United states information technology report q4 2012

Meanwhile, key pan-regional drivers of IT spending will include growing mobile and fixed broadband penetration, cloud computing, product innovation and new form factors such as tablets a

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INFORMATION TECHNOLOGY REPORT Q4 2012

INCLUDES 5-YEAR FORECASTS TO 2016

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: October 2012

CONTENTS

Executive Summary 5

SWOT Analysis 7

United States IT Sector SWOT 7

United States Political SWOT 7

United States Economic SWOT 8

United States Business Environment SWOT 8

Americas Pacific IT Risk/Reward Ratings 9

Table: Americas Risk/Reward Ratings, Q412 11

IT Markets Overview 12

IT Penetration 12

Market Growth And Drivers 14

Sectors And Verticals 16

Market Overview 20

Government Authority 20

Overview 21

Software 22

Services 25

Industry Developments 27

Industry Forecast 29

Table: USA IT Industry – Historical Data And Forecasts (US$mn unless otherwise stated), 2009-2016 31

Industry Forecast Internet 32

Table: Telecoms Sector – Internet – Historical Data & Forecasts, 2009-2016 32

Competitive Landscape 34

Hardware 34

Software 37

Macroeconomic Forecast 42

Table: United States – GDP By Expenditure, Real Growth %, 2008-2016 45

Company Profiles 46

Hewlett-Packard 46

Dell 52

Table: Selected Dell Mergers And Acquisitions 56

Microsoft Corporation 58

IBM 63

Country Snapshot 68

Table: The United States' Population By Age Group, 1990-2020 ('000) 69

Table: The United States' Population By Age Group, 1990-2020 (% of total) 70

Table: The United States' Key Population Ratios, 1990-2020 71

Table: The United States' Rural And Urban Population, 1990-2020 71

How We Generate Our Industry Forecasts 72

IT Industry 72

IT Ratings – Methodology 73

Table: IT Business Environment Indicators 74

Weighting 75

Table: Weighting Of Components 75

Sources 75

Executive Summary

BMI View: USA IT spending is forecast to reach US$559bn in 2012, up 5.5% year-on-year This leaves

our 2012-2016 forecast largely unchanged this quarter, despite a further contraction in PC sales in H112 Meanwhile, public IT procurements remained constrained due to the budget constraints faced by many government entities Overall moderate growth in budgets is expected, but much depends on the economic situation Despite a drive to cut expenses across government, many public sector organisations have appeared willing to continue spending on IT; however, the government hopes to make savings in its US$80bn IT budget US businesses remain cautious, but there is pent-up demand from projects delayed

as a result of the economic situation and cloud computing is expected to be increasingly important

Headline Expenditure Projections

Computer Hardware Sales: US$141.5bn in 2011 to US$146.8bn in 2012, +3.6% in US dollar terms

Forecast in US dollar terms unchanged from Q312, but Ultrabook failed to provide the hoped-for support

to PC sales in H112

Software Sales: US$153.0bn in 2011 to US$163.0bn in 2012, +6.4% in US dollar terms Forecast in US

dollar terms unchanged from Q312, but more investment is expected in utility software and orientated architectures rather than traditionally packaged PC software

services-IT Services Sales: US$234.9bn in 2011 to US$249.3bn in 2012, +6.0% in US dollar terms Forecast in

US dollar terms unchanged from Q312, with an increasing share of IT budgets being earmarked for newer solutions such as virtualisation and cloud computing

Risk/Reward Ratings: The USA scores 76.3 out of 100.0 for Q412 The USA ranks first in our

latest Americas risk/reward ratings (RRRs) table, ahead of Canada, as well as Latin American giants Brazil and Mexico The country ranking was secured by its global highest industry rewards score of 82.5, while its rating was also boosted a relatively high country rewards score of 90.0

Key Trends & Developments

ƒ The US federal government's ambitious Cloud First cloud migration strategy has tasked government agencies with migrating 80 services to the cloud within 18 months Key government agencies including NASA and the General Services Administration are already using the cloud

to collaborate and deliver applications The government hopes to eventually realise savings of up

to US$12bn per year from the move and will seek further savings by closing 472 federal data centres by the end of 2012

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

ƒ US PC sales are forecast to report single-digit growth in 2012, after a further annualised contraction in Q212 In H112, sales of ultrabooks fell far short of Intel's prediction that ultrabooks would comprise 40% of US notebook sales by the end of 2012 While exact sales figures are hard to derive, these devices seem unlikely to enjoy the success that was hoped for, at least initially In the United States, the average market price for an ultrabook was upwards of US$900 during H112, compared to around US$500 for a Windows notebook

SWOT Analysis

United States IT Sector SWOT

2012

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

to remain in positive growth territory

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

virtualisation, data centre consolidation, and cloud computing

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

manufacturing

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

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

spending

United States Political SWOT

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

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

candidates in the 2008 presidential election, including President Barack Obama's), and the widespread dissatisfaction of the voting public, may encourage both major parties to experiment with more consensual approaches

