United states information technology report q4 2014

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

Q4 2014 www.businessmonitor.com

UNITED STATES

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2018

Technology Report Q4 2014

INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: September 2014

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BMI Industry View 7

SWOT 9

IT SWOT 9

SWOT 11

Political 13

Economic 14

Business Environment 15

Industry Forecast 16

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

Broadband 21

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

Macroeconomic Forecasts 23

Economic Analysis 23

Table: GDP By Expenditure (United States 2011-2018) 28

Industry Risk Reward Ratings 30

Industry Risk/Reward Ratings 30

Table: Americas Risk/Rewards Ratings - Q4 2014 32

Market Overview 33

Hardware 33

Software 40

Services 46

Industry Trends And Developments 51

Regulatory Development 55

Table: IT Regulatory Authorities 55

Competitive Landscape 57

Local Companies 57

Table: CA Technologies 57

Table: Splunk 58

Table: Symantec 59

Table: EMC Corporation 60

Company Profile 61

Hewlett-Packard 61

Dell 69

Microsoft Corporation 75

IBM 82

Table: IBM Acquisitions, 2012 (Total Value, USD3.964bn) 85

Table: IBM Recent Acquisitions 85

Regional Overview 89

Demographic Forecast 93

Table: The United States' Population By Age Group, 1990-2020 ('000) 94

Table: The United States' Population By Age Group, 1990-2020 (% of total) 95

Table: The United States' Key Population Ratios, 1990-2020 96

Table: The United States' Rural And Urban Population, 1990-2020 96

Methodology 97

Industry Forecast Methodology 97

Sources 98

Risk/Reward Ratings Methodology 99

Table: It Risk/Reward Ratings Indicators 100

Table: Weighting Of Components 101

BMI Industry View

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

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

is expected to reach USD665bn in 2014, up 5.3% from 2013, and grow at a CAGR of 4.4% 2014-2018.

Headline Expenditure Projections

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

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

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

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

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

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

Key Trends & Developments

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

USD2.3bn The deal includes System x, BladeCenter and Flex System blade servers and switches, based Flex integrated systems, NeXtScale and iDataPlex servers and associated software, blade networkingand maintenance operations

x86-There was an interesting twist in approach at Microsoft following the strategic shift enacted after the departure of CEO Steve Ballmer In June 2014 Microsoft and Salesforce.com entered into a partnership

agreement in order to create new services that link Salesforce's CRM apps and platform to Microsoft Officeand Windows software The deal comes despite Microsoft also selling its own enterprise software servicesthrough the Azure brand, reflecting the new direction taken after the departure of Steve Ballmer as CEO.Under the terms of the deal, both the firms intend to offer various services, such as Salesforce1 for

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

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

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

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

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

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

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

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

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

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

big-■ Microsoft support of Windows XP ceased in Q214, which should accelerate desktopreplacements and OS upgrades

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

SWOT Analysis - Continued

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

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

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

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

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

SWOT Analysis

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

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

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

■ Connect America Fund is seeking to expand coverage

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

anticipated and no real respite is expected

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

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

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

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

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

making it more attractive prospect for many clients

■ Broadband growth remains steady, if unspectacular, and the relatively 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 in the wake of the Comcast-Time Warner deal

Political SWOT Analysis

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

international diplomacy

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

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

and divisive

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

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

may encourage both major parties to experiment with more consensual approaches

to certain policy areas

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

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

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

a default on its debt

Economic SWOT Analysis

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

and innovation, and high research and development spending

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

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

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

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

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

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

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

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

the loss of manufacturing jobs

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

Business Environment

SWOT Analysis

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

tremendous opportunities for businesses of all types and sizes

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

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

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

and airways

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

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

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

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

effective corporate tax rates, following a multi-decade downtrend

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

sales, USDmn 161,513.8 167,331.6 176,871.2 184,292.6 190,529.1 195,983.4 201,085.6 206,393.9Software sales,

