United states information technology report q2 2010

Q2 2010
Published by Business Monitor International Ltd.
www.businessmonitor.com
INFORMATION TECHNOLOGY REPORT
ISSN 2041-7101
Published by Business Monitor International Ltd.
UNITED STATES
INCLUDES 5-YEAR FORECASTS TO 2014
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UNITED STATES
INFORMATION
TECHNOLOGY REPORT
Q2 2010
INCLUDES 5-YEAR FORECASTS TO 2014


Part of BMI’s Industry Report & Forecasts Series
Published by: Business Monitor International
Publication date: April 2010

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CONTENTS
Executive Summary 5
SWOT Analysis 8
US IT Sector SWOT 8
US Telecoms SWOT 9
US Political SWOT 10
US Economic SWOT 10
US Business Environment SWOT 11
IT Business Environment Ratings 12
Table: Regional IT Business Environment Ratings 14
Market Overview 15
Government Authorities 15
Overview 16
Hardware 18
Software 22
Services 25
Industry Developments 27
Industry Forecast Scenario 29
Table: US – IT Sector (US$mn Unless Otherwise Stated) 32
Internet 33
Table: Telecoms Sector – Internet – Historical Data And Forecasts 33

Macroeconomic Forecast 35
Table: US – GDP Contribution To Growth 39
Competitive Landscape 40
Hardware 40
Software 42
IT Services 46
Company Profiles 48
HP 48
Dell 50
Microsoft 52
IBM 54
Country Snapshot: US Demographic Data 55
Section 1: Population 55
Table: Demographic Indicators, 2005-2030 55
Table: Rural/Urban Breakdown, 2005-2030 56
Section 2: Education And Healthcare 56
Table: Education, 2002-2005 56
Table: Vital Statistics, 2005-2030 56
Section 3: Labour Market And Spending Power 57
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Table: Employment Indicators, 2001-2006 57
Table: Consumer Expenditure, 2000-2012 (US$) 57
Table: Average Annual Wages, 2000-2012 (US$) 58

BMI Methodology 59
How We Generate Our Industry Forecasts 59
IT Industry 59
IT Ratings – Methodology 60
Table: IT Business Environment Indicators 61
Weighting 62
Table: Weighting Of Components 62
Sources 62
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Executive Summary
Market Overview
 US spending on IT products and services is forecast to reach US$629.3bn by 2014.
In BMI’s core forecast scenario, US spending on IT goods and services will reach US$511.4 in 2010 and
then advance at a compound annual growth rate (CAGR) of 5.3% over our five-year forecast period.
After a first half contraction as a result of the global economic crisis, and a modest pick-up in Q309, the
final quarter of 2009 brought strong growth in US PC shipments and signs of improvement in key IT
spending verticals.
Key market drivers are expected to include:
 Growing fixed and mobile broadband penetration
 Product innovation such as feature-rich netbooks
 Technology innovation such as GPS technology and services
 Business model innovations such as virtualisation and software-as-a-service (SaaS)
 Economic recovery

Businesses are likely to remain cautious in 2010, despite a slight pick-up towards the end of 2009,
and positive Q409 revenue reports from some leading US IT vendors. 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 the light of these
and other changes, major vendors have also adjusted their competitive strategies.
Industry Developments
 In August 2009 the federal government reported on its 2009 calendar year IT spending.
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In full-year 2009, total IT spending including all federal IT investment was measured at US$74.2bn, up
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.
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 end-user computing resources
and mobility services.
Competitive Landscape
 The US PC competitive landscape is dominated by two big domestic vendors, Dell and HP,
which together have at least 50% of the US market.
During the recession, HP was able to use its size and global clout to lower prices without its profits
suffering as much as those of its rivals. Of the two US giants therefore, it was HP that seemed in better
shape going into 2010. In Q110 HP attempted to build on this momentum with the release of a range of
new netbooks and netbooks, including its first ever touchscreen netbook. In 2009 HP had
been particularly successful in using the lower priced notebooks trend to bolster its position.
Microsoft received credit for a much smoother launch of Windows 7 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.
 Consolidation is expected to continue to shape the IT services landscape over BMI’s forecast
period.
In October 2009, 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.
Computer Sales
 The US addressable market for PCs and accessories is estimated by BMI at US$115.5bn in
2010, with low single-digit growth compared with 2009.
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US PC sales leapt forward in Q409, due to stronger than expected holiday sales, the release of Microsoft
Windows 7, and a low base in Q408. In H109 PC shipments were down between 1-2%, compared with
the same period of the previous year.
Notebooks are the fastest growing PC market segment and were on course to account for around 58% of
unit sales in 2009, rising to a projected 81% by 2014. Netbooks are forecast to account for around 12% of
notebook sales in the US last year. However, the netbook growth trajectory should flatten as the price
differential with fully featured notebooks becomes less significant.
Software
 The US software market is estimated at US$148.3bn in 2010, with single-digit growth from
2009.