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

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

United States Economic SWOT

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

are a risk A decision by Japanese and Chinese central banks to reduce their larger dollar holdings could cause sharp falls in the value of the US currency Low savings rate by US households on a historic basis, although this has begun

to reverse

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

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

United States Business Environment SWOT

presents tremendous opportunities for businesses of all types and sizes

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

congested roads and airways

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

with stimulus package funds being dedicated to that purpose

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

effective corporate tax rates, following a multi-decade downtrend

Americas Pacific IT Risk/Reward Ratings

The top of BMI's Risk/Reward Ratings for the Americas remains unchanged, with the US and Canada

leading the pack These two countries bring up the regional average significantly, with populations that are accustomed to the latest products and frequent upgrades However, emerging markets in Latin

America are seeing continued increases in demand for computer hardware while investment in new products such as cloud computing are gaining momentum There were no major changes in ranking, although Brazil's score dropped, moving it from joint third to fourth place while remaining markets held their places

The US stands out in the region for its large market size, not matched by any others in the Americas The presence of some of the world's largest and most important IT companies is a major boon for the market,

as well as a large number of corporations and SMEs, all of which have high demands for IT services and software Although the ongoing economic issues and high unemployment put pressure on the market,

BMI still believes the US' IT market will continue to exhibit strong growth and be one of the main drivers

of global trends and developments

Fellow developed market Canada follows the US, although its markedly lower IT score highlights the difference in market size With a significantly smaller population, Canada's IT market value is lower than the US However, as Canadian consumers exhibit similar demand for new IT hardware, and more

importantly IT services, the market stands above those in Latin America Services form the greatest share

of the IT markets in the US and Canada, while hardware drives growth in Latin America

Chile and Brazil take third and fourth place in our ratings, having shared third place last quarter Brazil's overall score fell slightly, while Chile held its total IT market rating Although Chile's market size is considerably lower than Brazil's, its inhabitants are among the most IT literate in the region, helping drive demand higher for IT services than for hardware Favourable demographics put Chile at the top of Latin American markets for country rewards, shared with Venezuela, and its stronger country risks score reflects a more stable political outlook and welcoming business environment

Brazil's IT market is the third largest in the region, hence a strong industry rewards score that remained unchanged this quarter However, Brazil's economy begins to show signs of a slowdown, with the

consumer-driven growth story appearing to be coming to an end Our core view that Brazil's structural economic imbalances would begin to unwind is now beginning to play out This will have a strong impact

on Brazil's IT market growth forecast While no other market is close enough to overtake it, slower growth puts a downside risk to Brazil's overall position in our ratings Nevertheless, there is still much to recommend Brazil, with an ever growing telecoms market increasing the number of broadband

subscriptions available, which in turn is driving demand for computer hardware The upcoming

international sporting events in 2014 and 2016 will also prove drivers for IT service demand

Mexico remains in the very middle of the table, despite a sharp drop in its overall score this quarter Mexico lost 2.2 points on the back of a strong decrease to its industry rewards score The uncertain

outlook for the economy negatively affects the growth prospects for the market, which BMI revised

downwards last quarter Consumer credit is forecast to fade in 2012, thrown into sharper relief by slower growth following the 4.1% increase in minimum wage seen in 2011, which drove PC sales in the first half

of that year Software and services offer the highest growth – although hardware remains the dominant segment of the IT market – and will offer the greatest growth prospects for the market in future

Peru and Argentina follow in sixth and seventh place with similar scores Argentina's IT market is

considerably larger than Peru's and its population is closer to Chile's tech-savvy inhabitants However, Peru's smaller market is set to see exceptional growth, with 2012-2016 CAGR of 11.2%, the second fastest rate in the region This, combined with a stronger country risks rating, helps keep Peru ahead of Argentina

Argentina faces a number of economic and political problems, not the least of which is rampant inflation

We remain concerned over this and government intervention in the economy, maintaining the country's unstable economic trajectory Although consumers are driving the economy, which should bode well for

IT market growth, there remain concerns over the overall business environment Argentina's country risks and rewards scores underpin its position in our ratings and its inability to move above Peru

This leaves Colombia and Venezuela at the bottom of the table Colombia's IT market growth is the highest in the region, while its market size is higher than both Venezuela and Peru The market ranks closely to Argentina, following an increase to its overall score this quarter Improving infrastructure and a number of government IT initiatives are helping to drive the market and a positive outlook for broadband

in the country also offers upside potential to Colombia's IT market forecasts Lower country rewards scores reflect weaker consumer spending and less favourable demographics than other markets in the region, but improvements here could help boost the market in the long term

Venezuela, meanwhile, remains at the bottom of the table with a difficult political and business

environment reducing opportunities in the market Venezuela's IT market is set to be overtaken by Peru in

2014, as sluggish growth sees it fall to the bottom of the region in market size The precarious business environment is responsible for limiting the amount companies are willing to invest in their IT

infrastructure in Venezuela We see little upside for this market in the short-to-medium term