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

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

IT market value, % of

e/f = BMI estimate/forecast Source: BMI

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

outlook extends over the medium term and we forecast a CAGR of 4.4% 2014-2018, with total spendingexpected to reach USD783bn in 2018 Despite the maturity of the IT market in the US, we believe there ismedium-term growth potential in sales of tablets and hybrid notebooks in the retail market, while in theenterprise market adoption of cloud computing, big data and machine-to-machine (M2M) communicationswill drive growth

2014 Outlook

US IT market growth will be sustained in 2014 by the supportive economic environment When comparedwith its developed market peers, the US market is expected to continue to perform well US economicgrowth for 2014 is forecast at 2.4% in real terms, while private final consumption is forecast to increase

even faster at 2.9% These growth rates are a positive for the retail hardware market as rising incomes and

progress made by consumers in deleveraging boosts confidence

One area to watch in 2014 is the competition between hybrid notebooks running Microsoft Windows 8/8.1and tablets, lead by Apple's iPad The US market is dominated by Apple's advertising, store and brandreach, with the iPad a must-have item among affluent consumer groups However, with hybrid pricesdeclining there is potential for Microsoft to make some in-roads in the ultra portable market There should

also be a boost to desktop sales after Microsoft ceased support for Windows XP in Q214 Traditionally

conservative business consumers will be forced to undertake operating system upgrades

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

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

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

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

government seeks to make savings in its USD80bn IT budget The recession may have had a lasting impact

on the IT market by encouraging consideration of cloud computing models such as software-as-a-service(SaaS)

Finally, enterprise spending on IT should experience moderate growth in 2014 as confidence begins toreturn However, while there is pent-up demand from projects delayed as a result of the economic situation,some of this may now be abandoned or reconsidered The growing market for cloud solutions and

virtualisation will constrain demand for on-premises computer networks Regardless of the exact strengthand nature of the recovery, the current economic environment will offer some opportunities to vendors

Industry Trends - IT Market

2011-2018

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

The economy will be generally supportive over the medium term, particularly when compared to otherdeveloped markets Real GDP growth is forecast to average 2.4% annually 2014-2018, with consumption

growth expected to be slightly slower at 2.2% However, BMI's in-house Country Risk breakdown of

income growth by income level shows that the gains will largely be captured by the highest earning 20% ofthe population This bodes well for vendors of premium hardware, for instance Apple, but the outlook forsales growth of mid-range devices is less positive

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

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

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

M2M market, or Internet of Things, which is a medium / long-term opportunity for IT software and service

providers to partner with telecoms operators For instance, in 2013 leading software and services firms,

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

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

Another technology trend is the adoption of cloud computing services, with surveys showing high levels ofsatisfaction with cloud services among US CIOs, reflecting the fact it is already the world's leading cloudmarket This means growth opportunities are relatively diminished compared to emerging markets, butvendors will drive value growth by rolling out more customised solutions and targeting SMEs

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

40,000 60,000

0

National Sources/BMI

The government remains a key consumer despite pressure on expenditure Federal IT spending reached alevel of around USD80bn as departments continue to issue IT tenders despite a drive to make savings

through 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 budget deficit, there will be increased pressure to reduce costs.

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

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

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

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

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

Summary

The hardware market is predicted to grow from USD225bn in 2014 to USD249bn in 2018 Softwarespending should rise from USD184bn to USD224bn, and IT services from USD257bn to USD309bn, overthe forecast period

Table: Telecoms Sector - Internet - Historical Data & Forecasts

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

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

No of Broadband Internet Subscribers

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

No of Broadband Internet Subscribers/100

Inhabitants 26.95 28.87 30.32 30.89 31.93 32.37 32.40 32.41

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

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

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

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

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

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

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

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

Industry Trends - Internet

2011-2018

Internet users, '000 Broadband internet subscribers, '000

2011 2012

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

100,000 200,000 300,000

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

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

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

Macroeconomic Forecasts

Economic Analysis

BMI View: The US economy's Q114 real GDP contraction of 2.9% will yield to positive growth over the

coming quarters, as labour market tightening and strong consumer confidence bolster household spending, and fixed investment picks up The base effects from weak Q1 growth, however, have prompted us to revise down our 2014 real GDP forecast from 2.4% to 2.1%, implying only a slight acceleration from 1.9% growth in 2013.

