Q4 2010 www.businessmonitor.com UNIteD StateS information technology Report INCLUDES 5-YEAR FORECASTS TO 2014 ISSN 2041-7101 Published by Business Monitor International Ltd. UNITED STATES INFORMATION TECHNOLOGY REPORT Q4 2010 INCLUDES 5-YEAR FORECASTS TO 2014 Part of BMI’s Industry Report & Forecasts Series Published by: Business Monitor International Production Date: October 2010 Business Monitor International Mermaid House, Puddle Dock, London, EC4V 3DS, UK Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com © 2010 Business Monitor International. All rights reserved. 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All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained. United States Information Technology Report Q4 2010 © Business Monitor International Ltd Page United States Information Technology Report Q4 2010 CONTENTS Executive Summary . SWOT Analysis . US IT Sector SWOT . United States Telecoms Market SWOT US Political SWOT 10 US Economic SWOT 10 US Business Environment SWOT . 11 IT Business Environment Ratings 12 Americas IT Business Environment Ratings . 12 Table: Regional IT Business Environment Ratings 12 United States Market Overview . 15 Government Authority 15 Overview 17 Hardware . 19 Drivers . 20 Segments 21 Netbooks 21 Tablet Notebooks . 22 E-Readers 22 Software . 23 Cloud Computing and SaaS . 25 Services 26 Industry Developments 28 Industry Forecast Scenario . 30 Table: US IT Sector Overview, 2007-2014 33 Internet 34 Table: US Internet Overview, 2007-2014 34 Macroeconomic Forecast 35 United States – Economic Activity . 38 Competitive Landscape . 39 Hardware . 39 Netbooks 40 Software . 42 IT Services . 46 Company Profiles . 47 HP 47 Dell 49 Microsoft 51 IBM 52 BMI Methodology . 53 How We Generate Our Industry Forecasts 53 © Business Monitor International Ltd Page United States Information Technology Report Q4 2010 IT Industry . 53 IT Ratings – Methodology 54 Table: IT Business Environment Indicators . 55 Weighting . 56 Table: Weighting Of Components 56 Sources 56 © Business Monitor International Ltd Page United States Information Technology Report Q4 2010 Executive Summary Market Overview US spending on IT products and services is forecast to reach US$683bn by 2014. US spending on IT products and services is forecast to grow to almost US$531bn in 2010 and reach nearly US$683bn by 2014. BMI has upwardly revised its forecast after US PC sales grew stongly in H110. After three quarters of decline as a result of the global economic crisis, a recovery in shipments growth that started in H209 gathered pace in H110 as businesses implemented hardware and systems upgrades that had been delayed from 2009. This upgrade cycle should still have some way to run but businesses remain cautious due to concerns about the possibility of a faltering economic recovery. A major demand driver will be private and public sector organisations looking for help with to utilise efficiencies from cloud computing models such as Software-as-a-Service (SaaS) and Infrastucture-as-a-Service. Other key market drivers are expected to include: Growing fixed and mobile broadband penetration. Product innovation such as tablet notebooks, e-readers and feature-rich netbooks. Technology innovation such as GPS and services. Business model innovations such as virtualisation. Economic recovery. The recession may have had a lasting impact on the IT market by creating the conditions for the popularity of low-cost netbooks and notebooks and encouraging consideration of new IT delivery models such as SaaS. In light of these and other changes, major vendors have also adjusted their competitive strategies. Industry Developments The government has reported on its 2009 calendar year IT spending. © Business Monitor International Ltd Page United States Information Technology Report Q4 2010 In 2009, total IT spending including all federal IT investment came to US$74.2bn, up by 1.99% on the previous year's total of US$72.8bn. In 2010, budgeted federal IT spending is set to rise to US$78.4bn. The stimulus bill, which required the use of electronic healthcare records by doctors by 2015 is expected to be a major driver of investment in this area. Competitive Landscape The US PC competitive landscape is dominated by two large domestic vendors, Dell and HP, which together account for at least 50% of the US market. In 2010, most PC vendors reported renewed growth as businesses proceeded with purchases delayed from 2009. Despite an overall fall in PC shipments in 2009, many vendors leveraged demand for notebooks and netbooks into continued growth. Meanwhile, the contest for top spot between HP and Dell continued. HP exemplified the recovery trend experienced by most vendors, with a 12% rise in revenues from its Americas region in Q310 to US$14.2bn. In April 2010, Apple finally launched its long-awaited iPad and achieved worldwide sales of around 2mn units within the first two months. Rival vendors such as HP and Dell have all announced or shown their own tablet products, while smartphone makers Research In Motion (RIM) and Samsung are also expected to compete in this segment. HP did not comment rumours that it would be releasing a tablet based on Google's Android operating system. Meanwhile, the government remains a key vendor target. In May 2010, HP achieved one of its most recent local market succeses with the win of a US$41.6mn contract from the US Department of Homeland Security. In September 2009, HP's EDS unit won a US$30mn contract from the US Department of the Treasury's Office of the Comptroller of the Currency (OCC) to provide and maintain computing resources and