Table: Americas Risk/Reward Ratings, Q412

Country

Industry Rewards

Country Rewards

Industry Risks

Country

Previous Rank

realisation of anticipated returns Source: BMI

IT Markets Overview

IT Penetration

A mixed regional picture is found with

relation to internet penetration In the US

and Canada, internet penetration in 2012

is estimated at 83.4% and 88.1%

respectively In Latin America, the

highest rate in 2012 is in Colombia

(57.1%), having experienced solid recent

progress on this indicator One feature of

Latin America is that a large amount of

internet access occurs outside the home

For example, data suggest 68% of

Mexican internet users go online from

places such as schools, workplaces and

internet cafés Data from Peru suggest

nearly 75% of internet users use a public

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

Meanwhile, in Latin American markets, broadband penetration is on course to reach as high as 32.5% in Argentina and 23.3% in Mexico, and has already passed 10% in Brazil, Chile, Colombia and Venezuela However, much broadband penetration growth is now being driven by mobile broadband users, thanks to the continued expansion of 3G mobile services across the region

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

Narrowband Internet Penetration

Per 100 Inhabitants

f = BMI forecast Source: BMI

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

potential, with IT spending as a percentage of GDP well below 2% in countries covered by BMI

However, government initiatives and growing PC affordability are now driving improvements on many ICT indicators In Brazil, a National Broadband Plan, and modernisation ahead of Brazil's hosting of the

2014 FIFA World Cup and 2016 Summer Olympics, should help to drive ICT utilisation

Growing affluence has brought

computers within the reach of a greater

proportion of the population PC

penetration is around 30% in Brazil, but

is set to rise to above 40% by 2016, while

Argentina is forecast to progress from a

current rate of 25% to around 35% in

2016 A similar situation prevails in

Chile and Mexico, where PC penetration

is estimated to be below 25% Colombia's

PC penetration reached around 15% in

2010, surpassing the government's

previous 2010 target of 10.8% BMI

estimates PC penetration in Peru could

reach 28% within the forecast period,

from less than 20% currently

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

government has launched a tender to provide 3mn PCs to public schools nationwide In Brazil, thousands

of rural schools have received computers and in December 2010 Brazilian states and municipalities began

to receive funds awarded under the 'computer for every student' programme In Chile in 2010, the

government launched a programme called 'Yo Eiljo mi PC' ('I choose my PC') Meanwhile, Colombia's Zona Clic programme is expected to involve the requisition of as many as 90,000 computers over the next few years

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

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

Broadband Penetration

Per 100 Population

f = BMI forecast Source: BMI

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

Market Growth And Drivers

Across the Americas, in 2012-2016,

external economic headwinds are likely

to mean slower growth in IT spending,

compared with the previous five-year

period In Canada and the United States,

consumers remain in a phase of

retrenchment thanks to the often stretched

state of household balance sheets

However, the fundamentals of rising

computer penetration and growing

affordability are expected to keep Latin

American markets on an upward path

Meanwhile, key pan-regional drivers of

IT spending will include growing mobile

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

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

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

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

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

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

In some Latin American countries such

as Mexico, much will depend on the

strength of the US recovery, which

remains uncertain A slowdown in China

in 2012 could also have ramifications on

business confidence and IT in markets

like Brazil Across the region, SMEs

have great potential to drive enterprise

application spending over the next few

years Brazil still has an estimated

400,000 small businesses that do not

have more than a very basic IT system

Meanwhile, around the region in markets

such as Colombia, government

programmes and growing computer affordability will support more spending on IT products and services

In Argentina in 2011, a number of IT tenders at both federal and provincial level were bid on ahead of October's presidential elections The Brazilian government's US$344mn modernisation strategy should mean enhanced IT spending over the next few years

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

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

period, particularly in the south east The Argentine market is dominated by the capital Buenos Aires, which has higher per capita income and education levels compared with the rest of the country

Brazil's IT market also has a distinct regional structure, with most spending accounted for by the south east region, which includes São Paulo as well as Rio de Janeiro São Paulo alone accounts for around 35% of spending and Rio de Janeiro, Espírito Santo and Minas Gerais for 25% Brazil remains on course

to become one of the top four computer markets as an expanding economy lifts millions into a middle class The fundamentals of rising computer penetration and growing affordability should keep the market

on an upward path

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

programmes and growing computer affordability help to sustain spending on IT products and services Meanwhile, Chile retains some strong IT market fundamentals including consumer affluence and a relatively favourable business environment Mexican government spending in an election will be one vendor focus, with a substantial information society budget and the roll-out of national and local projects

IT Market Size

As % Of National GDP

f = BMI forecast Source: BMI

Aside from regional trends, particular

factors are forecast for market demand in

individual markets Infrastructure

investments following 2009's award of

the 2016 Olympic Games to Rio de

Janeiro is expected to drive new Brazilian

market spending on IT systems and

solutions, as happened in South Africa

when it hosted the 2010 FIFA World

Cup In Venezuela, the steep devaluation

of the bolívar for non-essential imports

such as computers will depress spending

as consumers grapple with runaway

inflation and the attendant erosion of real

wages In Argentina the introduction of

new regulatory compliance laws for electronic invoicing, which took effect for some industries in 2011, provided a boost to enterprise investment in software platforms

