United states information technology report q4 2013

Cloud computing is the key growth area, but over the medium term, we expect real-time enterprise services will also developrapidly as enterprises seek competitive advantage by utilising

Q4 2013 www.businessmonitor.com

UNITED STATES

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2017

Technology Report Q4 2013

INCLUDES 5-YEAR FORECASTS TO 2017

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: September 2013

Business Monitor International

© 2013 Business Monitor International

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DISCLAIMER

BMI Industry View 7

SWOT 9

IT SWOT 9

Wireline 11

Political 13

Economic 14

Business Environment 15

Industry Forecast 16

Table: US IT Industry - Historical Data And Forecasts (US$mn unless otherwise stated) 16

Broadband 21

Table: Telecoms Sector - Internet - Historical Data & Forecasts 21

Macroeconomic Forecasts 23

Table: United States - GDP By Expenditure, Real Growth % 33

Industry Risk Reward Ratings 34

Americas Risk/Reward Ratings 34

Table: Americas IT Risk/Reward Ratings 36

Market Overview 37

Hardware 37

Software 45

Services 50

Industry Trends And Developments 53

Regulatory Development 57

Table: IT Regulatory Authorities 57

Company Profile 59

Dell 59

Microsoft Corporation 65

Hewlett-Packard 72

IBM 79

Table: IBM Acquisitions, 2012 (Total Value, US$3.964bn) 81

Regional Overview 85

Americas Overview 85

Demographic Forecast 89

Demographic Outlook 89

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

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

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

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

Methodology 93

IT Industry Forecasts 93

IT Risk/Reward Ratings - Methodology 94

Table: IT Business Environment Indicators 95

Weighting 96

Table: Weighting Of Components 96

Sources 96

BMI Industry View

BMI View: We forecast relatively strong growth in US IT spending compared with other developed markets

over the medium term Total spending is expected to reach US$588bn in 2013, up 6.6% from 2012, and grow at a compound annual growth rate of 5.1% to 2017 Economic uncertainty continues to be a drag on spending, and there are some areas where sales are in decline, for instance, desktops and notebooks, and some areas government spending due to fiscal retrenchment However, other areas of the market are growing rapidly, for instance, tablet sales are booming and enterprise adoption of emerging technologies such as real-time enterprise software and Big Data The US is also the leading cloud computing market globally with widespread adoption by enterprises, including leading the way in the most advanced

applications Although the National Security Agency PRISM revelations have dampened demand for US cloud services in other countries, most notably Europe, the impact on the US market is expected to be relatively limited

Headline Expenditure Projections

■ Computer Hardware Sales: US$144bn in 2012 to US$152bn in 2013, an increase of 4.7% Desktop and

notebook sales are declining, but at a slower rate than other developed markets, while booming tabletsales are driving growth

■ Software Sales: US$161bn in 2012 to US$173bn in 2013, an increase of 7.6% Forecast in US dollar

terms unchanged Emerging technologies such as machine-to-machine and Big Data are being adopted byenterprises, while demand for cyber security solutions is also an area of growth

■ IT Services Sales: US$246bn in 2012 to US$263bn in 2013, an increase of 7.2% Cloud computing is

the key growth area, but over the medium term, we expect real-time enterprise services will also developrapidly as enterprises seek competitive advantage by utilising the increases in available data

■ Risk/Reward Ratings (RRR): The US's score was 78.2 out of 100.0 The US retains first place in our

latest Americas RRR table, ahead of Canada, as well as Latin American giants such as Brazil andMexico

Key Trends & Developments

The revelations around the National Security Agency (NSA) PRISM intelligence gathering programmegenerated fears that the progress of the cloud computing industry could be derailed Surveys show that thescandal has hurt the prospects of US cloud providers internationally, most notably in Europe; however, thedomestic market appears to be relatively unscathed Nonetheless, cloud providers are concerned about theimpact of the government's activities on their growth prospects in a rapidly developing market A survey bythe US-based Cloud Security Alliance estimated that US cloud providers offering file storage and

computing in the cloud could lose 10% to 20% of the non-US market to rivals as a result of the PRISM

scandal The survey found that 10% of non-US respondents had already cancelled a project with a US

provider, while 56% would be less likely to use a US provider in future BMI believes US-cloud providers

will look to provide assurances to clients, which would include moving part of their operations out of the

US and into target markets

Demand for traditional form factors such as notebooks and desktops is declining in the US, albeit shipmentshave held up better than markets in Western Europe This is in part explained by the healthier economicbackdrop and also by the lower PC penetration rate in the US Meanwhile, tablet sales continue to boom anddrive the hardware market, with the latest data from Pew Research Centre showing penetration reached 34%

of the adult population in May 2013, up from just 14% a year earlier Although tablets offer continuedgrowth potential as penetration rates rise, we expect growth to slow Vendors will need to offer new features

in order for consumers to accept short replacement cycles and upgrade devices in quantities sufficient tooffset the slowdown from diminished first-time buyer opportunities

■ PC shipments have held up better than in other developed markets in 2012 and 2013.