Software CAGR for 2010-2014 is projected at around 6.2%, as the addressable market grows to around
US$188.8bn. The launch of Windows 7 is expected to provide a boost to the operating system market in
2010. This year should see a boost from systems upgrades deferred from last year when the economic
crisis had an impact across sectors.
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 estimated at US$227.3bn in 2010 with a sharp deceleration in
spending expected compared with 2006-2008.
IT services spending is expected to record growth of 5.5% in 2010, after a sharp deceleration last
year. Spending on IT services is quite closely correlated with GDP growth: bad news in a recession.
In early 2009 many vendors reported that they were not seeing many major blow-offs on existing deals.
The most severely hit area is likely to be softer project-type spending such as consulting and software
development. In the near term, budgets had often already been commissioned, and so the effects were
more likely to be felt in the second half of 2009 and in 2010.
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SWOT Analysis
US IT Sector SWOT
Strengths
 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 the recession eases, vendors should see more growth in other traditional big-
spending 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.

Threats
 A risk that recovery could be anaemic in 2010, in which case tech spending could
have another hard year.

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US Telecoms SWOT
Strengths
 Market dominated by postpaid subscribers generating high average revenue per
user (ARPU).
 Strong competition with four national operators and several smaller regional players.

 Strong mobile virtual network operator (MVNO) growth has helped to maintain
market growth.
 Value-added services (VAS) already form a large proportion of revenues.

Weaknesses
 Consolidation in the market has seen the number of regional operators reduced
while national operators get stronger.
 Market tends to slow steady growth and has yet to reach 100% penetration.
 ARPUs have fallen as a result of subscribers tightening their belts and the offerings
from prepaid operators, creating lower-priced services.
 Market split between two technologies: CDMA and GSM.
 Handset exclusivity means vendors cannot sell to the entire market.

Opportunities
 Low-cost unlimited tariffs offer the chance to retain subscribers in the economic
downturn rather than have subscribers move to prepaid services.
 Expansion of mobile networks, particularly for 3G services, means continued
contract opportunities.
 Data ARPUs increasing and wide variety of mobile content on offer creates chances
to boost revenues from non-voice services.

Threats
 The US economy was among the worst hit by the global economic downturn, with
customer confidence plummeting and subscribers lowering their spending.
 Weaker dollar has made the cost of contracts higher from external vendors.

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US Political SWOT
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 US continues to attract large numbers of immigrants committed to
citizenship and self-advancement.

Weaknesses
 Political debate between Republicans and Democrats has historically shown a
tendency to become more polarised and divisive.
 As today’s superpower, the US attracts the enmity of a wide range of political
groups opposed to the current international status quo.

Opportunities
 The changing political mood (as evidenced by the popularity of unconventional
candidates in the 2008 presidential election, including Obama) and the
widespread dissatisfaction of the voting public may encourage both major
parties to experiment with more consensual approaches to certain policy areas.

Threats
 The perception of inflexibility and bias in US foreign policy, particularly in the
Middle East, may stiffen opposition and, in a worse case scenario, provide a
fertile recruiting ground for radical anti-US groups such as al-Qaeda.Partly as a
reaction to foreign policy difficulties, US public opinion may return to isolationist
and protectionist modes.