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

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

at US$29.8bn in 2012, making it the largest IT market in the Latin American region, and a major global market in its own right Mexico is the second largest Latin American market with an estimated value in

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

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

Sectors And Verticals

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

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

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

IT Market Compound Growth

2012-2016 (%)

Source: BMI

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

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

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

Growth is expected to be much faster in Latin American market Notebook sales are outpacing the PC market as a whole, but there is also intensifying competition for PCs from tablets and smartphones, and a fall-off in netbook demand Commercial updates, expected to gather pace in the second half of the year, should help to keep overall growth on track

Tablets will be a growth area across the region in 2012, with robust sales of the iPad2 following its April

2011 launch In the US market, a Morgan Stanley report in H111 found that some 51% of CIOs expected

to buy tablets for their employees Tablets, at prices of US$400-800, are expensive relative to average salaries in most Latin Americas countries, but demand should receive a boost from expanding locally based production in Argentina, Brazil and elsewhere A number of major Brazilian organisations have already purchased thousands of tablets The Brazilian Ministry of Communications has also suggested the inclusion of tablets in digital inclusion programmes Meanwhile, the average price of a PC has continued

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

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

compared with 29% in the United States Across the region, companies are investing to improve decision making and optimise performance Mobility, smart devices, broadband and cloud services are among the trends encouraging more software spending by Mexican small and medium-sized enterprises (SMEs), which have to deal with increasing data flow Migrations to Microsoft's Windows 7 operating system will continue to drive revenues in 2012

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

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

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

most important open source applications

In general, enterprise resource planning (ERP) and other e-business products still dominate the Latin American enterprise software market, but vendors are also looking to other areas where faster growth is

total Customer relationship management (CRM), the next largest category, is still less than 10% of the total Demand for ERP solutions will remain robust in the near term due to the large potential market represented by SMEs in many parts of the country

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

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

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

Usage of the cloud for information storage appears relatively low in the US and Canada compared with some other mature markets However, 2011 saw many US government agencies at federal and local level launch cloud strategies and pilot programs A combination of enterprise objectives such as cost reduction and greater efficiency should combine to drive adoption of cloud services in 2012

Market Structure

% Of Total IT Market

f = BMI forecast Source: BMI

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

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

The IT services segment accounts for 16% to 42% of spending in the Latin American markets covered by

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

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

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

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

Outsourcing is also becoming an important spur to growth for the IT services sector, as several Latin American markets try to consolidate their reputations as regional offshoring hubs By some estimates, outsourcing may be equivalent to as much as 30% of IT spending in Brazil, with demand growing around 10% each year One driver for many markets will be ambitions to develop capabilities in the business process outsourcing (BPO) area and capture a larger global market share

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

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

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

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

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

Market Overview

Government Authority

Department of Commerce

Assistant Secretary for Communications

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 TV

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

Various other federal government ministries are also relevant to IT vendors

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 Research and Development (R&D) tax subsidies

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

Overview

Most tablets are expected to be significantly more expensive than smartphones, at US$400-800 Since the launch, unlocked Wi-Fi-only models of the iPad cost US$499 for a 16 gigabyte (GB) version and up to US$599 of 64GB Despite a previously mixed track record, this format is seen as a growth area.

typically break out ultrabooks as a separate category of notebook sales, Gartner's estimate of global

ultrabook sales in the region reaching half a million units in H112, would represent about 0.5% of total notebook sales in that period There is some suggestion that ultrabooks has taken a niche share of the high-end Windows notebook segment A report by research firm NPD suggested that ultrabooks

accounted for 11% of sales of Windows notebooks priced at US$700 or more in the US market from January to May 2012 However, the overall market for Windows notebooks was shrinking during the period

Due to initially high prices, these devices seem unlikely to enjoy the success that was hoped for In the United States, in H112 the average market price for an ultrabook was upwards of US$900, compared with

an average of around US$500 for a Windows notebook In contrast to netbooks, which prospered against the backdrop of the global financial crisis in 2008/09, the relatively higher-priced category of ultrabooks appears ill-timed given the current global economic malaise Vendors appear to have realised this and are moving ahead with plans to supply low-end ultrabooks Intel reportedly has resisted lowering Ivy Bridge CPU prices, but manufacturers are attempting to reduce costs by using cheaper Sandy Bridge CPUs and cheap batteries The final products are likely to reduce the price gap between netbooks and ultrabooks, but it may still be questioned whether this will be enough to ensure the take-off of this category Average ultrabook prices had already dropped to around US$850 by mid-2012, and were expected to dip further to around US$750 for the back-To-school season Meanwhile, the release of Windows 8 in October 2012 could provide a boost to the adoption of ultrabooks as consumers and businesses upgrade to the new operating system