mobility services. Computer Sales The US addressable market for PCs and accessories is estimated by BMI at US$126.4bn in 2010, with single-digit growth compared with 2009. © Business Monitor International Ltd Page United States Information Technology Report Q4 2010 US PC sales grew stongly in H110 and BMI estimates that the market is on course for full-year total PC sales of 77mn unit. In Q110, sales were boosted by a revival of the business PC market, which is expected to gather pace in the second half of the year. Notebooks are the fastest growing PC market segment and are estimated to have accounted for more than 60% of unit sales in 2009, while netbooks are estimated to account for about 15% of notebook sales. However, netbooks and notebooks face competition from other formats such as smartphones from Palm, RIM and Apple, as well as tablet notebooks. Software The US software market is estimated at US$151.3bn in 2010, with single-digit growth from 2009. Software CAGR for 2010-2014 is projected at 7.4%, as the addressable market grows to be worth around US$201.5bn. There should be a boost in 2010 from systems upgrades deferred from 2009, when the economic crisis had an impact across sectors. A combination of enterprise objectives such as cost reduction and greater efficiency should combine to encourage the adoption of cloud services in 2010. Drivers of demand for enterprise software include increasing operational efficiency, coordinating global supply chains and modernising logistics and warehouse functions. More investment can be expected to be in utility software and serviced-oriented architectures rather than traditionally packaged PC software. IT Services The US IT services market is forecast at US$230.9bn in 2010, with a sharp deceleration in spending expected compared with 2006-2008. IT services spending is expected to grow by 7.2% in 2010 after a sharp deceleration in 2009. Spending on IT services is quite closely correlated with GDP growth, which is bad news in a recession. One opportunity will be organisations looking for help with to utilise efficiencies from cloud computing such as SaaS and IaaS, as organisations look to save money on IT investments. National and local government is one vertical where strong interest in cloud services is being expressed. © Business Monitor International Ltd Page United States Information Technology Report Q4 2010 SWOT Analysis US IT Sector SWOT The largest IT market in the world with spending forecast to pass US$500bn in 2010. Despite currently challenging trading conditions, overall IT spending still expected to remain in positive growth territory. Weaknesses In 2009 customers were postponing projects and cutting back on short-term spending, particularly in areas such as consulting and software development. Opportunities Low base level of sales in H109 should allow for rapid growth at least in the first half of 2010. As economic woes ease, vendors should see more growth in other traditional bigspending IT verticals such as banks and financial organisations, retail and manufacturing. Growing popularity of mobile broadband networks in the US driving netbook sales. New business models like SaaS and virtualisation will continue to make progress A risk that recovery could be anaemic in 2010, in which case tech spending could have another hard year. Strengths Threats © Business Monitor International Ltd Page United States Information Technology Report Q4 2010 United States Telecoms Market SWOT Strengths Weaknesses Opportunities Threats Large proportion of households in US continues to have a fixed-line connection. Broadband growth remains robust despite a declining fixed-line market and falling pay-TV subscriptions. Demand for faster speeds is leading to new technologies being introduced by operators. Fixed-line decline in 2008-2009 was faster than expected and continues into 2010. No real respite is expected in the market. The recession has hit all areas of the market – even pay-TV operators have experienced declining subscriptions. Popularity of mobile services reduces the need for wireline connections. New technologies such as WiMAX and long-term evolution (LTE) will see network contracts being awarded to ensure latest products made available. Wireline broadband continues to offer faster download speeds than wireless options, making it a more attractive prospect for many clients. Internet protocol television growth highlights opportunities for operators to bring subscribers over a single network offering considerable cost savings. 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. Weaker dollar has made the cost of contracts higher from external vendors. © Business Monitor International Ltd Page United States Information Technology Report Q4 2010 Software The launch of Microsoft's Windows operating system, in October 2009, was the most significant event for Microsoft since the launch of Windows 95. Operating Systems Microsoft is dominant in the operating system segment. However, the company suffered in H109 from a deceleration in sales of PCs bundled with its software. Microsoft has a lot riding on the new operating release, given perceived problems with its previous operating system Windows Vista and also because of the continuing global challenge from open source. Windows Vista ran into problems when business users found that many of their business applications could not run on the Vista operating system. There were also complaints from both business and household users about performance defects, due to the large amount of processing power and memory required by Vista. Regarding the compatibility