United states information technology report q2 2011

Q2 2011
Published by Business Monitor International Ltd.
www.businessmonitor.com
INFORMATION TECHNOLOGY REPORT
ISSN 2041-7101
Published by Business Monitor International Ltd.
UNITED STATES
INCLUDES BMI'S FORECASTS
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UNITED STATES
INFORMATION
TECHNOLOGY REPORT
Q2 2011
INCLUDES 5-YEAR FORECASTS TO 2015


Part of BMI’s Industry Report & Forecasts Series
Published by: Business Monitor International
Copy deadline : April 2011

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CONTENTS
Executive Summary 5
Market Overview 5
Industry Developments 5
Competitive Landscape 6
Computer Sales 6
Software 7
IT Services 7
SWOT Analysis 8
US IT Sector SWOT 8
United States Political SWOT 9
United States Economic SWOT 9
United States Business Environment SWOT 10
IT Business Environment Ratings 11
Americas 11
Table: Regional IT Business Environment Ratings 14
United States Market Overview 15
Government Authorities 15
Overview 16
Hardware 18
Software 22
Industry Developments 27
Industry Forecast Scenario 30

Market Trends 30
Drivers 31
Segments 32
Summary 32
Table: US IT Sector Overview, 2007-2014 32
Internet 33
Table: Telecoms Sector – Internet – Historical Data & Forecasts 33
Macroeconomic Forecast 35
Table: United States – Economic Activity, 2008-2015 37
Competitive Landscape 38
Hardware 38
Software 41
IT Services 44
Company Profiles 46
HP 46
Dell 48
Microsoft 50
IBM 52
Country Snapshot: US Demographic Data 53
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Section 1: Population 53
Table: Demographic Indicators, 2005-2030 53
Table: Rural/Urban Breakdown, 2005-2030 54
Section 2: Education And Healthcare 54
Table: Education, 2002-2005 54

Table: Vital Statistics, 2005-2030 54
Section 3: Labour Market And Spending Power 55
Table: Employment Indicators, 2001-2006 55
Table: Consumer Expenditure, 2000-2012 (US$) 55
Table: Average Annual Wages, 2000-2012 (US$) 56
BMI Methodology 58
How We Generate Our Industry Forecasts 58
IT Industry 58
IT Ratings – Methodology 59
Table: IT Business Environment Indicators 60
Weighting 61
Table: Weighting Of Components 61
Sources 61

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Executive Summary
Market Overview
 US spending on IT products and services is forecast to reach US$653bn by 2015.
US spending on IT products and services is forecast to grow to reach US$653bn by 2015. BMI has
downwardly revised its forecast after PC sales entered negative y-o-y growth territory in Q410, after
strong growth in the first half of the year. Overall moderate growth is expected in 2011, with the public
sector in retrenchment mode and the private sector relatively stronger.
In 2011, an increase in project spending is expected. A major demand driver will be private and public
sector organisations looking for help to utilise efficiencies from cloud computing models such as
Software-as-a-Service and Infrastructure-as-a-Service. 2010 saw a number of government agencies at

federal and local level launch cloud strategies and pilot programs.
Other key market drivers are expected to include:
 Growing fixed and mobile broadband penetration.
 Datacentre consolidation and virtualisation
 Product innovation such as tablets, e-readers and feature-rich netbooks.
 Technology innovation such as GPS and services.
 Economic recovery.
Industry Developments
 GSA first federal agency to move all email to a cloud-based system
In December 2010, the US General Services Administration (GSA) became the first federal agency to
move email to a cloud based system for its entire organisation. As the first transition of its kind, the
GSA’s move is seen as a landmark that could influence other agencies that have previously held back
from similar moves due to security or service concerns.
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In 2010, budgeted federal IT spending was set to rise to US$78.4bn, from US$74.2bn in 2009.In 2010,
the Obama administration called on federal agencies to develop strategies to simplify and where possible
combine often sprawling IT operations so as to reduce costs. Guidelines published in 2010 by the Office
of Management and Budget called for agencies to initiate datacentre consolidation programs to help cut
US$3bn from the federal budget.
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 the final quarter of 2010, most leading vendors reported lower sales, due to a slowdown in consumer
purchases compared with the same period of 2009. The contest for top spot between HP and Dell
continued. HP’s share of total PC shipments in Q410 was estimated at close to 30%, although its

shipments had declined compared with Q409.
In 2010, demand for enterprise software strengthened, with leading vendor SAP reporting a number of
new American clients in Q410, including Glazer’s Wholesale Distributors, and American Lie Assurance
Co. Meanwhile cloud computing is a major opportunity driver. Over the year, SaaS pioneer
Salesforce.com added 20,000 net new customers, and reached a total of 3mn net paying subscribers.
2010 saw increasing competition between vendors for a growing number of public sector cloud contracts.
The GSA picked web-based Google Apps to replace IBM Lotus Notes as the provider of email and
collaboration software for its 17,000 full-time employees and contractors. In October 2010, New York
City announced an initiative to bring Microsoft’s BPOS (Business Productivity Onine Suite) to around
30,000 city employees.
Computer Sales
 The US addressable market for PCs and accessories is estimated by BMI at US$123.1bn in
2011, with single-digit growth compared with 2010.
US PC sales slowed in H210 but BMI estimated that the market was on course for full-year total
shipments of around 78mn units. US PC sales slipped into negative y-o-y growth territory in the final
quarter of 2010, dragging down the growth rate for the year as a whole. The commercial refresh segment
showed signs of vitality, with steady growth in replacement purchases, but consumers were spending less.
One additional driver of increased sales and lower prices is the move of telecoms operators into the PC
retail space. Notebooks are the fastest-growing PC market segment and are estimated to have accounted
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for more than 60% of unit sales in 2010. 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$154.6bn in 2011, with single-digit growth from
2009.