E-Readers

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

In 2011, more private and public sector organisations announced cloud computing strategies and launched

pilot projects Over BMI's five-year forecast period, the number of cloud computing contracts open to

vendors is likely to dramatically increase, presenting a challenge to traditional desktop-centric software models US organisations migrating to new cloud solutions have included government departments and

companies such as office supply retail group Staples

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

Operating Systems

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

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

Migrations to Microsoft's Windows 7 operating system were the most significant event for Microsoft

since the launch of Windows 95, and should continue to support software sales Windows 7 attracted more support from businesses than the vendor's previous operating system Windows Vista did, largely because Windows XP is getting old Businesses that declined to upgrade from XP to Vista, due to

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

driving business upgrades to Windows 7 Microsoft also argues that Windows 7 can help businesses to save costs, thereby 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 However, given the economic climate, IT directors will need to justify any upgrade in terms of cost savings

Open Source

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

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

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

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

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

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

most important open-source applications

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

Business Software

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

The majority of enterprise software demand, in functional terms, is for ERP and supply chain

management Despite a relatively mature market, there still remains plenty of potential for ERP

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

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

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

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

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

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

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

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

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

Cloud Computing And SaaS

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

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

cloud computing spending to be software-oriented The economic crisis may have given lasting additional

accessed remotely Research firm IDC has forecast that by the end of 2012, 80% of new commercial enterprise applications will have been deplayed on cloud platforms A survey in 2012 by North Bridge Venture Partners of 785 IT decision-makers reported that 50% of users expressed complete confidence in the cloud

In 2011, the federal government launched its Cloud First cloud migration strategy Software-as-a-Service

(SaaS) is expected to comprise above 70% of public cloud services over BMI's forecast period Most

cloud computing comprises consumer applications such as webmail, social networking and ecommerce applications Some vendors are now promoting the idea of Cloud 2, to reference integration of cloud computing with devices such as the iPad, iPhone, BlackBerry and smartphones

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

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

the following year At the same time, the survey found that only 30% of attorneys had any awareness of cloud computing, indicating potential for further penetration as awareness increases

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

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

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

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

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

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

Services

IT services spending is expected to grow about 6.2% in 2012, with an upwards revision in our forecast due to an improved economic outlook Spending on IT services is closely correlated with GDP growth, which is bad news in a recession, but better news in a recovery However, the ongoing debt crisis and political stalemate about how to deal with this issue will have a negative impact on public sector IT demand IT contractors will be worried that automatic federal spending cuts could kick in, with an effect

on tech investment

Market Trends

It is anticipated that the US IT services market will be worth US$249.3bn in 2012 A major demand driver going forward will be organisations looking for help to utilise efficiencies from cloud computing services such as SaaS and IaaS, Platform-as-a-Service (PaaS) and Communications-as-a-Service (CaaS) Particular areas of opportunity for cloud computing include banking and retailing and government

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

Segments

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

strongest

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

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

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

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

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

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

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

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

companies come under cost pressures, some may use outsourcing as a way to reduce costs However, the

main beneficiaries are likely to be service providers in major global destinations such as India and the Philippines The same goes for offshore software development

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

Industry Developments

Government Cloud Strategies

In 2011, the US federal government launched two initiatives which have had a significant impact on the development of the public cloud Firstly, former U.S Chief Information Officer Vivek Kundra introduced the ambitious Cloud First cloud migration strategy, which tasked government agencies with migrating 80 services to the cloud within 18 months Key government agencies including NASA and the General Services Administration are already using the cloud to collaborate and deliver applications The

government hopes to eventually realise savings of up to US$12bn per year from the move The

government will seek further savings to its US$80bn IT budget by closing 472 federal data centres by the end of 2012 and nearly 500 more by 2015

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

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

Authorisation Programme (FedRAMP) will be the body for monitoring the procurement of commercial and non-commercial cloud services for government departments and agencies Meanwhile, a joint

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

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

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

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

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

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

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

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

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

management

Federal IT Spending

The government has to cut US$1.2trn over 10 years from federal spending under a process called

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

In 2011, the public sector debt crisis and the associated political fallout had a constraining effect on IT demand However, despite a drive to cut expenses across government, many public sector organisations have appeared willing to continue to spend on IT The government considered this as a way to achieve efficiency Therefore, despite the adverse fiscal environment, it is possible that federal IT spending could actually rise by 1%-2% in the next fiscal year

In 2010, the Obama administration called on federal agencies to develop strategies to simplify and where possible combine often sprawling IT operations so as to reduce costs Guidelines published in 2010 by the Office of Management and Budget asked agencies to initiate data centre consolidation programs to help cut US$3bn from the federal budget The move was also regarded as a way to reduce the government's real estate holdings, which includes 2,000 federal data centres.

Accountability

The IT Dashboard was launched to monitor IT projects across the federal government This reflects pressure for cost cutting and increased efficiency in government, as a result of the difficult financial climate, rising deficit and the ambitious social programmes of the Obama administration The dashboard

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

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

be cancelled.

