United states information technology report q4 2010

Despite an overall fall in PC shipments in 2009, many vendors leveraged demand for notebooks and netbooks into continued growth.. Computer Sales ƒ The US addressable market for PCs and

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All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor

INFORMATION TECHNOLOGY REPORT Q4 2010

INCLUDES 5-YEAR FORECASTS TO 2014

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Production Date: October 2010

CONTENTS

Executive Summary 5

SWOT Analysis 8

US IT Sector SWOT 8

United States Telecoms Market SWOT 9

US Political SWOT 10

US Economic SWOT 10

US Business Environment SWOT 11

IT Business Environment Ratings 12

Americas IT Business Environment Ratings 12

Table: Regional IT Business Environment Ratings 12

United States Market Overview 15

Government Authority 15

Overview 17

Hardware 19

Drivers 20

Segments 21

Netbooks 21

Tablet Notebooks 22

E-Readers 22

Software 23

Cloud Computing and SaaS 25

Services 26

Industry Developments 28

Industry Forecast Scenario 30

Table: US IT Sector Overview, 2007-2014 33

Internet 34

Table: US Internet Overview, 2007-2014 34

Macroeconomic Forecast 35

United States – Economic Activity 38

Competitive Landscape 39

Hardware 39

Netbooks 40

Software 42

IT Services 46

Company Profiles 47

HP 47

Dell 49

Microsoft 51

IBM 52

BMI Methodology 53

How We Generate Our Industry Forecasts 53

IT Industry 53

IT Ratings – Methodology 54

Table: IT Business Environment Indicators 55

Weighting 56

Table: Weighting Of Components 56

Sources 56

Executive Summary

Market Overview

ƒ US spending on IT products and services is forecast to reach US$683bn by 2014

US spending on IT products and services is forecast to grow to almost US$531bn in 2010 and reach

nearly US$683bn by 2014 BMI has upwardly revised its forecast after US PC sales grew stongly in

H110 After three quarters of decline as a result of the global economic crisis, a recovery in shipments growth that started in H209 gathered pace in H110 as businesses implemented hardware and systems upgrades that had been delayed from 2009

This upgrade cycle should still have some way to run but businesses remain cautious due to concerns about the possibility of a faltering economic recovery A major demand driver will be private and public sector organisations looking for help with to utilise efficiencies from cloud computing models such as Software-as-a-Service (SaaS) and Infrastucture-as-a-Service

Other key market drivers are expected to include:

ƒ Growing fixed and mobile broadband penetration

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

ƒ Technology innovation such as GPS and services

ƒ Business model innovations such as virtualisation

ƒ Economic recovery

The recession may have had a lasting impact on the IT market by creating the conditions for the

popularity of low-cost netbooks and notebooks and encouraging consideration of new IT delivery models such as SaaS In light of these and other changes, major vendors have also adjusted their competitive strategies

Industry Developments

ƒ The government has reported on its 2009 calendar year IT spending

In 2009, total IT spending including all federal IT investment came to US$74.2bn, up by 1.99% on the previous year's total of US$72.8bn In 2010, budgeted federal IT spending is set to rise to US$78.4bn

The stimulus bill, which required the use of electronic healthcare records by doctors by 2015 is expected

to be a major driver of investment in this area

Competitive Landscape

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

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

In 2010, most PC vendors reported renewed growth as businesses proceeded with purchases delayed from

2009 Despite an overall fall in PC shipments in 2009, many vendors leveraged demand for notebooks and netbooks into continued growth Meanwhile, the contest for top spot between HP and Dell continued

HP exemplified the recovery trend experienced by most vendors, with a 12% rise in revenues from its Americas region in Q310 to US$14.2bn

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

units within the first two months

Rival vendors such as HP and Dell have all announced or shown their own tablet products, while

smartphone makers Research In Motion (RIM) and Samsung are also expected to compete in this

segment HP did not comment rumours that it would be releasing a tablet based on Google's Android operating system

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

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

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

Computer Sales

ƒ The US addressable market for PCs and accessories is estimated by BMI at US$126.4bn in

2010, with single-digit growth compared with 2009

US PC sales grew stongly in H110 and BMI estimates that the market is on course for full-year total PC

sales of 77mn unit In Q110, sales were boosted by a revival of the business PC market, which is expected

to gather pace in the second half of the year

Notebooks are the fastest growing PC market segment and are estimated to have accounted for more than 60% of unit sales in 2009, while netbooks are estimated to account for about 15% of notebook sales

However, netbooks and notebooks face competition from other formats such as smartphones from Palm,