Weaknesses ■ Due to the recession and subsequent slow economic recovery, customers postponed

IT investments and reduced short-term spending, particularly in areas such asconsulting and software development

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

Opportunities ■ Technologically savvy local population willing to spend on premium devices such as

Apple's iPad and MacBooks

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

big-■ Potential for growth in the hardware market through form factor evolution ie ultra-thinnotebooks, hybrids/convertibles and tablets

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

■ New business models such as software as a service and virtualisation will continue toclaim a large share of IT budgets

Threats ■ Enterprise and consumer concerns around data security and privacy could prove a

drag on adoption of cloud services and big data solutions

SWOT Analysis - Continued

■ Privacy became a more pressing issue with the PRISM spying revelations, which isexpected to damage US cloud computing providers

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

SWOT Analysis

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

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

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

■ Connect America Fund is seeking to expand coverage

Weaknesses ■ Fixed-line decline has been happening for over a decade In 2011 and 2012 it was

faster than expected and no real respite is expected

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

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

■ Despite Obama's US$7.2bn investment in improving broadband connectivity,deployment has been slow and a significant proportion of the population remainsunderserved

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

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

making it more attractive prospect for many clients

■ Broadband growth remains steady, if unspectacular, and the relatively lowpenetration rate means it should continue in this vein

■ IPTV growth highlights opportunities for operators to bring subscribers over a singlenetwork offering considerable cost savings

SWOT Analysis - Continued

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

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

■ LTE means the fixed broadband market will become increasingly redundant

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

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

Political SWOT Analysis

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

international diplomacy

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

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

and divisive

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

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

may encourage both major parties to experiment with more consensual approaches

to certain policy areas

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

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

Economic SWOT Analysis

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

innovation and high research and development spending

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

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

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

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

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

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

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

to the US's external imbalances

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

the loss of manufacturing jobs

■ Large growth in public spending, coupled with tax cuts, will worsen the fiscal deficit,eventually forcing more restrictive monetary policy and slower growth

Business Environment

SWOT Analysis

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

tremendous opportunities for businesses of all types and sizes

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

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

Weaknesses ■ Much of the country's physical infrastructure is in need of improvement, with

congested roads and airways

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

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

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

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

effective corporate tax rates, following a multi-decade downtrend

Industry Forecast

Table: US IT Industry - Historical Data And Forecasts (US$mn unless otherwise stated)

2010 2011 2012 2013f 2014f 2015f 2016f 2017f

IT Market Value 508,970 529,329 551,031 587,620 622,113 654,649 681,490 705,410 o/w Hardware 139,610 141,478 144,679 151,506 157,450 162,574 165,993 168,459

- PC 113,084 114,880 118,636 125,447 130,369 134,611 137,442 139,484

- Servers 12,565 12,733 13,021 13,636 14,171 14,632 14,939 15,161 o/w Software 145,311 152,976 160,626 172,760 184,456 195,740 205,469 214,445 o/w Services 224,049 234,875 245,727 263,353 280,206 296,335 310,028 322,506

IT Market, % of GDP 3.5 3.5 3.5 3.5 3.6 3.6 3.6 3.5

f = BMI forecast Source: BMI

BMI forecasts US spending on IT products and services will reach US$587.6bn in 2013, an increase of

6.6% over 2012, and then reach US$705bn by 2017 Despite the maturity of the IT market in the US, weidentify medium-term growth potential in sales of tablets, ultra-thin notebooks and hybrids/convertibles, aswell as adoption of cloud computing, big data and machine-to-machine (M2M) communications in theenterprise market These growth trends will support a compound annual growth rate of 5.1% 2013-2017.There is however downside risk to our core scenario as a result of global economic headwinds

2013 Outlook

The IT market in the US is highly developed, meaning growth will be slower than the fast growing

emerging markets However, when compared with its developed market peers, the IT market is expected toperform well Although the economic environment remains weak in 2013, it is nonetheless performing

better than Western European economies Real terms private final consumption growth is forecast by BMI

at 2.2% in 2013, which is a positive for the retail hardware market as rising incomes and progress made byconsumers in deleveraging boosts confidence