Healthcare IT

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

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

2015, is expected to be a major driver of investment in this area

Industry Forecast

US spending on IT products and services is forecast to reach US$559bn in 2012 and US$674bn by 2016

BMI has left its 2012-2016 forecast largely unchanged this quarter, despite a disappointing contraction in

PC sales in H112 Commercial and consumer segments were restrained, as a result of the economic uncertainty, which is expected to persist ahead of elections in November 2012 Meanwhile, federal and state IT spending was below expectations in Q112, due to the budget constrains faced by many

government entities.

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

efficiencies from cloud computing models such as Software-as-a-Service (SaaS) and Service (Iaas) 2011 saw the launch of the government's Cloud First initiative, as well as a number of federal and local government agency cloud migrations and pilot programmes

Infrastructure-as-a-Market Trends

IT vendors are concerned about the effect of the ongoing US federal deficit issue and the failure of politicians to agree a deficit reduction programme If automatic federal spending cuts kick in during the next fiscal year, IT projects could be affected The November 2012 elections have added to uncertainty about the trajectory of future government IT spending

US PC sales recorded negative growth again in Q212, after a smaller single-digit annualised decline in Q112 The market slowdown was due in part to base effects, but a contributory factor was disappointing sales in the consumer segment, particularly of notebooks The surge of demand for tablets also hit sales of traditional PCs, and the much-hyped new category of ultrabooks failed to provide much relief One factor

is likely that consumers and businesses are delaying purchases until the release of the Windows 8

operating system in October 2012

In 2012, there are expected to be many more contracts for provision of cloud services, following the launch by the federal government in 2011 of its Cloud First cloud migration strategy Departments such

as the U.S General Services Administration are already making significant use of cloud services, as the government seeks to make savings in its US$80bn IT budget The recession may have had a lasting impact on the IT market by encouraging consideration of cloud computing models such as SaaS In light

of these and other changes, major vendors have also adjusted their competitive strategies, with the old desktop-centric model of software delivery appearing increasingly outdated

Overall moderate growth in budgets is expected in 2012, but much depends on the economic situation Despite a drive to cut expenses across government, many public sector organisations have appeared

willing to continue to spend on IT However, with continuing fiscal retrenchment in the government sector, now translating into cuts in real terms, private sector growth is expected to be stronger

In our core forecast scenario, IT market growth will advance at a Compound Annual Growth Rate

(CAGR) of 4.8% over our five-year forecast period to 2016 Key drivers will include growing mobile and fixed broadband penetration, product innovation and new form factors such as tablets, technology

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

consumptions

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

Drivers

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

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

Cloud computing models are expected to be increasingly important, with surveys finding high levels of satisfaction with cloud services among U.S CIOs Vendors are now rolling out more customised SaaS solutions for small and medium-sized businesses The rollout of more service offerings, including those from new market players, will fuel demand Virtualisation is making headway and will continue to do

so, filtering to more parts of the data centre

The economic downturn may also have accelerated the growth of outsourcing of non-core processes and a shift More software development has been outsourced to India and other locations, and vendors will be

efficiency This trend has spread to government where more agencies, in search of cost savings, are likely

to go down the path of data centre consolidation In 2010, the Office of Budget Management called for federal agencies to consider such initiatives

Segments

Government remains a key end-user, with federal IT spending having reached a level of around US$80bn

as departments continue to issue IT tenders, despite a drive to make savings through closing hundreds of federal data centres during the period 2012-2015 New government programmes, including the expansion

of healthcare, should generate lucrative new opportunities for IT vendors, although, because of the growing budget deficit, there will be increased pressure to reduce costs

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

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

Summary

The hardware market is predicted to grow from US$147bn in 2012 to US$164bn in 2016 Software spending should rise from US$163bn to US$203bn and IT services from US$249bn to US$306bn, over the forecast period

Table: USA IT Industry – Historical Data And Forecasts (US$mn unless otherwise stated), 2009-2016

Industry Forecast Internet

Table: Telecoms Sector – Internet – Historical Data & Forecasts, 2009-2016

f = BMI forecast Source: BMI, FCC

Internet and broadband penetration

continues to grow, as wireless

technology becomes more

widespread and more popular among

subscribers

This may be due to the market

reaching maturity, and also the debt

crisis affecting the expenditure of

Americans on their broadband

packages Furthermore, as wireless

broadband becomes a more popular

way to connect to the internet,

fixed-line numbers will inevitably fall As a

result, we have slightly downgraded

our broadband forecasts for 2012, although our future growth forecasts stay strong We believe that the market will remain buoyant and experience strong growth over our five-year forecast period The

overhaul of the USF (see Broadband section) and replacement with the CAF will lead to increased focus

and attention on promoting broadband connectivity and roll-out

81.5% of Americans used the internet by end-2011, with a 27.1% fixed broadband subscriber rate If we included mobile broadband in our analysis, however, the figure would be much higher – we believe

Industry Trends – Internet Sector

2009-2016

f = BMI forecast Source: BMI, FCC

around 245mn, equivalent to 77.9% penetration We continue to expect steady increases in internet users throughout our five-year forecast period, with total internet users anticipated to reach 283.9mn in 2016