US Economic SWOT
Strengths
 The world’s largest economy with an impressive record of entrepreneurial
dynamism, innovation and a high research and development spend.
 Despite some threats to its reserve status, the US dollar is treated as an
international currency, meaning that investors around the world are prepared to
hold US debt. Because of this, the US is uniquely able to run large fiscal and
current account deficits.

Weaknesses
 Despite the dollar’s role as an international currency, excessive US debt levels
are a risk. A decision by Japanese and Chinese central banks to reduce their
larger dollar holdings could cause sharp falls in the value of the US currency.
 Low savings rate by US households, although this has begun to reverse.

Opportunities
 Further liberalisation of international trade through the WTO, coupled with a
more competitive dollar exchange rate, could boost export growth and help
restore balance to the US’s external imbalances.

Threats
 Intensified competition from China and other low-wage economies could
accelerate the loss of manufacturing jobs.
 Large growth in public spending, coupled with tax cuts, will worsen the fiscal
deficit, eventually forcing more restrictive monetary policy and slower growth.



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US Business Environment SWOT
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 better environments for entrepreneurial activity, with a highly
flexible labour force, a legal system that is friendly to business and significant
centres of technological innovation (such as California’s Silicon Valley).

Weaknesses
 Much of the country’s physical infrastructure is in need of improvement, with
congested roads and airways.
 US corporate tax is, on average, among the highest in the OECD.

Opportunities
 The Obama administration is committed to improving the nation’s infrastructure,
with stimulus package funds being dedicated to that purpose.
 The US has often been the origin of new drivers of economic growth booms,
and sectors ranging from biotechnology to alternative energy are being
discussed as possible catalysts.

Threats
 Government intervention in the economy puts the country’s reputation for free
enterprise at risk.

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IT Business Environment Ratings
BMI’s Americas IT Business Environment Ratings compare the potential of a selection of the region’s
markets over our forecast period, through to 2014. The ratings reflect our consideration of political and
economic risks, as well as risks associated specifically with IT intellectual property rights protection and
the implementation of government ICT projects.
The US is the largest IT market in the region – and indeed the world – and accounts for around 25% of
global IT spending. Despite the challenge from faster growing IT markets of countries such as China and
India, the US is forecast to maintain its global IT market leadership position for some time. After three
quarters of decline, the second half of 2009 brought a return to growth in US PC shipments and signs of
improved confidence in key IT spending verticals.
Across both consumer and business segments, US IT spending is expected to have a number of drivers,
including the growing popularity of mobile broadband networks, product and technology innovation as
well as economic recovery. The economic downturn may have accelerated the growth of outsourcing of
non-core processes and given additional momentum to IT delivery models such as software-as-a-service
(SaaS).
The Latin American economic outlook has improved in Q210 and six of the regional markets covered by
BMI have received upgrades in our Country Structure scores this quarter. Low PC penetration means
continued growth potential in a region characterised by significant income and geographical disparities.
In many markets, increased penetration of credit cards and credit availability from stores, as well as a
growing organised retail sector, should contribute to growth.
Brazilian IT spending is expected to bounce back in 2010, as the economy makes a strong recovery from
the recession. Brazil is our second highest-ranked Americas market, ahead of Mexico in third. Brazil
scores higher than Mexico on both market and country risk factors, but both have strong growth drivers.
Meanwhile, Chile’s fourth place reflects its status as one of the most developed markets in the region.
Chilean IT spending dipped into negative growth territory during 2009, but is expected to bounce back in
2010.
In fifth place, Argentina’s IT spending is projected by BMI to grow at a CAGR of 10% over 2010-2014.
Recovery after 2010 will be driven by rising incomes, expanding retail channels and more flexible terms
from retailers. Peru and Colombia are in sixth and seventh spots respectively. Peru’s free trade agreement
(FTA) with the US will boost demand for IT products and services. The regional structure of the Peru