The US economy will continue to strengthen in 2014, due to sustained improvement in the labour marketthat will fuel an acceleration in private consumption We will continue to see positive - although slowing -fixed investment growth this year, and we believe the drag on growth from government expenditure willlessen compared to last year However, we have revised down our 2014 growth forecast from 2.4% to 2.1%due to a particularly weak Q114 Indeed, real GDP contracted at a seasonally-adjusted, annualised rate of2.9% in the first quarter of the year, the largest contraction during a period of economic growth in

decades That said, the downward revision is attributable to base effects from Q1 and does not suggest thestart of a major slowdown We believe many of the contributing factors have already begun to recede,suggesting a much stronger second quarter

Growth To Remain Slow Over Forecast Period

US - Real GDP

USDbn 2005 prices (LHS) % y-o-y (RHS)

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f5,000

10,000 15,000 20,000

0

-5 -2.5

2.5 5 7.5

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

We maintain our view that the US economy is in the middle of a broad, multi-year expansion, although weexpect slower growth rates than during the late-1990s and mid-2000s We forecast average real GDPgrowth of 2.4% over our 10-year forecast period, a slowdown from the 3.1% average real GDP growthrecorded over the last 50 years

Expenditure Breakdown

Private Consumption: A downward revision to Q114 personal consumption expenditure (PCE) growth has

prompted us to revise down our forecast from 2.9% to 2.7% this year Still, even having accounted for aweaker-than-expected first quarter, our forecast implies the strongest rate of PCE growth in the past severalyears Consumer confidence levels are at post-financial crisis highs, and the employment-to-population ratiohit 59.0% in June, the highest reading since August 2009 We expect these trends to persist in the monthsahead, as jobless claims have been low, and business confidence levels are also relatively high, suggestingthat hiring will continue apace, further bolstering confidence and supporting consumer spending

Strong Hiring Boosting Confidence Levels

US - Change In Nonfarm Payrolls, '000 & Consumer Confidence Index (3mma)

Source: Bloomberg, BMI

Steady improvement in the US labour market over the past several years has helped to bring the US

economy to self-sustaining growth, an important part of which is several years of positive personal

consumption expenditure (PCE) growth That said, we acknowledge that growth over the coming years willsee PCE growth trend lower than was the case during the late-1990s and mid-2000s We forecast averagereal PCE growth of 2.2% from 2014-2018

Gross Fixed Capital Formation: Fixed investment growth slumped in early 2014, with business

investment and residential construction contracting in Q1, but we expect that this has already reversed inQ2 As capacity utilisation increases, and consumer demand strengthens, we expect businesses will makelong-delayed capital investments Additionally, years of de-leveraging and labour market tightening haveput more consumers in the position to buy a home Despite the drop off in home sales in late-2013 andearly-2014, houses remain affordable by historical standards, especially as mortgage rates have remainedlow A jump in housing construction starts and new home sales in May reinforces our view that the

downturn seen in the beginning of the year was transitory, and has already begun to recede

Residential Investment Recovering

US - Residential Construction Starts & New Home Sales, '000

Source: Bloomberg, BMI

Even with the recovery we expect to see following a weak first quarter, fixed investment will slow this yearrelative to 2013 We forecast 4.0% real fixed investment growth in 2014, after 4.5% growth last year, butexpect that base effects will see stronger growth of 5.3% in 2015

Net Exports: Net exports of goods and services will subtract 0.1 percentage points (pp) from headline

growth this year, a downward revision compared to the 0.1pp positive contribution in 2014 that we hadpreviously expected to see The revision is the result of a sharp contraction in exports in Q114, as well as an

uptick in imports in April and May, associated with stronger domestic economic activity (see 'Current Account Deficit Narrowing To Resume In H214', July 3).