High-speed internet is central to the marketing strategies of telecoms operators, with cable companies and mobile operators pursuing the high revenue area At the same time, the sheer popularity of internet-based services means that the point is fast approaching when most Americans will view such services as being essential to their daily lives The Broadband Technologies Opportunities Programme backs up this view and efforts to extend broadband services into rural areas will ensure that this trend continues, particularly

as service providers and content developers/vendors grow their product portfolios and become more adept

at marketing and pricing content that appeals to a broad range of consumers Increased revenue derived from such activities will allow operators to expand into new markets and it seems increasingly likely that fixed-line operators will need to become broadband-focused in order to survive

There were 88.7mn fixed broadband connections by the end of Q112; by end-2012, we believe this will rise to 92.7mn The rise of mobile broadband will slow down fixed broadband growth rates over the coming years, as these are not recorded in our broadband forecasts Especially with the launch of LTE,

we expect to see a rising popularity of 4G USB modems, which will impact wireline growth However, there is still some real scope for continued growth, with the fixed broadband market expected to reach about 107.264mn subscribers by end-2016, pushing the penetration rate up to 32.8% by the end of our forecast period

Competitive Landscape

Hardware

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

together account for at least 50% of the US market The top five leading vendors have over two-thirds of

the PC market in terms of volume, with Apple, Acer and Toshiba completing the list.

In H112, most PC vendors were hit hard by the sluggish market, with single-digit annualised declines in sales in both Q112 and Q212 Apple was the only top-five vendor not to lose ground In Q212, Acer and

HP each reported a double-digit decline in their US shipments, of 14.1% and 12.7% respectively,

according to an estimate by market research firm Gartner Japanese vendor Toshiba saw its shipments

decline by around 20%, while Dell's sales were down by 9.5%.

In Q112, HP again led in the US PC market and succeeded in bucking an overall negative shipments

trend, with 6.6% growth, according to an estimate by IDC Dell, in second place, saw its sales dip by

3.6% However, Apple, riding a wave of popularity for its MacBook range as well as iPads, also saw growth, of around 3.8% The most dramatic contractions were experienced by Asian giant Acer, which reported a quarterly decline of 19.1%, according to IDC Acer was also in negative growth territory

In 2011, several vendors suffered from the sharp slowdown in the US market, which was caused

by lacklustre consumer demand HP remained the market leader, but its sales were down 25% in Q411, compared to the same period of the previous year The company was hit not only by the economic

situation, but also uncertainty about the future of its PC division The company's former CEO, Leo Apotheker, had previously floated the idea of a spin-off or sale of its US$41bn computer business,

prompting some potential customers to defer purchases of the brand

In Q411, HP was the overall PC market leader, with a market share of 23.02%, down from 28.6%, in Q311, according to an estimate by market research firm IDC Meanwhile, according to the IDC data, Dell's overall PC market share of 22.44% was up from 21.96% in Q311 Acer, whose traditional strength

is in the consumer segment, was hit the hardest by the market contraction The company's market share was down to 8.14% in Q411, closing off a bad year

Acer's US sales were down by more than 40% in H111 HP, was another major loser, with negative sales growth of around 10% The company recorded negative growth in Q211, although the decline was far less steep, at less than 1%

Meanwhile, despite the hype around the new product category of Ultrabooks, which were intended largely as a challenge to the strength of Apple's Macbook Pro in the high-end notebook category, Apple continued to profit at the expense of the number one and two PC vendors In Q212, Apple was the only major vendor to report growth in its U.S market shipments, registering 4.3%, according to Gartner

Apple continues to dominate sales of notebooks priced at US$1,000 or higher, with its MacBook enjoying

a price advantage over high-end ultrabooks The Macbook Air starts at US$1,000, with many high-end ultrabooks retailing at around the US$1,400 mark Apple reported US growth of around 18% in Q411, building on a strong performance earlier in 2011 The company's growth of nearly 10% in Q111 increased

to more than 14% in Q212 In Q311, Apple reported a US PC market share of 11.3%, up from 10.5% in Q310 Apple's growth was driven by the success of its MacBook Air and of the iPad, as tablets ate into the share of traditional PC sales

Tablets

Initial sales of the iPad, which launched worldwide in March 2010, were strong, with around 2mn units sold worldwide within the first two months On launch, unlocked Wi-Fi-only models of the iPad cost US$499 for a 16 gigabytes (GB) version and up to US$599 for 64GB US sales of tablet notebooks could

pass 3mn units in 2010 and reach 20% of US PC sales within BMI's five-year forecast period Analysts

have taken different views on whether tablets should be included in calculations of PC market share

Price Competition

The emergence of low-priced notebooks and netbooks was the main PC market growth area in the

economic downturn in 2009 and had an effect on the PC competitive landscape

HP was particularly successful in using this trend to bolster its position In July 2009, the company was

selling a US$298 laptop at Walmart stores, while a Dell product, also produced for Walmart, sold for