market will evolve, with slower growth likely in Lima compared with other Peruvian provinces.
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Meanwhile, Colombia’s consumer-driven economic boom of the past few years has faded, but a PC
penetration rate of around 10% is one of the lowest in the region and indicates untapped potential.
Venezuela’s last place in our rankings reflects BMI’s judgement that the economic situation and business
environment in the country are unfavourable for IT spending growth, with consumer-driven growth of
recent years cooling due to economic uncertainty, the collapse in oil prices and currency devaluation.
There will continue to be areas of opportunity, but BMI anticipates another difficult year in 2010.
Brazil and Mexico account for around 75% of PC sales in Latin America, with economic growth lifting
millions into a computer-owning middle class. However, Brazil currently ranks higher than Mexico on
grounds of market size, as well as country risk environment. At twice the size of Mexico’s market, Brazil
is already estimated to be the fifth largest PC market in the world. Growing broadband penetration,
including 3G mobile, will drive the PC markets of both countries.
BMI projects that Mexican IT spending will grow again in 2010, despite continued economic
uncertainties. Close ties with the US are a long-term driver of IT opportunities; for example, the city of
Monterrey is developing as an important outsourcing hub. There should also be opportunities in key IT
verticals such as financial services, telecoms and government, with other growth sectors in 2010 set to
include healthcare, utilities and small and medium-sized enterprises (SMEs).
Despite business environment improvements, there are structural inhibitors in Mexico and Brazil. In
Brazil, these include a significant digital divide and bureaucracy. Mexico has a heavily regulated labour
market, while another negative factor is the government’s austerity drive.
Chile’s fourth place, ranking ahead of Argentina, is partly earned by having the highest country risk
rankings of any of the states in our Latin America table. However, with PC penetration of only 18% in

Chile and 22% in Argentina, there is considerable room for growth in both states. Continued PC sales
growth is expected in Argentina, where IT spending is being driven by factors such as greater credit
availability and growing broadband penetration. In both Chile and Argentina, government ICT policies
support market growth.
Both Peru and Colombia offer opportunities despite some business environment risks. Peru’s market will
receive a boost from the FTA with the US. There are opportunities in sectors such as banking and
financial services, telecoms, retail, mining and SMEs. Government programmes are also a factor,
particularly PCs for schools. In Colombia, the government regards ICT as a means to advance its central
strategic goal of helping to reintegrate disaffected groups. The Ministry of Communications assigned a
COP1.5bn budget for its National ICT Plan for the 2008-2010 period.
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Investment in Venezuela is likely to remain relatively low, given the political environment, which is
increasingly adverse for private investment. However, computer shipments should still grow, thanks to
government affordable computer programmes and more local production of computers. The government’s
2007-2012 Economic Plan has a key role for technology in development and various public bodies are
rolling out e-infrastructure projects. However, concerns remain about currency devaluation, import
restrictions and government policies on issues such as open-source software, which will require investor
caution.
Table: Regional IT Business Environment Ratings
Limits Of Potential Returns
Risks To Realisation Of
Returns

IT Market
Country
Structure
Limits
Market
Risks
Country
Risk
Risks
IT BE
Rating
Regional
Ranking
United States 83 90 85 50 59 56 76.3 1
Brazil 72 65 69 45 44 44 61.8 2
Mexico 64 60 63 53 60 57 61.1 3
Chile 56 65 59 50 73 64 60.6 4
Argentina 48 70 56 45 46 45 52.7 5
Peru 53 55 54 45 68 59 55.4 6
Colombia 52 55 53 48 56 53 52.8 7
Venezuela 45 70 54 40 48 45 51.0 8
Scores out of 100, with 100 highest. The IT BE Rating is the principal rating. It comprises two sub-ratings, ‘Limits Of
Potential Returns’ and ‘Risks To Realisation Of Returns’, which have a 70% and 30% weighting respectively. In turn, the
‘Limits’ rating comprises IT Market and Country Structure, which have a 70% and 30% weighting respectively and are
based upon growth/size/maturity/govt policy of IT industry (Market) and the broader economic/socio-demographic
environment (Country). The ‘Risks’ rating comprises Market Risks and Country Risk, which have a 40% and 60%
weighting respectively and are based on a subjective evaluation of industry regulatory and IP regulations (Market) and
the industry’s broader Country Risk exposure (Country), which is based on BMI’s proprietary Country Risk ratings. The
ratings structure is aligned across the 14 industries for which BMI provides Business Environment Ratings methodology
and is designed to enable clients to consider each rating individually or as a composite, which the choice depending on

their exposure to the industry in each particular state. For a list of the data/indicators used, please consult the appendix
at the back of the report. Source: BMI