RIM and Apple, as well as tablet notebooks

reduction and greater efficiency should combine to encourage the adoption of cloud services in 2010

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

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

IT Services

ƒ The US IT services market is forecast at US$230.9bn in 2010, with a sharp deceleration in spending expected compared with 2006-2008

IT services spending is expected to grow by 7.2% in 2010 after a sharp deceleration in 2009 Spending on

IT services is quite closely correlated with GDP growth, which is bad news in a recession

One opportunity will be organisations looking for help with to utilise efficiencies from cloud computing such as SaaS and IaaS, as organisations look to save money on IT investments National and local

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

SWOT Analysis

US IT Sector SWOT

Strengths ƒ The largest IT market in the world with spending forecast to pass US$500bn in

2010

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

to remain in positive growth territory

Weaknesses ƒ In 2009 customers were postponing projects and cutting back on short-term

spending, particularly in areas such as consulting and software development

Opportunities ƒ Low base level of sales in H109 should allow for rapid growth at least in the first half

of 2010

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

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

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

Threats ƒ A risk that recovery could be anaemic in 2010, in which case tech spending could

have another hard year

United States Telecoms Market SWOT

Strengths ƒ Large proportion of households in US continues to have a fixed-line connection

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

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

Weaknesses ƒ Fixed-line decline in 2008-2009 was faster than expected and continues into 2010

No real respite is expected in the market

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

ƒ Popularity of mobile services reduces the need for wireline connections

Opportunities ƒ New technologies such as WiMAX and long-term evolution (LTE) will see network

contracts being awarded to ensure latest products made available

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

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

Threats ƒ 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

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

US Political SWOT

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

most international diplomacy

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

Weaknesses ƒ Political debate between Republicans and Democrats has historically shown

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

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

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

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

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

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

US Economic SWOT

Strengths ƒ The world’s largest economy with an impressive record of entrepreneurial

dynamism, innovation and a high research and development spend

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

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

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

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

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

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

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

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

US Business Environment SWOT

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

presents tremendous opportunities for businesses of all types and sizes

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

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

congested roads and airways

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

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

with stimulus package funds being dedicated to that purpose

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

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

enterprise at risk

IT Business Environment Ratings

Americas IT Business Environment Ratings

Table: Regional IT Business Environment Ratings

Limits Of Potential Returns

Risks To Realisation Of

Returns

IT Market

Country Structur

e Limits

Market Risks Country Risk Risks

IT BE Rating

Regiona

l Ranking

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

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

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

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

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

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

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

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

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

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

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

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

2010

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

United States Market Overview

Government Authority

Government Authority National Telecommunications and Information

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

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

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

NTIA itself has several sub-bodies including:

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

ƒ The Office of Policy Analysis and Development

ƒ The Office of Telecommunications and Information Appliances (OTIA)

Major programmes run by the OTIA include:

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

ƒ A programme to drive the transition to digital television

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

Various other federal government ministries are also relevant to IT vendors

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

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

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

Overview

IT Spending - 2009e IT Segments

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

Despite continued economic uncertainty, and the faster growing IT markets of countries such as China and India, the US is forecast to maintain its

global IT market leadership position for

some time

BMI estimated US IT spending at just over

US$487bn in 2009 As a mature market,

BMI assumes that IT services accounts for

around 44% of US IT spending, compared

with 27% for hardware and 29% for

software

Each segment is comprised of several

sub-segments In the hardware segment,

notebook computers now account for around

58% of sales, and this share is expected to

rise to 81% by 2014, pushing desktops

down to less than one-fifth of unit sales A

major driver will be sales of netbooks, which now account for around 12% of sales, although the netbook

PC Spending - Segments

2009

Source: BMI

growth trajectory will flatten as the price differential with fully featured notebooks becomes less

significant

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

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

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

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

BMI counts most custom-developed software in

IT services Custom-developed software has

declined in importance as packaged software has

become more specialised and customised to

particular industries, and it may now account for

around 10% of commercial software value

The two largest IT spending verticals are

discrete manufacturing and government, which

have typically accounted for around 10% of

total IT spending each Banking has traditionally

also accounted for a similar amount although it

remains to be seen what will happen to bank IT

spending in the wake of the financial crisis Other significant IT spending verticals include retail,

wholesale, telecoms and construction

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

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

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

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

Software Spending - Segments

2009

Source: BMI

Hardware

BMI forecasts that the US computer and accessories market will grow by 13% in 2010 We have

upwardly revised our projection after a PC sales performance in H110 that was strong by any standards The PC market's 2010-2014 CAGR is now projected at 4.7% and value could reach the US$152bn by