problem, Microsoft has tackled this with a free extension to Windows called XP Mode. This allows users to run Windows XP applications on Windows 7. Windows will also use less processing power and memory than Windows Vista. Meanwhile, Microsoft has received credit for a much smoother launch of Windows compared with its previous operating system, due in large part to better cooperation with other players in the software value chain, including PC vendors and end-users. A wave of new PCs were released in Q409 with the new operating system, while Acer and Dell said that, as of launch date, there was zero inventory of Vista machines going into stores. BMI projects that Windows will provide a boost to the operating system software market in 2010. The new system will likely attract more support from businesses than Vista, largely because XP is now getting old. Many businesses that declined to upgrade from XP to Vista, due to reported problems with the latter, may now go straight to Windows 7. Microsoft will still offer reduced support for XP until 2015, but hardware manufacturers will start to wind down their support from about 2012. This will be a key factor that should drive business upgrades to Windows 7. Microsoft also argues that Windows can help businesses to save costs, enabling IT departments to be run more efficiently. In particular, Windows is better suited to virtualisation than either XP or Vista. Virtualisation look sets to become an important trend in IT spending in the next few years, as it allows businesses to simplify the management of desktop PCs by running desktop applications and storing user data within the data centre. Given the current economic climate, however, IT directors will need to justify any upgrade in terms of cost savings. In July 2009, Microsoft posted declines in profits and sales for its fourth 2009 fiscal quarter. The economic downturn added to trends that were driving adoption of open source software. The desire to make savings has led business and customers to look more closely at open source software in some cases. © Business Monitor International Ltd Page 42 United States Information Technology Report Q4 2010 However, many customers now have a more realistic assessment of the advantages and disadvantages of open source and are adopting a practical approach. A key issue and precondition for the more widespread adoption of open source will be the development of a support infrastructure. Customers are increasingly looking for vendors to offer support for open source software. BMI expects this trend to continue with the development of more support infrastructure for the most important open source applications. Impact of Netbooks Microsoft was threatened in 2007 with the emergence of the popularity of netbook computers. Most netbooks originally came with open source Linux operating systems due to the heavy systems requirement of Windows Vista. Netbooks were therefore seen as a threat to Microsoft's revenues. However, Microsoft has fought back by allowing netbooks to ship Windows XP, bringing its market share back up. By the end of 2009, it is estimated that as few as 5% of netbooks will run on Linux, whereas two years ago only 10% came with Windows. Nevertheless, the popularity of netbooks still has a drawback for Microsoft in that it currently only sells a lower cost version of Windows for the small form-factor portable PCs. In June 2009, Acer announced it would produce a netbook that ran on the Google Android operating system. This seemed to herald the long-anticipated jump of Android from smartphones onto notebook PCs. However, Acer will continue to provide Windows on its devices. Android is most likely to appeal to consumers who are particularly price sensitive. The Android operating system has made advances in the smartphone segment, with estimates that around 18-20 phones would come with the operating system by end of 2009. Business Software The US business software market is competitive with tier-2 vendors, including some industry specialists, having around a more than 25% share of this market. There is room for smaller companies to compete alongside the major players such as SAP, Oracle and Microsoft © Business Monitor International Ltd Page 43 United States Information Technology Report Q4 2010 In April 2009, a survey by Panorama Manufacturing And Distribution Consulting Group showed that SAP had 2009 the leading ERP software market share in the manufacturing and distribution industries, followed by Oracle and Microsoft. SMEs The main enterprise software vendors are increasingly focused on the small and medium-sized enterprise (SME) segment, rolling out a succession of product lines and software packages previously only available to larger companies. New releases were tailored to SMEs' smaller Source: Panorama Consulting Group, April 2009 budgets and particular organisational needs. Key application areas include security, enterprise communications, network and server virtualisation, and business intelligence. HP has targeted this segment with solutions that allow businesses to operate with fewer staff and less capital and technology resources. Solutions meeting this need include storage, virtualisation, remote access and consolidation solutions. Oracle Sun Acquisition Business software vendors have increasingly Other Industries 2009 looked to expand through strategic acquisitions. This process is driven largely by demand for more targeted applications. In H109, Oracle purchased Sun Microsystems for US$7.4bn. Oracle's acquisition came after IBM dropped its own bid to buy one of the most famous names in IT. Although