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Market Overview
Government Authorities
Government Authority
National Telecommunications and Information Administration (NTIA),
Department of Commerce
Assistant Secretary for Communications and

Information
Lawrence E Strickling

The Department of Commerce (DoC) regulates various information technology industry-related areas.
The DoC is host to several agencies including the National Telecommunications and Information
Administration (NTIA), which advises the president on telecommunications and information-related
issues.
NTIA itself has several sub-bodies including:
 The Office of International Affairs, which helps to foster the ability of US IT companies to
compete abroad.
 The Office of Policy Analysis and Development.
 The Office of Telecommunications and Information Appliances (OTIA).

Major programmes run by the OTIA include:
 The US$4.7bn Broadband Technology Opportunities Program to develop broadband services to
underserved areas.
 A programme to drive the transition to digital television.
The Department of Commerce also hosts the National Institute of Standards and Technology, which is a
non-regulatory agency that promotes US innovation and standards.
Various other federal government ministries are also relevant to IT vendors.
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 Several departments including the Department of Defense, Homeland Security, Health and
Human Services, and the Department of Commerce itself are major purchasers of IT products
and services.
 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.
Overview
The US accounts for around 25% of
global IT spending in terms of both size
and value.
Despite the current recession, and the
faster growing IT markets of countries
such as China and India, the US is
forecast to maintain its global IT market

leadership position for some time.
BMI estimated US IT spending at around
US$490bn in 2009. As a mature market,
BMI assumes that IT services accounts
for around 44% of US IT spending,
compared with 27% for hardware and 29% for software.
Each segment is comprised of several sub-segments. In the hardware segment, notebook computers now
account for around 58% of sales, and this share is expected to rise to 81% by 2014, pushing desktops
down to less than one-fifth of unit sales. A major driver will be sales of netbooks, which now account for
around 12% of sales, although the netbook growth trajectory will flatten as the price differential with fully
featured notebooks becomes less significant.

IT Spending 2009
US$bn

Source: BMI forecasts
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Software also comprises several
segments. The business software market
(packaged software), including enterprise
resource management, customer
relationship management, human
resources management, financial

applications and so on, as well as
business intelligence and other
information-enabling applications, is
estimated to account for around one-third
of revenues. Middleware, including
systems management and database
management software, accounts for
between 15-20% of spending. Operating
systems of PCs, servers, and mainframes, as well as storage systems, account for around 20% of
spending. Internally developed software accounts for a declining share of the market. The software
market is being transformed with the rise of the SaaS delivery model.
The main segments in IT services include
implementation, systems integration (SI),
maintenance and service, as well as
higher value services such as consulting
and software development, and managed
services/outsourcing.
BMI counts most custom-developed
software in IT services. Custom-
developed software has declined in
importance as packaged software has
become more specialised and customised
to particular industries, and it may now
account for around 10% of commercial
software value.

IT Segments
2009

Source: BMI forecasts

PCs: Segments
2009

Source: BMI forecasts
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The two largest IT spending verticals are
discrete manufacturing and government,
which have typically accounted for
around 10% of total IT spending each.
Banking has traditionally also accounted
for a similar amount although it remains
to be seen what will happen to bank IT
spending in the wake of the financial
crisis. Other significant IT spending
verticals include retail, wholesale,
telecoms and construction.
US consumers are sophisticated and
enthusiastic consumers of consumer
electronics products including computers. According to the Consumer Electronics Association, the
average US household spent US$1,405 on consumer electronics products during the period March 2007-
March 2008. Meanwhile, BMI estimates IT spend/capita was just below US$1,600 in 2009. However, a
mature market with high penetration rates requires product and technology innovation to drive continued
growth: the average US household has 2.5 PCs.