However, government expenditure is forecast to contract by 1.5% in real terms in 2013, illustrating thedifficulties vendors will face in boosting sales to the public sector Uncertainty continues to be generated bythe political tensions around the issue of the US federal deficit Automatic federal spending cuts known assequestration commenced on March 1 2013, and this could potentially hit IT projects Given the continuedsplit of party control of the legislature, the November 2012 elections have not made much progress inaddressing the trajectory of future government IT spending

One area of public sector spending that will continue to grow is cloud services, for which there are expected

to be many more contracts with the continued implementation of the federal government of its Cloud Firstcloud migration strategy Departments such as the US General Services Administration are already makingsignificant use of cloud services, as the government seeks to make savings in its US$80bn IT budget Therecession may have had a lasting impact on the IT market by encouraging consideration of cloud computingmodels such as software-as-a-service (SaaS)

Turning to the hardware market, there is a mixed outlook in 2013 Tablet sales are booming in 2013 despiterising penetration as consumers seem willing to accept much shorter replacement cycles compared withtraditional form factors Meanwhile, desktop and notebook shipments are declining PC shipments

(excluding tablets) declined by around 10% year-on-year (y-o-y) to Q113 as consumers continue to

exhibited a preference for tablets There was however a slower rate of decline y-o-y to Q213 of 1.5-2%, inpart because of weak performance in Q212 distorting the trend but also a symptom of hardware vendors

cutting prices of hardware There had been some hope on the part of vendors that the release of Microsoft's

Windows 8 OS in October 2012 would lead to increased sales of desktops and notebooks; however, theboost has not lived up to vendors hopes However, there is potential for innovative hybrid/convertible

designs to experience growth, particularly following the release of Intel's new Haswell chipsets in June

2013, which enable longer battery life, higher performance and slimmer notebooks BMI believes hybrids/

convertibles and ultra-thin touch-screen notebooks have the potential to experience rapid growth, but with

momentum only beginning to build in 2013, the impact will be felt more strongly later in our forecastperiod.

Enterprise spending on IT will experience only moderate growth in 2013 as confidence remain fragile.While there is pent-up demand from projects delayed as a result of the economic situation, some of this maynot 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 currenteconomic environment will offer some opportunities to vendors

BMI has a bright outlook for the M2M market, or Internet of Things, which is a medium-term opportunity

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

services firms, including SAP and Wipro, have partnered with M2M communications providers to tap

growth in the nascent market US mobile operators are among the global leaders in the deployment of M2Mservices, with verticals such as utilities, security, asset tracking, vehicle infotainment and other smartservices targets for growth We believe software and services firms will benefit either though partnershipswith operators, or by selling direct to operators

Another area of growth is the cloud computing market, with surveys showing high levels of satisfactionwith cloud services among US CIOs Vendors are now rolling out more customised SaaS solutions forSMEs The roll-out of more service offerings, including from new market players, will fuel demand.Virtualisation is making headway and will continue to do so, and it is proceeding to more and more parts ofthe datacentre Another growth opportunity will be private and public sector organisations looking for help

to utilise efficiencies from cloud computing models such as SaaS and Infrastructure-as-a-Service (IaaS).The federal government's Cloud First initiative is one of a number of federal and local government agencycloud migrations and pilot programmes

The economic downturn may also have accelerated the growth of outsourcing of non-core processes and ashift Already, more and more software development has been outsourced to India and other locations, and

vendors will be able to make the case that external spending on IT solutions can help the bottom line andadd to efficiency This trend has spread to government where in 2011, more agencies, in search of costsavings, are likely to go down the path of datacentre consolidation The Office of Budget Management in

2010 called for federal agencies to consider such initiatives

Segments

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

a level of around US$80bn as departments continue to issue IT tenders despite a drive to make savingsthrough closing hundreds of federal datacentres in 2012-2015 New government programmes, including theexpansion of healthcare, should generate lucrative new opportunities for IT vendors, although because ofthe ever-growing budget deficit, there will be increased pressure to reduce costs

As the recession eases, IT vendors should experience more growth from traditionally big-spending sectors

such as banking, financial services, retail and manufacturing BMI expects financial services will be a key

spending vertical as new regulations require increased investment, and in addition, the cyber security threatfacing them will require investment in services and solutions The advent of mobile payment systems will

be an additional source of spending growth

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

is a substantial market However, particularly in a difficult economic climate, there are significant

differences between the needs of businesses in different industries Increasingly, vendors will need tocustomise approaches based on industry-specific needs