not Oracle's largest ever acquisition, it was certainly one of the most significant in strategic terms, as it was Oracle's first hardware acquisition. By adding hardware to the mix, the deal fits Source: Panorama Consulting Group, April 2009 into Oracle's strategic plan to become a © Business Monitor International Ltd Page 44 United States Information Technology Report Q4 2010 technology one-stop-shop for its global customer base. However, Oracle can also get leverage from synchronicities with Sun software. Sun's Java platform, used to write platforms for websites and mobile phones, will be a major asset for Oracle. Sun's Solaris is a major platform for Oracle's database software. The deal was just the latest in a string of recent acquisitions for Oracle that are estimated to have cost more than US$40bn. The acquisition will have an impact on the business software competitive landscape as rival vendors work out how they are affected. IBM, in particular, which many thought a natural fit for a Sun acquisition, will have to redefine its relationship with Oracle. Software-as-a-Service SaaS has emerged as one of the key growth areas of the worldwide software market, including in the US. Leading segment player Salesforce.com has now exceeded a US$700mn annual run rate and claims a strong fiscal position with over 35,000 paying customers. Major Salesforce.com accounts include Dell, with 40,000 total subscribers, Japan Post, Cisco and Spring. These are all large customers that use multiple applications on the on-demand platform, instead of buying products from Microsoft, Oracle and other traditional vendors. Popular SaaS applications include sales force automation, marketing automation, partner relationship management, service and support, and content management. Salesforce.com aims to expand by providing an entire application development and deployment platform and on-demand operating platform as part of the infrastructure. In 2009, the global economic crisis gave what may prove to be a significant boost to the SaaS model, with vendors such as Google and Salesforce.com reporting continued growth. In Q309, Salesforce added 4,700 net new customers, a record total, following slightly negative new business growth in the first two quarters. Salesforce also claimed to have won contracts against Oracle at a number of key accounts including ING, American Express and Centrex. © Business Monitor International Ltd Page 45 United States Information Technology Report Q4 2010 IT Services The US IT services market is relatively fragmented with potential for consolidation. The global financial crisis had a sharp impact on IT services vendors in 2009. However, the impact seemed to have been relatively greater on Indian vendors such as Infosys and Tata Consulting Services (TCS), due to their generally greater proportionate exposure to the US financial services industry. The fall of Lehman Brothers and Merrill Lynch was ominous for Indian outsourcers that were highly exposed to the US market and financial services. Share of these companies had fallen by more than half by mid2009. US segment leaders such as Accenture and IBM generally saw revenues down between 10-15% in the first half of the year compared with 2008. The industry was looking to diversify away from financial services into more focus on opportunities in other sectors such as telecoms, healthcare, utilities and manufacturing. Globally, financial services accounts for about 20% of IT services spending, ahead of government, which is about 18%, and similar to manufacturing at around 22% according to market research firm IDC. Most IT vendors anticipated improved revenues in 2010 as clients ramped up spending. HP reported Q110 revenues for the Americas region of US$13.6bn, up 9% on the same period of 2009. In the second half of 2009, the market had picked-up, and HP reported solid fiscal Q409 results on the back of its services business. The company said that services had generated revenues of US$8.9bn for the quarter, up 8% on the same period of the previous year. In recent years there have been a number of acquisitions and merger deals. According to IDC there were about 230 such deals globally in 2007 in the software and IT services space. In October 2009, a computer hardware giant Dell made a US$3.9bn purchase of Perot Systems, while Xerox followed later in the month with its US$6.4bn acquisition of Affiliated Computer Services. Meanwhile, HP said that its integration of EDS was ahead of schedule, and in September 2009 HP changed the name of the EDS unit to HP Enterprise Services. Following the integration of the companies, HP had sought to cut costs by slashing 19,000 jobs. In the month of the name change, HP's EDS unit won a US$30mn contract from the US Department of the Treasury's Office of the Comptroller of the Currency to provide and maintain end-user computing resources and mobility services. Another factor set to shape the IT services market over BMI's five-year forecast period is the trend for leading niche IT market players to seek to evolve into full IT service companies like HP and IBM. Business software major Oracle and networking equipment leader Cisco are both moving on separate but parallel paths towards this end. © Business Monitor International Ltd Page 46 United States Information Technology Report Q4 2010 Company Profiles HP Services Technology services, consulting and integration. HP is organised into three main divisions: Personal Systems Group (PSG): Business and consumer PCs, mobile computing devices and workstations. Recent Developments Printing and Imaging Devices; Inkjet, Laser Jet