Hardware
BMI forecast that the US computer and accessories market will grow 3.2% in 2010 after a robust
performance in Q409. PC market 2010-2014 CAGR is projected at 3.5% and value could reach the
US$132bn mark by 2014.
2009 Performance and 2010 Outlook
US PC sales leapt forward in Q409, due to stronger than expected holiday sales, and a low base in Q408.
Volume PC sales were up by at least 25% according to market research firms Gartner and IDC. The US
addressable market for PCs and accessories is estimated by BMI at US$115.5bn in 2010, with low single-
digit growth compared with 2009. In H209, the US PC market finally showed signs of recovery, with low
single-digit growth in Q309, following three consecutive quarters of shipments decline. In H109 PC
shipments were down between 1-2%, compared with the same period of the previous year. Sales
contracted around 1% in Q109 and 2% in 2009.
The recovery in Q409 was based however mainly consumer purchases of notebooks, while the corporate
PC segment remained sluggish. Low priced notebook and netbooks were the main drivers, along with the

Software: Segments
2009

Source: BMI forecasts
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launch of Windows 7, and vendor and retailer promotions. Vendors targeted consumers with aggressive
marketing and price points which eroded profitability.
However, the downside to this was significant downwards pressure on prices, with consumers unwilling

to pay big bucks, and looking for good enough solutions to their computing needs. Lower prices were also
driven from the supply side, with vendors competing fiercely due to the market slowdown, and the
disruptive popularity of low-priced netbooks.
The strong response by consumers in this environment to netbooks and ultra-slim laptops ended up
pushing prices of notebooks into the sub-US$500 range. Average PC selling prices were estimated to
have fallen by around 20% as between 2008 and the first half of 2009. However, BMI believes that prices
will remain relatively stable in 2010.
The credit crunch and consumer and business retrenchment contributed to the slowdown, which started in
Q408, after demand had remained fairly robust through the first three quarters of the year. According to
the United States Information Technology Industry Statistics service, the replacement rate for desktop
PCs had stretched from four years to five years, and for notebooks to around three years, due to the
economic uncertainty.
Annual computer sales are forecast at 69mn units this year, up from around 66mn in 2009. Shipments are
projected to reach 84mn by 2014. Despite the challenging trading conditions in 2009, vendor reports
indicated that many segments of the US computer market proved surprisingly resilient. Particularly in
Q409 he market has outperformed, not only analyst expectations, but also some emerging markets.
Business demand remained sluggish going into 2010. Businesses are expected to maintain a cautious
attitude to IT investments in 2010 due to uncertainty about the economic recovery, but there could be a
boost, particularly in the second half of the year, from computer hardware tenders delayed from 2009. In
2010, sales of Microsoft’s new Windows 7 operating system, and new Core technology, have the
potential to help trigger a new cycle of hardware upgrades. Much will depend on business confidence.
The launch of Windows 7, in October 2009, reportedly saw closer collaboration between Microsoft
and leading PC vendors like HP, Acer and Dell. Both Acer and Dell said that, as of launch day, there was
to be zero inventory of Vista-based machines going into stores. However, Windows 7 requires less power
than its predecessor, Vista, and so there is a possibility that some consumers may simply decide to
upgrade their existing machine rather than buy a new one.
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Prior to the global economic crisis, PC sales had growth peaked in Q308, but then fallen off as the effects
of the crisis started to impact consumer confidence. The two leading PC vendors HP and Dell saw sales
decline by around 4% and 16% respectively in that period. Dell was harder hit because of its relatively
greater reliance on desktops and the enterprise segment. There were reports of some companies deferring
spending as tighter margins and flagging export sales increased a focus on the bottom line.
Segments
Notebooks are the fastest growing PC market segment and projected to be on course to account for nearly
60% of unit sales in 2009, rising to a projected 81% by 2014. Netbooks are forecast to account for around
12% of notebook sales in the US last year. Some evidence from Q209 suggested that the ratio could be
even higher, perhaps even above 20%.
The netbook growth trajectory is expected to flatten as the price differential with fully featured notebooks
becomes less significant. Meanwhile, enhanced versions of netbooks with features like larger screens and
more powerful processors should further blur the line between the two categories.
The popularity of netbooks in H109 drove a big increase in shipments for the notebook category as a
whole, accounting for around 80% of notebook segment growth. Meanwhile, in H109 commercial sales
of desktops and notebooks fell by a double-digit factor, and commercial desktop purchases were also
down. Desktop sales declined in both consumer and commercial segments and are expected to
comprise less than one-quarter of the PC market by 2014.
Drivers
Back-to-school sales were an important driver of the recovery in PC shipments in Q309. Even in H109
the consumer channel was the main growth area, with consumers continuing to spend on notebooks,
despite the recession. Consumer spending was stronger than anticipated and should continue to drive
opportunities going forward. Lower prices and product innovation apparently offset some of the effects of
falling consumer confidence.
One additional driver both of increased sales and of lower prices is the move of telecoms operators into
the PC retail space. With increasing mobile and fixed broadband penetration, notebooks and netbooks