The hardware market is predicted to grow from US$152bn in 2013 to US$168bn in 2017 Software

spending should rise from US$173bn to US$214bn, and IT services from US$263bn to US$323bn, over theforecast period

Industry Trends - IT Market

2010-2017

f = BMI forecast Source: BMI

Table: Telecoms Sector - Internet - Historical Data & Forecasts

2010 2011 2012 2013f 2014f 2015f 2016f 2017f

No of internet users ('000) 239,893 255,318 265,851 272,097 276,422 278,769 283,924 292,014

No of internet users/100

f = BMI forecast Source: BMI, FCC

New data from the FCC imply that there were

91.668mn fixed broadband subscribers in the US at

the end of 2012, alongside 170.076mn mobile

broadband subscribers The FCC's definition of

broadband uses data transfer rate benchmarking that

is not wholly consistent with that employed

elsewhere in the world Nevertheless, it is clear from

the FCC's data that the most significant growth in

broadband is in the wireless arena and that, as has

been seen in other mature markets worldwide, the

greater flexibility of mobile relative to fixed

connections is causing some xDSL customers to 'cut

the cord'

The fixed broadband market remains buoyant mainly

due to cable and fixed wireless usage, which remains

strong, as well as to a small but growing base of

fibre accesses BMI forecasts the number of fixed

broadband connections to reach 97.038mn by the end of 2013, rising to 107.021mn by 2017

High-speed internet is central to the marketing strategies of telecoms operators, with cable companies andmobile operators pursuing the high revenue area At the same time, the sheer popularity of internet-based

Industry Trends - Fixed-Line

Sector

2009-2017

f = BMI forecast Source: BMI, FCC

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

Macroeconomic Forecasts

BMI View: While we are revising down our 2013 real GDP forecast for the US from 2.1% to 1.8%, we

maintain that the core components of the US economy are on the cusp of a cyclical upswing that could drive growth over the next several quarters The downward revision is mainly attributable to base effects and changes in our export growth forecast, and we believe the risks to our 2014 forecast of 2.7% real GDP growth are predominantly to the upside.

Macro Outlook: We have recently revised down our 2013 US real GDP growth forecast from 2.1% to

1.8%, but we maintain that the US economy is gaining steam and is set for more rapid expansion over thecoming quarters Indeed, the downward revision to this year's growth forecast is mostly attributable to thefirst quarter figure and base effects from Q412, and we believe that risks are to our 2014 and 2015 real GDPgrowth forecasts of 2.7% and 2.6% are predominantly to the upside

Slightly Weaker 2013 Before GDP Acceleration

US - Real GDP Growth, %

Note: f=BMI forecast; Source: BMI, BEA

Not only do we expect accelerating growth next year, we believe the US economy could be on the cusp of amulti-year period of stronger growth The three most cyclical components of GDP - durable goods

consumption, business investment, and residential housing - as a share of the total economy remain quitedepressed by historical levels, coming in at just 18.2% in Q113 The current level, while part of a steadyuptrend since late 2009, is only just above the previous 40-year low of 18.1%, which was recorded in Q491.While risks to growth certainly remain, we believe that the US economy is poised for a prolonged period ofgrowth, especially as some of the factors that previously weighed on GDP fade away

A Lot Of Room To Run

US - Cyclical Components Of GDP, % of GDP

Source: BMI, BEA

In addition to base effects, the main driver for our downward forecast revision is from the external accounts.Real exports of goods and services have shown only sluggish growth, prompting us to revise down thiscomponent of 2013 growth, whereas we see a strengthening consumer leading to more rapid import growththan we had originally expected

Expenditure Breakdown

Private Consumption: We continue to believe the US consumer is slowly and sometimes unsteadily

-gaining momentum after several years of weak activity A tax increase at the start of 2013 likely weighed onQ113 real private consumption, which still contributed 1.8 percentage points (pp) to real GDP growth andgrew by 2.6% year-on-year (y-o-y), the strongest reading since Q111 This reading is broadly in line withour forecast for 2.2% real private consumption growth this year, up from 1.9% last year Key to the

recovery in private consumption is the improvement that we have seen in the labour market over the pastseveral quarters Nonfarm payrolls have been increasing at a steady rate, somewhere between 150,000 and

200,000 jobs per month, for the last several quarters, and we expect this trend to hold (see 'Jobs Creation To

Pick Up', May 7) Meanwhile, initial jobless claims are trending lower, coinciding with a reduction in the

unemployment rate from a high of 10.0% in October 2009 to 7.6% in May of this year