and commercial printing. Technology Solutions: Software and managed services, EDS, storage and servers. In September 2009, HP changed the name of its EDS unit, created following the acquisition of fellow IT services giant EDS, to HP Enterprise Services. In the same month, the EDS unit won a US$30mn contract from the US Department of the Treasury. HP's third and fourth quarter positive performance was driven largely by services revenues, which in Q309 were up 93% compared with the same period of the previous year, reaching US$8.5bn. This was primarily due to HP's acquisition of EDS. In Q309, HP said that its business was stabilising, making the company confident that it would be an early beneficiary of an economic turnaround. In H109 HP continued to contest with Dell for leadership position in the US computer market. In Q209, HP slipped into second place behind Dell, according to market research firm IDC, with 26% of the market to Dell's 26.3%. Gartner put HP's US market share at 25.7% in Q309, once again behind Dell. However, HP had previously dethroned Dell as the market leader in Q109, driven largely by the consumer notebook segment. In 2009 HP was particularly successful in using the low-price notebook trend to bolster its position. In July 2009 the company was selling a US$298 laptop at Wal-Mart stores, while a rival Dell product, also produced for Wal-Mart, retailed for US$398. Following the success of its Wal-Mart product, HP continued with its low-price strategy for the back-to-school season. In the software segment, HP is targeting SMEs with solutions that allow businesses to operate with fewer staff and less capital and technology resources. Solutions offered by HP to meet this need included storage, virtualisation, remote access and consolidation solutions. Future Plans For FY10, HP expects revenue of around US$117.0bn to US$118.0bn. The company has said that it sees significant opportunities to invest in innovation and sales to expand its portfolio and market coverage. HP also plans to improve margins in 2010 and to increase margins by leveraging a leaner cost structure, while continuing to invest for growth. Revenues In Q110, HP reported revenues of US$31.2bn, up by 8% y-o-y. Revenues from the Americas grew by an annualised 9% to US$13.6bn. In Q409, HP reported revenues of US$30.8bn, down 8% on the same period of the previous year, but up 12% on Q309. Income was up y-o-y © Business Monitor International Ltd Page 47 United States Information Technology Report Q4 2010 from US$2.1bn in Q408 to US$2.4bn in Q409. In Q309, HP reported net revenues of US$27.5bn, down 2% from the same period of the previous year and up 4% in constant currency. The US accounted for 38% of global revenues in the quarter. In FY08 HP reported revenues of US$118.4bn, up 13%. Presence 321,000 employees worldwide as of 2008. Sectors In Q308, HP attributed record profit in services, double-digit revenue growth in China and solid cash flow as driving its bottom line growth. Services revenue increased 93% to US$8.5bn due primarily to the EDS acquisition. HP Software revenue declined by 22% to US$847mn. Personal Systems Group (PSG) posted an increase of unit shipments of 2% and maintained the leading market position in PCs worldwide. PSG revenue declined by 18% to US$8.4bn. Imaging and Printing Group (IPG) revenue declined by 20% to US$5.7bn. © Business Monitor International Ltd Page 48 United States Information Technology Report Q4 2010 Dell Services Manufacturer, marketing and sales of computer systems and services worldwide. In December 2008, Dell announced that it was re-organising itself into four global business units: Recent Developments Large Enterprise Public SME Consumer n October 2009, Dell made an offer to acquire IT services company Perot Systems. Dell expected the acquisition to close in Q409. The purchase should position Dell to grow by expanding its offering of IT services and solutions. Perot Systems will in effect become Dell's IT services unit. In Q309, Dell narrowly pipped HP for the market leader position, according to market research firm Gartner, taking 26.2% of the market to HP's 25.7%. In Q209, Dell beat HP into the US PC market leader position, according to market research firm IDC, taking 26.3% of the market to HP's 26.0%. However, Dell reported disappointing profits in Q309 of US$727mn, down from US$15.2bn in the same period of the previous year as margins came under pressure. Globally Dell has suffered in the US downturn from the deep cuts in corporate spending, as well as the transition away from desktops. Dell Americas revenues from the corporate segment declined 17% in value terms (and 23% in units) in fiscal 2009. These trends have reinforced the logic of the company's largely successful global transition towards a more retailfocused approach. In Q209, IDC reported that Dell achieved negative 18.9% shipments growth in the US market, compared with just -2.3% for major domestic rival HP. Dell has mounted a strong global comeback in the past couple of years, from declining unit sales, by moving aggressively into the retail segment. The company has thus moved away from its 'direct Dell' strategy of selling direct to customers. In the US the company has done this by developing partnerships with leading retailers such as Best Buy. This strategy has provided with a fresh source of growth during a slowing market, enabling it to recover some of the market share that it had lost to HP, as well as Asian challengers like Acer, Lenovo and Toshiba. Revenues Dell reported revenues of US$61.6bn for FY09, unchanged from 2008. Net income, however, was