have become popular wireless connectivity options for consumers. As in other markets, telecoms
operators have emerged as significant distribution channels for netbooks, which are offered to subscribers
bundled with broadband service packages. AT&T and Verizon have moved quickly to offer these to
subscribers for subsidised prices of as low as US$50.
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The continuing build-out of Wi-Fi networks in major cities is also an important driver of demand for
netbooks. Studies have suggested a relatively greater demand in cities such as New York, San Francisco
and Boston, where Wi-Fi is relatively ubiquitous.
Netbooks
While the popularity of netbooks was well timed to help offset PC market stagnation during the global
economic slowdown, some vendors expressed concern that the cheaper portable computers would erode
margins for the industry. The recession has boosted the fortunes of lower priced Taiwanese vendor Acer
in the US this year, while traditionally higher end vendors like Apple have suffered. Notebook prices in
the US$500-600 range are already common. Intense competition in the current economic climate and a
reduction in component prices and manufacturing costs are among other drivers of low prices.
Netbook prices were expected to stabilise at around the US$350-400 level during the 2009 back-to-school
season. In Q409 the launch of a new version of Intel’s Atom chip, code-named ‘Pine Trail’, was
scheduled with the new chip billed as a cheaper, and more efficient, version than the current Atom, which
helped to drive the netbook explosion.
A future industry trend is likely to be vendor concentration on ultra-thin notebooks, or power-saving
notebooks computers, which can potentially bridge the divide between netbooks and fully fledged
notebooks. Netbooks are also likely to be enhanced, with larger screen and hard-drive sizes.
NetTabs

It is anticipated that this year will see the emergence of the NetTab, a new form factor device between the
size of a smartphone and a netbook. NetTabs are being designed to appeal to consumers who find a
smartphone inconvenient for consuming video media, or surfing the web, but for whom a netbook is still
too big or heavy. NetTabs are expectedly to be significantly more expensive than smartphones, and
between US$400-US$800, and despite a previous mixed track record with this form factor, are seen as a
growth area in 2010-2011.
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Software
Software CAGR for 2010-2014 is
projected at around 8.0%, as the
addressable market grows to around
US$188.8bn. In the current economic
climate, business software vendors will
look to pitch efficiency gains, as
declining margins encourage companies
to focus on reducing costs.
2010 Outlook
It is forecast the US software market will
be worth US$148.3bn in 2010, with
single-digit growth from 2009. Sales of
Windows 7 are expected to provide a
boost to the operating system market in
2010. This year should see a boost from systems upgrades deferred from last year when the economic

crisis had an impact across sectors. Strong economic headwinds led some companies to review IT budgets
or look to defer systems updates and may have given additional momentum to alternative software
models such as SaaS and cloud computing.
Piracy
Despite being an advanced market, it is still estimated that around 20% of software used in the US in
2008 was illegal or pirated. According to lobbying group the Business Software Association, total losses
from illegal software in the US market were around US$9bn in that year. The industry continues to push
for stiffer penalties. Legal history was made in H109 when a 39-year-old woman received a six-month jail
sentence in federal prison for selling illegal software.
Operating Systems
BMI estimates that operating systems and storage software account for around 10% of the US software
market. Growing PC sales have driven the share up from around 5% a few years ago. PCs account for
about 40% of the operating system segment, with servers, mainframes and storage devices making up the
rest.
The launch of Microsoft’s Windows 7 operating system in October 2009 was the most significant event
for Microsoft since the launch of Windows 95. Windows Vista ran into problems when business users