US$398 Following the success of its Walmart product, HP continued with its low-price strategy for the back-to-school season In September 2009, HP introduced a variety of new computers with prices

significantly below those for similar models introduced earlier in the year

Strategy Adjustments

Chinese PC vendor Lenovo is also making gains in the U.S market as it remains of course to overtake

HP as the world's number one PC vendor by volume The company has adopted a more aggressive approach to challenging its rivals in the US market and has extended its channel reach In Q212, the company reported sales growth of around 6% in the U.S market, in a context of an overall market decline

in sales Lenovo is also targeting Dell's share of the government and education segment, where the U.S vendor has long enjoyed a strong position

Taiwanese vendor Acer faces a challenge, due to the slowdown in consumer spending, which has been the main driver of the PC market for the past few years In 2011, more growth was driven by commercial refreshes, rather than consumer, which is traditionally Acer's strong point Acer also aces a threat to its rise from HP's decision to compete directly in the low-end market HP has prepared for this shift by making changes to its design, parts procurement and shipment processes, which have enabled it to reduce contract manufacturing costs

Dell suffered in Q111 from weak consumer demand and a sluggish recovery in the business segment The company had mounted a strong global comeback in the past couple of years by moving aggressively into the retail segment and away from its traditional 'direct Dell' strategy of selling direct to customers In the

US, the company has done this by developing partnerships with leading retailers such as Best Buy This

strategy has provided it with a fresh source of growth during a slowing market, enabling it to recover some of the market share that it had lost to HP, as well as Asian challengers such as Acer, Lenovo and Toshiba

Netbooks

In H112, the decline of the netbook product category continued Former category leader Toshiba

announced it would cease to compete in this market segment in the US, joining other major vendors such

as Dell and Lenovo, which had already pulled out HP and Asus are still competing in the segment, but

Asian giants Sony and Samsung had not released any new netbook models in the US market by

mid-2012 Netbooks promised to shake up the competitive landscape of the PC market as vendors rolled out new waves of product launches Asian vendors like Asus, Acer and Samsung were all able to leverage the rapidly growth of the market for netbooks to increase their sales in the US market Meanwhile, other

vendors such as Japanese giants Toshiba and Fujitsu also entered the US market with products in this

segment In June 2009, Toshiba launched three new netbook computer models on the market and

announced an aim of eventually capturing 15-20% of the market for this product

Netbooks were generally seen as second computers, particularly for children and students In May 2009, Dell rolled out its first mini-laptop designed for young students The netbook was made from easy-to-grip rubber and had various easy-to-use features, including a light that shines when the computer is connected

to the internet The 10-inch screen computer was aimed at students from kindergarten through eighth grade, and retailed at a price of US$369 According to IDC, Dell has around 36% of the US' PCs-for-schools market, from kindergarten through to 12th grade, and 43% of the college market

However, netbook sales growth slackened in 2010 and the trend continued in 2011 Whereas previously it was understood that notebook sales would be sustained by consumers purchasing netbooks as second or third computers, it now appears more likely that they will purchase tablets and other mobile devices as alternatives This posed a challenge to vendors with a particular strength in netbooks, such as Acer and

Software

Operating Systems

Microsoft is dominant in the operating system segment and with US$70bn in annual revenue has eleven

products that each earn it more than US$1bn a year In October 2012, the vendor is due to launch its new Windows 8 operating system, which PC vendors hope will provide a much-needed boost to the PC market However, pre-launch publicity around the new operating system has been low-key compared with that for its predecessor Windows 7, as Microsoft tries to lower expectations Meanwhile in 2011 the company's dominance with its Windows software appeared to be under threat of erosion from the surge in demand for non-Windows tablets Analysts have long worried about Microsoft's potential over-reliance

on Windows to drive its revenue, and in Q111 sales of Windows fell short of expectations

Microsoft had a lot riding on its Windows 7 software, given perceived problems with its previous

operating system Windows Vista and also because of the continuing global challenge from open source 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, due to the large amount of processing power and memory required by Vista

The new system has attracted more support from businesses than Vista, largely because XP is now getting old Many businesses that declined to upgrade from XP to Vista, due to reported problems with the latter, may now go straight to Windows 7 Microsoft will still offer reduced support for XP until 2015, but hardware manufacturers will start to wind down their support from about 2012 This will be a key factor that should drive 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 In particular, Windows 7 is better suited to virtualisation than either XP or Vista Virtualisation look sets to become an important trend in IT spending in the next few years, as it allows businesses to simplify the management of desktop PCs by running desktop applications and storing user data within the datacentre Windows 8 is expected to offer vendors the opportunity to promote tablets with touch screens and flexible designs

Despite the disappointing results for Windows, Microsoft's overall revenue actually rose 13% to

US$13.4bn in Q311, owing mainly to strong sales of Microsoft Office Sales for Microsoft's business division, which makes Office, rose 21% year-on-year (y-o-y), to US$5.3bn In future, a revival in

corporate IT spending should help Microsoft by boosting spending on Windows PCs

However, interest in open source is growing in the public sector During the recession, an increasing