US$2.5bn, down 16% from US$2.9bn in the previous year. Presence 76,500 employees. Sectors Dell's commercial business serves large corporations, public customers such as government, education, healthcare and SMEs. In Q309, Dell continued to report a slowdown in most © Business Monitor International Ltd Page 49 United States Information Technology Report Q4 2010 business segments. In Q309, Dell's global consumer business reported a 10% y-o-y increase in revenues on a 32% increase in shipments. © Business Monitor International Ltd Page 50 United States Information Technology Report Q4 2010 Microsoft Services Software licences, support and services. Microsoft has five major business divisions: Recent Developments Client, which includes the Windows product family Server and tools, which includes software server products, services and solutions Online business services Microsoft Business Division, which includes Microsoft Office and Microsoft Dynamics Entertainment and Devices, which includes the Xbox video game system Microsoft suffered a deceleration in sales of PCs bundled with its software in H109 owing to the economic slowdown. In July 2009, Microsoft posted declines in profits and sales for the fourth 2009 fiscal quarter, blaming the weakness in global PC and server sales. However, the fourth quarter brought some significant product milestones including the release of Windows Server 2008 R2, and the search engine Bing. The launch of Microsoft's Windows operating system was the most significant event for Microsoft since the launch of Windows 95. Microsoft has a lot riding on the new operating release, given perceived problems with its previous operating system Windows Vista, and also because of the continuing global challenge from open source. Windows Vista ran into problems when business users found that many of their business applications could not run on the Vista operating system. Microsoft has taken a couple of steps to fix perceived problems with Vista. Regarding the compatibility problem, Microsoft has tackled this with a free extension to Windows called XP Mode. This allows users to run Windows XP applications on Windows 7. Secondly, Windows will use less processing power and memory than Windows Vista. Revenues Microsoft's Q409 revenues were down by 17% y-o-y to US$13.1bn. In the fiscal year ending June 2009, Microsoft reported net revenues of US$58.44bn, down by 3% y-o-y. Presence As of June 2009, Microsoft had 92,736 employees, with 55,843 working in the US. Sectors Microsoft dominates the operating system segment but was threatened in 2007 with the emergence of the popularity of netbook computers. Most netbook computers originally came with open source Linux operating systems due to the heavy systems requirement of Windows Vista. Netbooks were therefore seen as a threat to Microsoft's revenues. However, Microsoft has fought back by allowing netbooks to ship Windows XP, bringing its market share back up. In the enterprise software segment, Microsoft competes with its Microsoft Dynamics suite of products. In April 2009, a survey by Panorama Consulting Group ranked Microsoft third in the manufacturing and distribution industry's ERP segment, with a market share of around 14%. © Business Monitor International Ltd Page 51 United States Information Technology Report Q4 2010 IBM Services Manufacturer, distributor and provider of advanced IT solutions including hardware, software, peripherals and data processing equipment. IBM has three main business segments: Recent Developments Global Technology Services Global Business Services Software In 2008, IBM reported revenues growth of 5%, despite the economic slowdown, while pre-tax income also rose. Over 90% of segment profits in 2008 came from software, services and financing. Around 65% of IBM's 2008 revenues were generated outside the US. In 2008 the company invested US$6.3bn for 15 acquisitions, 10 of them in software. IBM also invested US$6.3bn in R&D. In 2009, IBM said that it had prioritised strategic investments in service-oriented architectures, business analytics and next generation data centres, relying on these areas to drive growth in 2010. IBM expected 2009 pre-tax income for its software segment to grow at a double-digit rate to around US$8bn. Future Plans The company's goal is earnings per share of US$10-11 in 2010. Revenues In the second quarter of 2010, IBM reported total revenues of US$23.7bn, up by 2% y-o-y. Revenus for the Americas region, which includes the US, were up by 3% y-o-y. Presence 410,097 employees. Sectors In 2008, IBM reported the following results by division: Technology services revenues were up by 9% (6% adjusting for currency); pre-tax income up by 30%. Global business services revenues up by 9% (5% adjusting for currency); pre-tax income up by 30%. Software revenues up by 11% (8% adjusting for currency); pre-tax income up by 18%. Software pre-tax profits doubled over the five years to 2008, when they were US$7bn. © Business Monitor International Ltd Page 52 United States Information Technology Report Q4 2010 BMI Methodology How We Generate Our Industry Forecasts BMI’s industry forecasts are generated using the best-practice techniques of time-series modelling. The precise form of time-series model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined. For example, data for some industries may be particularly prone to seasonality, i.e. seasonal trends. In other industries, there may be pronounced non-linearity, whereby large recessions, for example, may occur more frequently than cyclical booms. Our approach varies from industry to industry. Common to our