Labour Market Stabilisation To Continue

US - Change In Nonfarm Payrolls (LHS) & Initial Jobless Claims (RHS), '000s

Source: BMI, FRED

Improvement in the labour market will benefit consumption by both increasing the purchasing power ofmany households and by improving consumer sentiment; we expect the drop in the unemployment rate overthe next several quarters to reassure consumers that the economy is returning to "normal", encouraging

them to spend Compounding the steady improvement in the labour market is the increase in real personalincome excluding transfers The rate of income growth year-on-year has accelerated in each of the last fourmonths, suggesting that the second quarter of 2013 could see stronger private consumption growth, posingupside risk to our 2013 and 2014 forecasts.

Incomes Accelerating In Q213

US - Real Personal Income Less Transfers, % chg y-o-y

Source: BMI, FRED

Finally, we believe that households are more likely to be inclined to spend than at any time in the pastseveral years While personal income has been climbing, household net worth has been climbing evenfaster, creating a positive wealth effect that we believe will support more rapid consumption growth.Similarly, a period of deleveraging, low interest rates, and rising incomes mean that household debt

servicing ratios - the cost of making payments on outstanding consumer and mortgage debt - are near year lows While we expect interest rates in the US to rise as the likelihood of monetary policy

30-normalisation grows, we expect that the impact on private consumption growth will be minimal in the to-medium term

short-Positive Wealth Effect & More Money To Spend

US - Household Net Worth & Debt Services Costs, % of Personal Disposable Income

Source: BMI, Bloomberg

Fixed Investment: We expect the contribution of fixed investment to real GDP growth to fall slightly from

1.1pp in 2012 to 0.9pp this year, due to the fact that our Infrastructure team sees slightly weaker housing

sector growth this year compared to last (see 'Core Views Playing Out, Growth To Decelerate', June 27).

Still, we expect relatively robust 6.5% growth in fixed investment this year, and believe the historically highlevel of housing affordability will entice many buyers to enter the market Additionally, building permitsremain in an uptrend, suggesting that we will see strong construction in the second half of the year

Sector Poised For Further Expansion

US - Home Affordability Index & New Building Permits ('000)

Source: BMI, FRED, Bloomberg

Furthermore, housing prices are now in a firm uptrend, which we believe will encourage new housingconstruction and reinforce household wealth dynamics and consumption growth In June, the Case-Shiller20-City Index was 24.8% below its April 2006 peak, leading us to believe housing price increases are stillsustainable Indeed, as noted above, residential investment as a percentage of GDP has fallen well below itshistorical average of 4.4% over the last 50 years, coming in at just 2.7% in Q113

Positive Price Growth Will Support Residential Investment

US - Case-Shiller 20-City Index, % chg y-o-y

Source: BMI, FRED

We also believe we could see a pickup in non-residential investment over the coming quarters, with thepotential for business investment to surprise to the upside Corporate profits are strong, and balance sheetsare in many cases flush with cash, suggesting that accelerating private consumption could be met withincreased investment Indeed, we believe the recent uptick in durable goods orders in recent months willtranslate to increased investment in business equipment and software over the short term, and this is adynamic we believe could accelerate if consumer demand surprises to the upside

Durable Goods Orders Up, Business Investment Will Follow

US - Equipment & Software Investment (LHS) & New Goods Orders

Source: BMI, Macrobond

Net Exports: The downward revision to our headline real GDP growth number is partly the result of

changes to our forecast for real net exports of goods and services We have revised down our export growthfigure slightly, from 3.5% to 2.5%, due to back-to-back contractions in annualized real export growth inQ412 and Q313 The slight uptick we have seen in recent months in export orders suggests that we will see

a slightly stronger back half of the year, but we do not think this will be sufficient to outpace importsgrowth, which we anticipate will accelerate more quickly in the second half of 2013 on the back of strongerconsumer demand We have revised up our 2013 real imports of goods and services forecast from 2.8% to3.3%, well above the 2.4% import growth posted in 2012

Exports Will Head Higher, But Outpaced By Imports

US - New Export Orders & Goods Export Growth

Source: BMI, Macrobond

Government Consumption & Gross Fixed Investment: Cutbacks in government spending weighed

heavily on real GDP growth in 2011 and 2012, knocking 0.6pp and 0.3pp respectively off the headlinefigure, but we expect that the worst in the contraction in government spending is behind us for now Asnominal growth accelerates, we expect government revenue growth to pick up, easing the fiscal picture atall levels of government

Less Of A Drag On GDP

US - Contribution Of Government Consumption & Gross Investment To Real GDP Growth, pp

