiary Samsung Electronics America

launched a new, ultraportable laptop, the ATIV Book 9 The laptop was available for pre-order starting fromQ115 for USD1,199.99 Samsung also launched the ATIV One 7 Curved in early 2015, the first curved all-in-one PC in the industry The 27-inch PC was also available for pre-order starting Q115 for USD1,299.99.Software

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

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

Market Trends: The US software market is expected to be worth USD190.6bn in 2015, a 5.2% increase

over 2014 We forecast slightly slower growth in 2015 after some operating system upgrade demand wasbrought forward to 2014 by the withdrawal of Microsoft support for XP in April 2014

A stronger economic outlook will translate to higher confidence levels and greater demand for software,while at the same time recent economic headwinds and looming risk factors in the global economy willensure clients retain a focus on a clear return on investment from software investments The economicbackdrop in recent years has also given additional momentum to the adoption of cloud computing - despitefallout from the NSA Prism scandal

Cloud computing is now an established technology in the US, but the number of cloud computing contracts

open to vendors is likely to dramatically increase over BMI's five-year forecast period from 2015-2019,

presenting a challenge to traditional desktop-centric software models A wide range of US private andpublic sector organisations have announced cloud computing strategies and launched pilot projects USorganisations migrating to new cloud solutions have included government departments and companies such

as office supply retail group Staples

management (CRM), financial management systems and information software accounts for around 60% ofthe sub-category total Middleware, such as database management systems and systems management tools,accounts for the remaining 40%.

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 (2015-2019), more investment can be expected in

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

Surveys indicate that an average ERP implementation for manufacturing and distribution companies takesaround 19-20 months, with an average sales cycle of around four months A survey by Panorama

Consulting Group found that the 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 third-party consulting

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

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

Salesforce has been expanding its reach into new verticals In June 2014, Netherlands-based technology

company Royal Philips and Salesforce entered a strategic alliance to provide an open, cloud-based

healthcare platform The move will capitalise on Philips' leadership in medical technology, clinical

informatics and clinical applications and Salesforce.com's leading position in enterprise cloud computingand customer engagement The new cloud-based healthcare information technology will allow medicaldevice and data interoperability, together with data collection and subsequent analysis This will help boostclinical decision making by professionals and allow patients to access more involved in the management oftheir personal health

Salesforce.com, along with HP, joined global communications solutions provider Verizon Enterprise Solutions' Secure Cloud Interconnect service (SCI) in December 2014 The SCI service is now available

with HP Helion Managed Cloud Service and the Salesforce Customer Success Platform, allowing firms torapidly scale and utilise several cloud services through a pay-as-you-go model Verizon's networkingoffering provides the benefits of dynamic bandwidth allocation, encryption security, applications

performance throughput and quality of service options

In July 2014, Cisco purchased Assemblage, a provider of a browser-to-browser cloud-based collaboration

platform The financial terms of the deal were not revealed Following the acquisition, Assemblage will joinCisco's Collaboration Technology Group The deal will aid Cisco in the development of easy-to-use next-generation collaboration solutions Following the acquisition, the company is also likely to integrateAssemblage's technology with its own cloud-based collaboration offerings

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