Positive Contribution Over Forecast Period

US - Real Net Exports Of Goods & Services

Net exports of goods and services, bn (LHS) Net exports, pp contribution to nominal USD GDP growth (RHS)

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f-1,000

-500 0 500

-6 -3 0 3

Source: BEA/BMI

Over the next several years, we expect net exports to make a very small positive contribution to growth,averaging less than 0.1pp per year on average over our 10-year forecast period This trend will be driven byincreased domestic oil and gas production, which has reduced US demand for energy imports and may lead

to greater exports in the future Additionally, as we expect lower trending consumer activity over our term forecast period, we see relatively less demand for imported consumer goods This marks a substantialshift in the role of net exports with regard to GDP growth during the last 20 years, during which net exportssubtracted an average of 0.2pp per year from headline growth

long-Government Consumption & Investment: We expect to see weaker government spending this year than

we originally forecast, as data have shown a contraction in spending at the federal, state, and local levels in

Q114 (see 'Budget Deficit To Narrow To Long-Term Average In 2014', July 2) That said, we maintain that

the fiscal drag is lessening, and that the effect of the budget sequester on growth should dissipate this year

We forecast just a 0.5% contraction in real government spending in 2014, compared to a 2.2% contraction

in 2013

There will be little political consensus in the remainder of President Obama's second term (through January2017) for major fiscal overhaul, leading us to believe that spending levels put in place by the sequester arelikely to be maintained At the state and local level, we believe stronger economic growth will bolster taxintake, reducing the need for further fiscal consolidation in many states We forecast real growth in

government spending will average 0.4% per year over our 10-year forecast period

Risks To Outlook

Our 2.1% real GDP growth forecast for 2014 assumes fairly robust growth in Q214, and if this were to fail

to materialise, we could see growth fall to the 1.8-2.0% range, implying very little or no acceleration fromthe 1.9% real GDP growth recorded in 2013 While we believe it is unlikely that we would see anothermajor contraction in inventories, we acknowledge that there is scope for continued weakness in most otherareas In particular, if we were to see a major drop-off in consumer confidence that weighed on householdspending and business investment, we would likely see growth remain tepid in the coming quarters At thispoint, we believe that a major slowdown compared to last year is unlikely, barring some exogenous shock,such as a major geopolitical flare-up or a sizeable financial market correction

Table: GDP By Expenditure (United States 2011-2018)

Private final consumption, USDbn 10,711.8 11,149.6 11,501.5 12,048.3 12,559.6 13,067.0 13,594.9 14,144.2 Private final consumption, USDbn 10,711.8 11,149.6 11,501.5 12,048.3 12,559.6 13,067.0 13,594.9 14,144.2 Private final consumption, real

growth % y-o-y 2.5 2.2 2.0 2.7 2.2 2.0 2.0 2.0Government final consumption,

USDbn 3,158.7 3,167.0 3,125.5 3,215.6 3,341.7 3,465.9 3,594.7 3,728.3Government final consumption,

USDbn 3,158.7 3,167.0 3,125.5 3,215.6 3,341.7 3,465.9 3,594.7 3,728.3Government final consumption,

real growth % y-o-y -3.2 -1.0 -2.2 -0.5 0.7 0.5 0.5 0.5Fixed capital formation, USDbn 2,195.6 2,409.1 2,564.0 2,694.3 2,865.5 3,047.5 3,241.1 3,447.0 Fixed capital formation, USDbn 2,195.6 2,409.1 2,564.0 2,694.3 2,865.5 3,047.5 3,241.1 3,447.0 Fixed capital formation, real

growth % y-o-y 6.2 8.3 4.5 4.0 5.3 5.3 5.3 5.3Exports of goods and services,

USDbn 2,101.2 2,195.9 2,259.9 2,385.0 2,562.6 2,753.7 2,955.2 3,171.7Exports of goods and services,