(4-Quarter MA)

Source: BMI, BEA

Furthermore, states and municipalities have already enacted many of the cutbacks necessary to deal with theslowdown in revenue caused by the recent recession, meaning that they will see their fiscal balances makemuch less of negative contribution to growth than in previous quarters Finally, while the federal

government sequester will continue to weigh on the economy, contributing to government consumption's0.3pp drag on real GDP growth this year, we expect that its effects will be muted going forward Weforecast government consumption to have no net impact on GDP growth next year and a slight positiveimpact in 2014 and 2015

entail financial contagion that would affect US banks, and a drawback in credit at this point in the recoverycould have negative effects for our growth forecasts.

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

2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f

Real GDP growth, % change y-o-y 1 -3.1 2.4 1.8 2.2 1.8 2.7 2.6 2.4 2.4 Private final consumption, real growth

% y-o-y 1 -1.9 1.8 2.5 1.9 2.2 2.5 2.2 2.0 2.0 Government final consumption, real

growth % y-o-y 1 3.7 0.6 -3.1 -0.8 -1.5 0.0 0.7 0.5 0.5 Fixed capital formation, real growth

% y-o-y 1 -19 -0.2 6.6 8.5 6.5 7.2 5.3 5.3 5.3 Exports of goods and services, real

growth % y-o-y 1 -9.1 11.1 6.7 3.4 2.5 5.2 5.1 5.0 5.0 Imports of goods and services, real

growth % y-o-y 1 -13.5 12.5 4.8 2.4 3.3 5.1 4.2 4.0 4.0 Net exports of goods & services, real

growth % y-o-y 1 -28.2 18.2 -2.8 -1.8 7.0 4.7 0.2 -0.6 -0.9

Notes: e BMI estimates f BMI forecasts Sources: 1 BEA/BMI.

Industry Risk Reward Ratings

Americas Risk/Reward Ratings

The positions of the countries in our Risk/Reward Ratings are more stable this quarter after several

countries saw changes in our previous update Chile has returned to third place after Brazil had displaced it.Chile's score remains unchanged but Brazil's falls sharply as we have revised our forecasts for the market.The strength of USA and Canada means their scores are virtually unassailable by the emerging markets inLatin America Demand for faster growing services and software remains much weaker in Latin Americancountries

The US dominates the global IT market so its position high above regional peers is to be expected Many ITdevelopments originate in the country and vendors benefit from a strong consumer and business marketdemand for IT services The IT market benefits from strong replacement rates among the population, which

is accustomed to using IT services and devices at work and at home There is a change in the outlook for thehardware sector, though, as tablets become an increasingly important form factor, but the greatest impact onthe US' position is its increasing move to IT services We see this segment permeating more areas ofconsumers' lives and continuing to drive demand in the IT market

The distance between second-placed Canada and third-ranked Chile gives little opportunity for the latter toovertake Canadian consumers have many similar characteristics to their US counterparts and it is merelythe difference in market size that leaves Canada in a clear second place

Chile returns to third place with its stable scores reflecting its position as a top market for vendors, despite asmall population IT is more widely used among Chilean consumers and businesses than in many of its peermarkets, so the market is comparatively large as a share of GDP Chile's market is more geared towards ITservice growth as hardware growth has been stronger historically As IT services become a greater part ofeach market, the impact of acquiring software licences and hardware in US dollars is reduced to someextent

Brazil's growth outlook reflects an increasing awareness of the need for IT among businesses in the country,

a feature of the majority of markets in the region Brazil offers particularly strong prospects as the region'slargest market along with its strong economy Nevertheless, the consumer story has weakened, leading us torevise our forecasts, particularly for software and services, which are the market drivers There are stillopportunities as Brazil looks forward to hosting international sporting events and will need to update

infrastructure and services to manage this Despite its fall in the ratings, Brazil still holds the second highestindustry rewards score.