analysis of every industry, however, is the use of vector autoregressions. Vector autoregressions allow us to forecast a variable using more than the variable’s own history as explanatory information. For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity. When forecasting for some of our industry sub-component variables, however, using a variable’s own history is often the most desirable method of analysis. Such single-variable analysis is called univariate modelling. We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA). In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting. It must be remembered that human intervention plays a necessary and desirable part in all of our industry forecasting techniques. Intimate knowledge of the data and industry ensures we spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not. IT Industry Forecasts There are a number of criteria that drive our forecasts for each IT variable. IT forecasting is complicated due to the fragmented nature of the market, with little transparency of vendor data and low apparent agreement between many sets of figures in terms of market definition, base and methodology. In addition, forecasts are naturally affected by consideration of a variety of internal and external political and economic factors. © Business Monitor International Ltd Page 53 United States Information Technology Report Q4 2010 Within best-practice techniques of time-series modelling, BMI’s quarterly updated forecasts are improved substantially by intimate knowledge of the prevailing features of each local market. Individual variables taken into account in creating each forecast include: Overall economic context, and GDP and demographic trends; Underlying ‘information society’ trends; Projected GDP share of industry; Maturity of market structure; Regulatory developments and government policies; Developments in key client sectors such as telecommunications, banking and e-government; Technological developments, and diffusion rates; Exogenous events. Estimates are calculated using BMI’s own macroeconomic and demographic forecasts. IT Ratings – Methodology Our approach in BMI’s IT Business Environment Ratings is threefold. First, we seek accurately to capture the operational dangers to companies operating in this industry globally. Second, we attempt, where possible, to identify objective indicators that may serve as proxies for indicators that were traditionally evaluated on a subjective basis. Finally, we include aspects of BMI’s proprietary Country Risk Ratings (CRR) that are relevant to the IT industry. Overall, the ratings system, which integrates with those of all 16 industries covered by BMI, offers an industry-leading insight into the prospects/risks for companies across the globe. Ratings System Conceptually, the ratings system divides into two distinct areas: Limits of potential returns: Evaluation of sector’s size and growth potential in each state, and also broader industry/state characteristics that may inhibit its development. Risks to realisation of those returns: Evaluation of industry-specific dangers and those emanating from the state’s political/economic profile that call into question the likelihood of anticipated returns being realised over the assessed time period. Indicators The following indicators have been used. Overall, the rating uses three subjectively measured indicators, and 41 separate indicators/datasets. © Business Monitor International Ltd Page 54 United States Information Technology Report Q4 2010 Table: IT Business Environment Indicators Indicator Rationale Limits to potential returns Market structure IT market value, US$bn Sector value growth, % year-onyear (y-o-y) Denotes breadth of IT market. Large markets score higher than smaller ones Denotes sector dynamism. Scores based on annual average growth over five-year forecast period Government initiatives and spending Denotes spending boost provided by public sector, which can be a crucial determinant of sector development Hardware, % of total sales Denotes maturity of market. A high proportion of hardware sales – compared to services/software – indicates that the overall IT market is immature Country structure Urban-rural split GDP per capita, US$ Urbanisation is used as a proxy for development. Predominantly rural states therefore score lower A high GDP per capita supports long-term industry prospects. Overall score for country structure is also affected by the coverage of the power transmission network across the state Risks to potential returns Market risks Intellectual property (IP) laws ICT policy Markets with fair and enforced IP regulations score higher than those with endemic counterfeiting Subjective evaluation of official policy towards IT development, as enshrined in statute and tax code Country risk Short-term external risk Rating from CRR evaluates the vulnerability to external shock, which is the principal cause of economic crises. Such a crisis would cut investment Short-term financial risk Rating from BMI’s CRR, to denote risk of currency crisis and stability of banking sector. The former would hit revenues in hard currency, while the latter would curtail investment funding Trade bureaucracy Legal framework Bureaucracy Corruption Rating from CRR to denote ease of trading with the state Rating from CRR denotes the strength of legal institutions in each state – security of investment can be a key risk in some emerging markets Rating from CRR denotes ease of conducting business in the state Rating from CRR denotes the risk of additional illegal costs/possibility of opacity in tendering/business operations