2014

2010 Outlook

US PC sales grew stongly in Q110, with unit sales estimated by BMI at more than 17mn units BMI

estimates that the market is on course for full-year total PC sales of 77mn units In Q110, sales were boosted by a revival of the business PC market, which is expected to gather pace in the second half of

2010

The US addressable market for PCs and accessories is estimated by BMI at US$126.35bn in 2010, with

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

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

25% y-o-y according to market research firms Gartner and IDC

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

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

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

have fallen by around 20% between 2008 and H109 However, BMI believes that prices will remain

relatively stable in 2010

Total annual computer sales are forecast at 83mn units in 2010, higher than previously forecast, and up from around 69mn in 2009 Shipments are projected to reach 124mn by 2014 Despite the challenging trading conditions in 2009, vendor reports indicated that many segments of the US computer market were surprisingly resilient, pointing to futue growth potential Particularly in Q409, the market outperformed not only analyst expectations but also some emerging markets

Business demand remained sluggish going into 2010 Businesses are expected to maintain a cautious attitude to IT investments in 2010 due to uncertainty about the economic recovery, but there could be a boost, particularly in H210, from computer hardware tenders delayed from 2009

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

be zero inventory of Vista-based machines going into stores However, Windows 7 requires less power than Vista so there is a possibility that some consumers may simply decide to upgrade their existing machine rather than buy a new one

Prior to the global economic crisis, PC sales growth peaked in Q308 but fell as the effects of the crisis started to affect consumer confidence The two leading PC vendors, HP and Dell, reported sales declining

by around 4% and 16% respectively in that period Dell was harder hit because of its relatively greater reliance on desktops and the enterprise segment There were reports of some companies deferring

spending as tighter margins and flagging export sales increased a focus on the bottom line

Drivers

In H210, vendors were preparing for the summer and graduation gift market, with a focus on

user-friendly competitively priced devices that offered a range of options to access digital content such as video games Summer internships and travels plans will also provide a seasonal boost to PC purchases

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

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

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

One additional driver of increased sales and lower prices is the move of telecoms operators into the PC retail space With increasing mobile and fixed broadband penetration, notebooks and netbooks have become popular wireless connectivity options for consumers As in other markets, telecoms operators have emerged as significant distribution channels for netbooks, which are offered to subscribers bundled

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

for subsidised prices of as low as US$50

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

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

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

Boston, where Wi-Fi is relatively ubiquitous

Segments

Desktop shipments were estimated at around 24mn units in 2009 and could rise to 28mn by 2014 In H109, commercial sales of desktops and notebooks fell by a double-digit factor and commercial desktop purchases were also down, before stablising in the second half of the year Desktop sales declined in both consumer and commercial segments and are expected to comprise less than one-quarter of the PC market

by 2014

Notebooks are the fastest growing PC market segment and accounted for an estimated 60% of unit sales

in 2009, rising to a projected 81% by 2014 Notebook sales were estimated at around 45mn in 2009 and could pass 95mn by 2014 The popularity of netbooks in 2009 was a big factor keeping notebook sales in positive territory and accounted for about 80% of notebook segment growth

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

Netbooks

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

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

the US, while traditionally higher-end vendors have suffered Notebook prices in the US$500-600 range are already common Intense competition in the current economic climate and a reduction in component prices and manufacturing costs are among other drivers of low prices

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

season In Q409, the launch of a new version of Intel's Atom chip, codenamed 'Pine Trail', was

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

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

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

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

solutions and often include a Wi-FI option In 2010, there has also been the emergence of tablet

notebooks, spearheaded by Apple's iPad Some analysts have forecast that within the next couple of years

tablet notebooks could start to outsell netbooks

Tablet Notebooks

Initial sales of the iPad, which launched worldwide in March 2010, were strong, with around 2mn units sold worldwide within the first two months Other vendors are expected to follow Apple in releasing net tablet devices which have a form factor between the size of a smartphone and a netbook US sales of tablet notebooks could pass 3mn units in 2010 The introduction of tablets based on the Android

operating should provide additional impetus to sales in H210

In H110 Dell, HP and Lenovo announced or presented some type of tablet computer NetTabs are being

designed to appeal to consumers who find a smartphone inconvenient for watching videos or using the

internet, but a netbook is still too big or heavy Within BMI's forecast period, it is projected that tablet

notebooks could reach the point of accounting for above 20% of PC sales

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

to US$599 fo 64GB Despite a previously mixed track record, this format is seen as a growth area in 2010-2011 Some analysts forecast that tablet sales could overtake sales of netbooks within the next 2-3 years and be well ahead of desktops