USDbn 2,101.2 2,195.9 2,259.9 2,385.0 2,562.6 2,753.7 2,955.2 3,171.7Exports of goods and services,

real growth % y-o-y 7.1 3.5 2.7 2.8 5.1 5.0 5.0 5.0

GDP By Expenditure (United States 2011-2018) - Continued

Imports of goods and services,

USDbn 2,669.9 2,743.1 2,757.2 2,865.2 3,049.0 3,244.8 3,464.3 3,698.7Imports of goods and services,

USDbn 2,669.9 2,743.1 2,757.2 2,865.2 3,049.0 3,244.8 3,464.3 3,698.7Imports of goods and services,

real growth % y-o-y 4.9 2.2 1.4 2.8 4.2 4.0 4.0 4.0Net exports of goods and

services, USDbn -568.7 -547.2 -497.3 -480.3 -486.4 -491.2 -509.0 -527.0Net exports of goods and

services, USDbn -568.7 -547.2 -497.3 -480.3 -486.4 -491.2 -509.0 -527.0Net exports of goods and

services, real growth % y-o-y -3.6 -3.4 -4.3 2.8 -0.2 -1.1 -1.5 -1.8

Note e/f=BMI estimate/forecast; Source: BEA/BMI

Industry Risk Reward Ratings

Industry Risk/Reward Ratings

Positions held in BMI's Risk/Reward Ratings table for the Americas reflect this variety of markets in the

region, with a wide range of scores The developed markets of the US and Canada score highly on marketvalue and regulatory environments, while Latin American markets have strong growth potential over themedium term We believe emerging markets will undergo a period of rapid 'catch-up' growth as

technologies leapfrog older iterations seeing a strong appetite for new developments such as cloud

computing, smart infrastructure investment and the internet of things

There is no surprise at the top of the table in Q4 as the US continues to occupy the top position The US isnot only the regional, but also global leader in terms of market value, adoption of emerging technologiesand the strength of the local ecosystem The US is expected to remain a global leader, but the increasedcyber security tensions between the US and China - as well as Russia, the EU and Brazil - has increased

uncertainty BMI does not expect the NSA controversy to be a major disruptive factor in the short term, but

with the potential for further information to emerge, and trust in US vendors at a low point there is

downside risk that a global industry could become increasingly national in orientation - particularly inemerging technologies such as cloud computing and data analytics

Canada received an improved score in the Q4 ratings as a result of an upgrade in the industry rewardscategory However, it continues to score below the US in terms as a result of its far smaller population,meaning any significant closing of the gap is unlikely However, like the US, Canada is home to a vibrantecosystem that should offset saturation in the retail market and cost saving initiatives in the public sector.This position was boosted in December 2013 when Cisco announced plans to invest up to CAD4bn

(USD3.77bn) in Ontario to create one of four global Cisco Internet of Everything (IoE) Innovation Centres

Chile sits in third position, but scores considerably behind the developed markets of North America TheLatin American markets are less developed economically, and correspondingly trail their developed marketpeers in terms of IT adoption As a result we expect areas such as retail hardware spending will significantlyoutpace developed markets Lower cost devices and rising incomes have enabled increases in PC

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

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

Chile moved ahead of Brazil into third position despite receiving an unchanged score q-o-q Despite the size

of the country being a major factor in the position of the countries in our ratings, Chile is boosted by the fact

it is the most technologically advanced market in Latin America in the region, supported by higher incomesand levels of education and a strong stable government with strong scores in key areas such as investorprotection and rule of law This often makes Chile a first stop for newcomers to the region or establishedplayers to launch their latest product updates

Brazil dropped one position to fourth in the Q4 update due to a small decline in the industry rewardscategory as a result of a weaker medium term consumer spending outlook However, Brazil has alwaysbenefitted from the size of the local population, by far the largest in Latin America The scale of the

opportunity in Brazil continues to attract major investments from leading global IT vendors For instance, inJune 2014 Microsoft activated a data centre in Brazil, making it one of the eleven regions in the world that

is equipped with local infrastructure for the company's cloud computing platform Azure Meanwhile, EMC

is building an R&D centre that will be largely focused on providing big data analytics to the oil & gassector, as the facility is located next to Petrobras and Halliburton