affecting companies’ ability to compete Source: BMI © Business Monitor International Ltd Page 55 United States Information Technology Report Q4 2010 Weighting Given the number of indicators/datasets used, it would be wholly inappropriate to give all subcomponents equal weight. Consequently, the following weight has been adopted. Table: Weighting Of Components Component Weighting Limits of potential returns 70% – IT market 65% – Country structure 35% Risks to realisation of potential returns 30% – Industry risks 40% – Country risk 60% Source: BMI Sources Additional sources used in IT reports include national ministries and ICT regulatory bodies, national industry associations, and international industry organisations such as the International Telecommunication Union (ITU), officially released company results and figures, and international and national industry news agencies. © Business Monitor International Ltd Page 56 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. [...]... International Ltd Page 14 United States Information Technology Report Q4 2010 United States Market Overview Government Authority Government Authority National Telecommunications and Information Administration (NTIA), Department of Commerce Assistant Secretary for Communications and Information Lawrence E Strickling The Department of Commerce (DoC) regulates various information technology industry-related... 15 United States Information Technology Report Q4 2010 The US Treasury is in charge of tax issues affecting the US industry, including such issues as R&D tax subsidies The Office of E-Government and Information Technology within the Office of Budget Management is responsible for monitoring federal IT spending across federal departments © Business Monitor International Ltd Page 16 United States Information. .. substantially in the past decade © Business Monitor International Ltd Page 27 United States Information Technology Report Q4 2010 Industry Developments Federal IT Spending (US$bn) 2009 -2010 Source: US Office of E-Government and Information Technology IT Spending By Federal Agencies 2009 Source: US Office of E-Government and Information Technology 2009 Federal IT Spending In full-year 2009, total IT spending... International Ltd Page 19 United States Information Technology Report Q4 2010 Business demand remained sluggish going into 2010 Businesses are expected to maintain a cautious attitude to IT investments in 2010 due to uncertainty about the economic recovery, but there could be a boost, particularly in H210, from computer hardware tenders delayed from 2009 The launch of Windows 7, in October 2009, reportedly saw... Monitor International Ltd Page 22 United States Information Technology Report Q4 2010 Software Software CAGR for 2010- 2014 is projected at around 7.4%, as the addressable market grows to around US$201.5bn In a difficult economic climate, business software vendors will look to pitch efficiency gains, as declining margins encourage companies to focus on reducing costs 2010 Outlook It is forecast the US... a mature market with high penetration rates requires product and technology innovation to drive continued growth: the average US household has 2.5 PCs © Business Monitor International Ltd Page 18 United States Information Technology Report Q4 2010 Hardware BMI forecasts that the US computer and accessories market will grow by 13% in 2010 We have upwardly revised our projection after a PC sales performance... market is predicted to grow from US$148.6bn in 2010 to US$178.4bn in 2014 Software spending should rise from US$151.3bn to US$201.5bn, and IT services from US$230.9bn to US$303.1bn, over the forecast period © Business Monitor International Ltd Page 32 United States Information Technology Report Q4 2010 Table: US IT Sector Overview, 2007-2014 2007 2008 2009e 2010f 2011f 2012f 2013f 2014f 457,683 489,500... Core technology have the potential to help trigger a new cycle of business hardware upgrades Windows-7 driven PC upgrades were slower than hoped for in H110, but are expected to gather strength in the second half of the year Much though will depend on business confidence in a continued economic recovery © Business Monitor International Ltd Page 20 United States Information Technology Report Q4 2010. .. during the 2009 back-to-school season In Q40 9, the launch of a new version of Intel's Atom chip, codenamed 'Pine Trail', was scheduled, with the new chip billed as a cheaper, and more efficient, version than the current Atom, which helped to drive the netbook explosion © Business Monitor International Ltd Page 21 United States Information Technology Report Q4 2010 A future industry trend is likely to... improved confidence in key IT spending verticals © Business Monitor International Ltd Page 12 United States Information Technology Report Q4 2010 Across both consumer and business segments, US IT spending is expected to have a number of drivers, including the growing popularity of mobile broadband networks, product and technology innovation as well as economic recovery The economic downturn may have accelerated . Date: October 2010 United States Information Technology Report Q4 2010 © Business Monitor International Ltd Page 2 United States Information Technology Report Q4 2010 ©. anaemic in 2010, in which case tech spending could have another hard year. United States Information Technology Report Q4 2010 © Business Monitor International Ltd Page 9 United States. which will require investor caution. United States Information Technology Report Q4 2010 © Business Monitor International Ltd Page 15 United States Market Overview Government Authority