Netbooks Share Of Total
Notebook Shipments
Oct 2008-April 2009

Source: The NPD Group (2009)
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found that many of their business applications could not run on the Vista operating system. There were
also complaints from both business and household users about performance defects, generally due to the
large amount of processing power and memory required by Vista. By all accounts, the Windows 7 launch
went much more smoothly, thanks to closer cooperation in the pre-launch period between Microsoft and
other players in the software value chain, including PC vendors and end-users.
Microsoft has a lot riding on the new release, given the continuing challenge from open source. The
company has taken a couple of steps to fix perceived problems with Vista. On the compatibility problem,
Microsoft has tackled this with a free extension to Windows 7 called XP Mode. This allows users to run
Windows XP applications on Windows 7. According to estimates, as many as one in five Vista users had
found that they could not run XP applications on the new operating system. Secondly, Windows 7 will
use less processing power and memory than Windows Vista.
BMI projects that Windows 7 will provide a boost to the operating system software market in 2010. The
new system will attract more support from businesses than Windows Vista did, largely because Windows
XP is now getting old. Businesses that declined to upgrade from XP to Vista, due to reported problems
with the latter, will now go straight to Windows 7. Microsoft will still offer reduced support for XP until
2015, but many hardware manufacturers will start to wind down their support from about 2012. This, as
much as the lack of support from Microsoft, will be the factor that drives business upgrades to Windows
7. Microsoft also argues that Windows 7 can help businesses to save costs, enabling IT departments to be
run more efficiently.
Windows 7 is better suited to virtualisation than either Windows XP or Windows Vista. Virtualisation
looks set to become an important trend in IT in the next few years and allows businesses to simplify the
management of desktop PCs by running desktop applications and storing user data within the data centre.
Given the current economic climate, however, IT directors will need to justify any upgrade in terms of
cost savings.
Open Source
The economic downturn was projected to add to the trends that are driving adoption of open source
software. The desire to make savings has led some businesses and customers to look more closely at open
source software. However, many customers have by now made a realistic assessment of the advantages
and disadvantages of open source and have adopted a practical approach.
A key issue and precondition for the more widespread adoption of open source will be the development of

a support infrastructure. Customers are increasingly looking to vendors to offer support for open source
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software. BMI expects this trend to continue with the development of more support infrastructure for the
most important open source applications.
Most netbook computers originally came with open source Linux operating systems due to the heavy
systems requirement of Windows Vista. Netbooks were therefore seen as a threat to Microsoft’s revenues.
However, Microsoft has fought back by allowing netbooks to ship Windows XP, bringing its market
share back up.
Business Software
Business software is estimated to account for around 50% of total US software revenues. Spending on
applications such as enterprise resource planning (ERP), customer relationship management (CRM),
financial management systems and information software is perhaps around 60% of the sub-category total.
Middleware, such as database management systems and systems management tools, accounts for around
40%.
The majority of enterprise software demand, in functional terms, is currently for ERP and supply chain
management. Despite a relatively mature market, there still remains plenty of potential for ERP
implementations in industries such as consumer products, telecommunications, energy, engineering,
construction, transportation, food & beverage, retail and metal working.
ERP demand drivers include increasing operational efficiency, coordinating global supply chains and
modernising logistics and warehouse functions. Meanwhile, business intelligence and other information-
enabling software will continue to be one of the fastest growing product areas.
Software is often seen as an investment that helps to save costs and that will make an impact on the
bottom line. However, over BMI’s five-year forecast period, more investment can be expected to be in

utility software and serviced-oriented architectures rather than traditionally packaged PC software. Major
application areas such as ERP, CRM and business intelligence, security and supply chain management are
increasingly being delivered this way.
Surveys indicate that an average ERP implementation for manufacturing and distribution companies takes
around 19 to 20 months, with an average sales cycle of around four months. A survey by Panorama
Consulting Group found that average total cost of ownership was in the region of US$8.6mn.
Companies spent around 23% of the total implementation budget on business implementation costs,
including third-party consulting.