E-Readers

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

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

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

Software CAGR for 2010-2014 is projected at around 7.4%, as the addressable market grows to around US$201.5bn In a difficult economic climate, business software

vendors will look to pitch efficiency gains, as declining margins encourage companies

to focus on reducing costs

2010 Outlook

It is forecast the US software market will be worth US$151.3bn in 2010, with single-digit growth from

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

Piracy

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

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

Operating Systems

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

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

The launch of Microsoft's Windows 7 operating system in October 2009 was the most significant event for Microsoft since the launch of Windows 95 Windows Vista ran into problems when business users found that many of their business applications could not run on the Vista operating system There were also complaints from both business and household users about performance defects, generally due to the large amount of processing power and memory required by Vista By all accounts, the Windows 7 launch went much more smoothly, thanks to closer cooperation in the pre-launch period between Microsoft and other players in the software value chain, including PC vendors and end-users

Microsoft has a lot riding on the new release, given the continuing challenge from open source The company has taken a couple of steps to fix perceived problems with Vista On the compatibility problem,

Microsoft has tackled this with a free extension to Windows 7 called XP Mode This allows users to run Windows XP applications on Windows 7 According to estimates, as many as one in five Vista users had found that they could not run XP applications on the new operating system Secondly, Windows 7 will use less processing power and memory than Windows Vista

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

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

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

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

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

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

Open Source

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

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

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

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

most important open source applications

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

Business Software

Business software is estimated to account for around 50% of total US software revenues Spending on applications such as ERP, customer relationship management (CRM), financial management systems and

information software is perhaps around 60% of the sub-category total Middleware, such as database management systems and systems management tools, accounts for around 40%

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

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

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

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

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

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

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

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

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

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

Cloud Computing and SaaS

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

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

association CompTia found that 14% of law firms planned to invest in cloud computing over the next year At the same time, the survey found that only 30% of attorneys had any awareness of cloud

computing, indicating potential for further penetration as awareness increases

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

during the economic downturn SaaS has become more acceptance as smaller businesses have

increasingly had to meet performance, visibility and compliance standards previously expected more of larger companies SaaS potentially enables these smaller companies to meet these needs cost-effectively,

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

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

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

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

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

Services

IT services spending is expected to grow by 5.5% in 2010, after a sharp deceleration in the previous year Spending on IT services is quite closely correlated with GDP growth, which is bad news in a recession

2010 Outlook

It is estimated that the US IT services market will be worth US$231bn in 2010, an increase in spending

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

projections in 2009 However, the most pain was felt by vendors that were more exposed to the crisis-hit financial sector

In early 2009, many vendors reported they were not seeing many major blow-offs on existing deals However, there were reports of IT managers in various sectors reviewing spending In the near term, budgets had often already been commissioned, and so the effects were more likely to be felt in H209

Verticals

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

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

responding by trying to diversify away from financial services to other verticals and by targeting

resources at markets outside the US

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

subject of debate among economists The likelihood of IT budgets being cut will increase the longer the slowdown lasts

Segments

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

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

A major demand driver will be organisations looking for help with to utilise efficiencies from cloud computing services such as SaaS and IaaS, Platform-as-a-Service (PaaS) and Communications-as-a-Service (CaaS.) Particular areas of opportunity for cloud computing include banking and retailing as organisations in those fields look to save money on hardware investments

Federal and local governments are another vertical where stong interest in cloud services is being

expressed Market research firm INPUT has forecast that the state and local government market for

vendor-supplied IT systems could grow to US$60.1bn by 2014, equivalent to around 30% of the IT Services market Software products account for around 15% of this projected spend Even departments such as the Department of Defence have a long-standing interest in private cloud-type solutions, some of which may even be hosted by commercial organisations external to the government agency in question However such arrangements are most likely to apply in the case on 'less security sensitive' information such related to healthcare provision and recruitment activities

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

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

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

In full-year 2009, total IT spending including all federal IT investment was measured at US$74.2bn, up

by 1.99% on the previous year's total of US$72.8bn A total of 7,409 investments were made, with 781 investments made by federal agencies classified as 'major' Major investments accounted for US$38.6bn

of the total

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

In 2010, federal IT spending is set to rise to US$78.4bn Defence is again expect to spend the most, with a budget of US$33.4bn However, the largest budgeted increase is for the Department of Commerce, where

IT spending is set to increase from US$3.6bn to US$6.4bn in 2010

Healthcare IT

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

healthcare IT The stimulus bill, which requires the use of electronic healthcare records by doctors by

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

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

Accountability

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