Argentina holds its higher position in the table as a result of the move to forecasting in local currency ratherthan US dollars This offers a higher growth rate than previously While the country was not displaced, wehighlight ongoing risks to the county's outlook, particularly in light of currency depreciation Mexico wasunable to move back to fifth place, but it maintains its score and Argentina's more precarious position couldsee Mexico regain its stronger position The Mexican consumer outlook has improved over the past year,and this should provide a boost to the IT market

In Peru's case the slowdown in China will affect demand for commodities, which we believe will have animpact on the overall growth rate for the economy With IT market growth so closely linked to the

developments in the economy, this has slowed our expectations Although Peru offers strong potential, ourdowngraded forecasts have lowered the country's score

Colombia and Venezuela remain at the bottom of our ratings, with the latter offering limited prospects.Despite the death of Hugo Chavez in March 2013, we foresee little chance of there being any major changeswith his successor winning the resulting election This spells a continued difficult time for companies in the

IT sector in Venezuela, which relies on business demand for much of its growth Although there are

opportunities with government expansion, we believe these are not sufficient to make up for the potentialfrom business growth, which remains stifled

Table: Americas IT Risk/Reward Ratings

Rewards Risks

Country Industry Rewards Country Rewards Industry Risks Country Risks IT Rating Rank Previous Rank USA 82.5 90.0 55.0 66.8 78.2 1 1 Canada 62.5 90.0 65.0 66.7 70.3 2 2 Chile 54.2 75.0 50.0 68.2 61.3 3 4 Brazil 65.0 65.0 45.0 50.8 60.0 4 3 Argentina 58.3 70.0 40.0 52.1 57.9 5 5 Mexico 60.8 60.0 52.5 48.1 57.3 6 6 Peru 58.3 50.0 45.0 55.1 54.1 7 7 Colombia 55.0 55.0 47.5 46.8 52.6 8 8 Venezuela 41.7 70.0 35.0 34.6 46.5 9 9

Average 59.8 69.4 48.3 54.3 59.8 -

-Scores are weighted as follows: 'Rewards' at 70%, of which Industry Rewards, 65%, and Country Rewards, 35%; 'Risks'

at 30%, of which Industry Risks, 40%, and Country Risks, 60% The 'Rewards' rating evaluates the size and growth potential of a telecoms market in any given state, and a country's broader economic/socio-demographic characteristics that impact the industry's development; the 'Risks' rating evaluates industry-specific dangers and those emanating from the state's political/economic profile, based on BMI's proprietary Country Risk Ratings that could affect the realisation of anticipated returns Source: BMI

Market Overview

Hardware

The US hardware market remains in good health compared with other developed markets where the decline

in desktop and notebook sales has been significantly steeper One factor is the relatively lower PC

penetration rate in the US, but the stronger economic backdrop is a more significant factor BMI forecasts

that the US computer and accessories market value will grow by 4.7% to US$152bn in 2013 Decliningsales of desktops and notebooks are a drag on growth, but booming sales of tablets will offset this trend As

a result, growth of PC shipments has been maintained overall Meanwhile, datacentre construction ishelping to boost server sales The computer hardware market's 2013-2017 compound annual growth rate(CAGR) is projected at 3.1% and the market value should reach US$168bn by 2017

Market Trends

Although PC sales held up better in the US than in

Europe, the desktop and notebook markets still

declined as consumers opted for tablets Despite the

decline, the market still remains huge, with around

65mn units shipped in 2012 (excluding tablets)

Although vendors of traditional form factors are

undoubtedly under pressure, the new category of

ultrabooks, as well as ultra-thin notebooks and

hybrids/convertibles, offers an avenue for growth

As well as cannibalisation by tablets, retailers

claimed that many businesses and consumers were

waiting for the October 2012 release of Microsoft's

new Windows 8 operating system before investing in

an upgrade; however, adoption has thus far been

sluggish Analyst firm IDC reported in Q113 that the

PC industry had banked on Windows 8 and less

expensive ultrathin notebooks to boost PC sales However, a lack of touch screen components for ultrathinnotebooks led to a lack of Windows 8 computers Performance in terms of shipments improved in Q213according to IDC and Gartner data, with shipments down 1.5-2% year-on-year (y-o-y) More Windows8touch notebooks were available; however, the improved performance may have as much to do with cuts to

Hardware Market (US$mn)

2010-2017

f = BMI forecast Source: BMI

prices by vendors and retailers willing to sacrifice margins in order to sustain volumes The release ofWindows 8 still has potential to boost PC sales as the market adjusts to delayed hardware upgrades, andcould also provide a fillip to the ultrabook market as tablet makers leverage its capabilities to offer deviceswith touchscreens and convertible designs.