Mexico is the other large emerging market in Americas after Brazil that has large untapped potential, andcould ultimately move above Chile due to its size While Mexico has great potential, in the short-to-medium

term there are several bottlenecks to IT market development BMI holds the view that telecoms market's

regulations have, over several years, weakened the market's growth and meant broadband growth has notreached the level seen elsewhere in the region This has limited demand for computing hardware on which

IT services and software market growth depends Improvements to the regulatory environment, as well aswider economic and political institutional reform, will be critical to Mexico realising its potential andmoving up the regional ratings

Peru and Colombia occupy sixth and seventh position in the ratings, continuing to sit above Argentina afterthe latter slid down the table due to economic risks Peru and Colombia share many characteristics as lessdeveloped markets in the region, with low levels of PC penetration among consumers and enterpriseadoption of products and solutions such as ERP and cloud services far below levels in even the advancedLatin American markets While this feature of the markets results in a low score, it also translates to growthpotential as incomes rise and domestic enterprises modernise

After Argentina dropped from eighth to fifth in the Q3 ratings - its position and score was unchanged in theQ4 update The Argentine economy and IT market remains in a state of great uncertainty due to the

economic risks associated to the ongoing legal challenges over public debt BMI estimates the IT

market only increased by 1.9% in US dollar terms, as persistent high inflation (estimated at 25% in 2013)

and slowing economic activity took their toll on business and consumer demand We believe this trend willcontinue throughout the year due to economic uncertainty Consumers and businesses will remain hesitantabout making large IT purchases and significant import restrictions will limit sales

In contrast to Argentina, which remains mired in economic and political uncertainty, there are signs ofimprovement in Venezuela, which has itself been hit by depreciation and domestic instability There arealso positives in the IT market, for instance, in March 2014 the science, technology and innovation ministerManuel Fernández announced the government was planning to digitise all its services by 2016 While therehas been some improvement the Venezuelan economy will continue to present major challenges to vendors,with high inflation, a slowdown in private consumption and fiscal pressures

Table: Americas Risk/Rewards Ratings - Q4 2014

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

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

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

Market Overview

Hardware

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

is in better health compared with other developed markets where the decline in desktop and notebook saleshas been more pronounced This is in part explained by the steeper recession in Europe, and also the lower

PC penetration rate in the US, allowing vendors to continue to tap first-time buyers

BMI forecasts continued outperformance for US hardware spending versus developed markets We expect

US computer and accessories market value will grow by 3.8% to USD225bn in 2014 Declining sales ofdesktops and notebooks are a drag on growth, but booming sales of tablets are offsetting this trend

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

Market Trends

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

Retailers had hoped that the 2012 release of Windows 8 would boost sales of PC, particularly touch screen

equipped models but uptake was disappointing as US consumers continued to opt for Apple's iPad in their

droves Windows 8/8.1 still has potential to boost PC sales as the market adjusts to delayed hardwareupgrades and the cessation of Microsoft support for Windows XP in Q214, and could also provide a fillip tothe ultrabook market as tablet makers leverage its capabilities to offer devices with touchscreens andconvertible designs

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

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

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

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

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

Meanwhile, Lenovo agreed in January 2014 to acquire IBM's x86 server business for USD2.3bn The dealincludes System x, BladeCenter and Flex System blade servers and switches, x86-based Flex integratedsystems, NeXtScale and iDataPlex servers and associated software, blade networking and maintenanceoperations The deal will dramatically increase Lenovo's exposure to the US server market

In December 2013 IBM announced that it intends to invest more than USD1.2bn to increase its global cloudfootprint The company will unveil 15 new centres globally, in addition to the existing 13 and 12 global datacentres from SoftLayer and IBM respectively The new data centres will be in China, Washington DC,Hong Kong, London, Japan, India, Canada, Mexico City and

Hardware Market(2011-2018)