PC sales had also endured a year of overall stagnation in 2011, although there were growth areas such astablets A number of factors dragged down the US PC market in 2011, including the sluggish economicrecovery and competition from other form factors, particularly tablets The marked slowdown was largelydriven by disappointing sales in the consumer segment, particularly of notebooks The surge in demand fortablets contributed to restrained growth for traditional notebooks Vendors also pointed to a lack of

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

Public sector spending was also weaker than usual due to the current fiscal constraints In contrast, businesssegment demand continued to grow across all segments, although there is underlying vulnerability tonegative sentiment about the economic recovery The growing interest in cost-savings from IT solutionsbased on the cloud and virtualisation will restrain demand for on-premises computer hardware

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

tablets, with average prices and margins declining further to fight off cannibalisation The sluggish

economic situation has created significant downwards pressure on prices, with consumers unwilling to paybig money and looking for 'good enough' solutions to their computing needs The professional segmentremained weak in 2012 as government agencies and educational institutions faced tight budget constraints

Servers

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

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

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

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

In June 2013, it was reported that Microsoft was set to invest US$678mn to expand its datacentre in Iowa.The project was awarded tax benefits and aims to create 29 jobs, according to the board of the Iowa

Economic Development Authority Microsoft will be eligible to receive up to US$20mn in tax credits for

the project, which will house servers, networking equipment and office space to operate the company'scloud services.

In April 2013, it was reported that Facebook was set to construct a US$1.5bn datacentre in Iowa, but the

company has not yet made a public statement The datacentre, which is being described as 'the most

technologically advanced data centre in the world', will be reportedly built in two US$500mn phases on a1.4mn square foot site The datacentre will be Facebook's fourth as it already has datacentres in Oregon,North Carolina, US, and one under construction in Lulea, Sweden

Desktops And Notebooks

The US PC market is mature, with a household PC penetration rate of 77% in 2010; however, this is stillsome way off the levels of PC penetration in European markets with comparable income levels There islimited scope for sales to first time buyers, meaning the market is predominantly based on personal devicesand upgrades/replacement purchases As a result, there is a heavy bias towards mobile PCs, which hadbenefited notebook/netbook vendors prior to the arrival of tablets which have virtually eliminated netbooks

as a device category Notebook sales have also been hit by a shift to tablets, while desktops are increasinglybeing run as utility machines and being overlooked for upgrades as households opt for mobile devices

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

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

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

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

The popularity of netbooks was a big factor keeping notebook sales in positive territory during the recession

in 2008-2009, and accounted for about 80% of notebook segment growth However, the netbook growthtrajectory flattened in 2010 as the price differential with fully-featured notebooks became less significant.Meanwhile, enhanced versions of netbooks with features such as larger screens and more powerful

processors should further blur the line between the two categories The emergence of tablets has alsoundermined demand for netbooks At their peak, netbooks are estimated to have accounted for about 12% ofnotebook sales in the US in 2009, with estimated unit sales of more than 6mn

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

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

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

2013

Tablets

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

Kong, Norway and Singapore The tablet market is built on Apple's iPad, but by 2013, there is a deeper market with competition from vendors producing devices running Google's Android OS and Microsoft's

Windows 8 Research by the Pew Research Centre indicates that the deepening of the tablet market, with avariety of models available at different price points, has helped to drive penetration rates higher It reportedsignificant increases in penetration of tablets among US adults, with growth accelerating from mid-2012 ascheaper Android devices, and Apple's own iPad Mini, hit the market Pew Research found that more thanone-third of adults owned a tablet by May 2013, but as penetration rises, it is expected that tablet sales willslow The uncertainty arises from the fact that consumers in the US have so far exhibited a willingness toupgrade devices with a short replacement cycle, a trend that will become harder to sustain as innovationslows

As is the case globally, the US tablet market has been dominated by Apple; however, its position didweaken in 2012 and it faces much stronger competition in 2013 Data from Statcounter show that Apple'siOS, run on its tablets, accounted for 6.2% of US PC browsing traffic in August 2013 - a figure that was up

by 1.7 percentage points (pp) y-o-y This data supports research from Magid Advisors who estimates that intotal Apple's iPad was the dominant device in Q213, present in 59% of tablet owning households (of which

6% is attributable to the iPad Mini) This is far ahead of Amazon's Kindle Fire, present in 31% of tablet

households, and Samsung devices, present in 19% of tablet owning households

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

accounted for just 1.5% of PC browsing traffic (up 1pp) y-o-y This recent data reinforces Apple's

dominance; however, it is notable that Android is becoming a more significant competitor for Applefollowing the release of popular tablets such as the Kindle Fire from Amazon, the Nexus 7 and 10 andSamsung's Galaxy Tab range However, unlike the global market, the US has a strong preference for brands,and as such OEM devices running Android, which are available at much lower price points, have failed tomake an impact so far

The success of Android vendors came only after the release of lower cost tablets and were predominantlythe smaller 7" form factor This contrasted with Apple's larger and more expensive iPad - and the popularity