Personal computer sales, USDmn Servers sales, USDmn

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f 0

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

BMI

Desktops And Notebooks

With already high household penetration there is only limited scope for sales to first time buyers, meaningthe market is predominantly based on personal devices and upgrades/replacement purchases As a result,there is a heavy bias towards mobile PCs, which had benefited notebook/netbook vendors prior to thearrival of tablets which have virtually eliminated netbooks as a device category Notebook sales have alsobeen hit by a shift to tablets, while desktops are increasingly being run as utility machines and beingoverlooked for upgrades as households opt for mobile devices as a way into the latest technology

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

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

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

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

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

former netbook leader Toshiba announced that it was following Dell and Lenovo in withdrawing from the

segment in the US HP and Asus continued to compete in the netbook segment, but Asian giants Sony and

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

2013

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

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

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

Tablets

The US has been one of the fastest tablet adopting nations, trailing only high income markets such as HongKong, Norway and Singapore The tablet market is built on Apple's iPad, but 2014 has seen a deeper market

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

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

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

As is the case globally, the US tablet market has been dominated by Apple; however, its position didweaken in 2012 and it faced much stronger competition from 2013 Data from Statcounter show thatApple's iOS, run on its tablets, accounted for 8.8% of US PC browsing traffic in June 2014 - a figure thatwas up by 2.8 percentage points (pp) y-o-y This data supports research from Magid Advisors who

estimates that in total 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 1.9% of PC browsing traffic (up 0.5pp) y-o-y to June 2014 This recent data reinforces

Apple's dominance Unlike the global market, the US has a strong preference for brands, and as such OEMdevices running Android, which are available at much lower price points, have failed to make much of animpact so far.

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

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

of Windows 8 In October 2012, with the launch of the new OS, Windows vendors were able to introducetouch devices for the first time

Hybrids/Convertibles

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

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

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

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

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

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

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

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

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

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

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

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

Vendor Developments

Struggling former global PC market leader Hewlett Packard announced a new line-up of devices in June

2014 as it looks to recover ground on tablet early movers, and gain traction in the hybrid notebook market

It expanded its line-up of touch convertible PCs with the launch of a new group of form factors and multipleoperating system (OS) options HP launched HP Envy x360, equipped with an Intel Core processor and a15.6-inch diagonal, full HD 10-point touch screen display The company has also rolled out HP Pavilionx360, featuring a 13.1-inch diagonal 10-point touch screen and HP Split x2 with an Intel core processor and

a 10-point touchscreen display In addition, the company has introduced the HP Chromebook and the HPSlateBook under its Chrome and Android offerings

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

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

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

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

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

ecosystem section to market Xbox SmartGlass, SkyDrive and other services

In June 2013, Google confirmed its Chromebook laptops would be stocked at US retail chains Walmart and Staples Walmart will stock Chromebooks across 2,800 retail locations in the US, priced at USD199,

while Staples will sell Chromebooks across its 1,500 US stores Google unveiled the Chromebook platform

in the US in 2011 and also confirmed plans to expand overseas, including the UK and Sweden

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

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

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

Dell announced plans to bundle an improved security suite with its hardware in June 2013 in an effort todifferentiate is products to protect market share and insulate downward pressure on prices, particularly in

the enterprise segment The new suite provides anti-malware defence and encryption services and is

available via Dell's Protected Workspace program

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

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

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

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

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

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

Device Penetration* (%)

2006-2013

*Age 18+ Source: Pew Research Centre, BMI

Software

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

reaches USD224bn in 2018 We expect software sales growth will surpass growth in hardware spending asbusiness software vendors pitch efficiency gains, in line with companies focusing on reducing costs.Meanwhile, the software market is being influenced by the continued move towards distributed computing,software-as-a-service (SaaS) and service-oriented architectures

Market Trends

The US software market is expected to be worth USD184bn in 2014, a 6.2% increase over 2013 Economicheadwinds have led to clients focusing on a clear return on investment from software investments, and hasalso given additional momentum to the adoption of cloud computing - despite fallout from the NSA Prismscandal Many US software companies reported positive revenue growth in 2013 as US companies investedmore in utility software and service-orientated architectures, rather than traditionally packaged software