Software CAGR for 2011-2015 is projected at around 6.0%, as the addressable market grows to around
US$194.5bn. A combination of enterprise objectives such as cost reduction and greater efficiency should
combine to encourage the adoption of cloud services in 2011.
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$247.6bn in 2011, with vendors reporting a more
stable market.
IT services spending is expected to grow by 6.0% in 2011, building on a stablilsation of the market in the
previous year. Spending on IT services is quite closely correlated with GDP growth, which is bad news in
a recession but better news in a recovery. In 2011, unlike in 2010 when hardware refreshes drove IT
spending, services is expected to be the fastest-growing segment.
One opportunity will be organisations looking for help 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.



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SWOT Analysis
US IT Sector SWOT

Strengths
 The largest IT market in the world, with spending forecast to pass US$552bn in

2011.
 Despite the challenging trading conditions, overall IT spending is still expected to
remain in positive growth territory.

Weaknesses
 During the recession in 2009, customers postponed projects and reduced short-term
spending, particularly in areas such as consulting and software development.

Opportunities
 Demand for new IT strategies to take advantage of innovations such as virtualisation,
datacentre consolidation, and cloud computing
 As economic woes ease, IT vendors should see more growth from traditional big-
spending sectors such as banks, financial services, retail and manufacturing.
 The growing popularity of mobile broadband networks is driving netbook sales.
 New business models such as SaaS and virtualisation will continue to make
progress.

Threats
 There is a risk that recovery could be anaemic in 2011, in which case spending on
technology could have another hard year.
 A large federal budget deficit could lead to pressures on public sector IT spending.

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United States Political SWOT
Strengths

The US is an undisputed superpower, and therefore occupies centre stage in most

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

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

United States Economic SWOT
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 on a historic basis, 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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United States 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
Americas
BMI’s Americas IT Business Environment Ratings compare the potential of a selection of the region’s
markets over our forecast period to 2015. 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 information and communications technology (ICT) projects.
In Q211 the US retains its top position in our regional rankings as the largest IT market in the region and
the world, and accounts for about 25% of global IT spending. Despite the challenge from faster-growing
IT markets such as Brazil, the US is forecast to maintain its global IT market leadership position.
In H210 the US commercial PC segment showed signs of vitality, with steady growth in replacement
purchases, but consumers were spending less. During the next few years, across consumer and business
segments, US IT spending is expected to be driven by a number of factors including product and
technology innovation, and investment in fixed and mobile broadband infrastructure as well as economic
recovery.
A major opportunity will be demand from private and public sector organisations aiming to use cloud
computing services. In 2011 there are expected to be many more contracts for the provision of cloud
services, following on contracts awarded during 2010 by the cities of New York and Los Angeles, and the
General Services Administration (GSA) of the federal government. As the US economy recovers, there
will be more growth in traditional big-spending IT verticals such as financial services, retail and

manufacturing. Meanwhile, government remains a key source of projects.
The Latin American IT market outlook remains positive in Q211, with BMI retaining its IT business
environment ratings in Q211. Low PC penetration means continued growth potential in a region
characterised by significant income and geographic 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.
Brazil is expected to be one of the best performing regional IT markets over BMI’s five-year forecast
period. The government’s launch of a US$344mn modernisation strategy in late 2010 should mean
enhanced IT spending over the next few years. A National Broadband Plan was announced in 2010 and
modernisation, ahead of Brazil’s hosting of the 2014 FIFA World Cup and 2016 Summer Olympics,
should also help to drive demand for IT products and services.
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In 2011, Brazilian consumer PC sales are expected to continue growing, due to economic growth and low
unemployment fuelling consumer confidence. In 2010, double-digit shipments growth was boosted by
major government procurements at national, provincial and municipal levels, and this should continue.
Meanwhile, a PC penetration rate of less than 25% indicates there is plenty of room for market growth.
Brazil is our second-highest ranked market in North America and South America, ahead of Mexico,
which retains third position. Brazil scores higher than Mexico on market and country structure factors, but
both have strong growth drivers. Mexican IT spending is expected to grow at a double-digit compound
annual growth rate (CAGR) over BMI’s five-year forecast period.
Brazil and Mexico account for about 75% of PC sales in Latin America, with economic growth lifting
millions into a computer-owning middle class. However, Brazil ranks higher than Mexico due to market
size and country structure environment. At twice the size of Mexico’s market, Brazil is already estimated
to be the fifth-largest PC market in the world. However, Brazil’s company spending on IT, measured as a
percentage of revenues, is understood to lag behind global peers. Growing broadband penetration,

including 3G mobile, will drive the PC markets of both countries.
Spending by the Mexican government should grow as public sector organisations launch e-services and
supporting infrastructure. Other market drivers include rising PC penetration and growing PC
affordability, as well as US corporate demand for IT outsourcing. Close ties with the US are a long-term
driver of Mexican IT opportunities. For example, the city of Monterrey is becoming an important
outsourcing hub.
However, 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 some vendors also have concerns about an apparent escalation in drug violence,
which may affect channel activities in some regions of the country and increase operating costs.
Meanwhile, Chile’s fourth place in our table reflects its status as one of the most developed markets in the
region. Chilean IT spending is projected to grow at a CAGR of 10% over 2010-2014. A wide-ranging
government plan to increase ICT utilisation in government and other sectors such as healthcare and
education will encourage IT investment. The recent earthquake may have diverted consumer funds from
technology to other priorities, but reconstruction offers opportunities for government agencies to advance
IT modernisation.
Chile’s relatively high ranking, ahead of Argentina, is partly because it has the highest country risk rating
of any of the states in our Latin America table. However, PC penetration is below 20% in Chile and 25%
in Argentina, so there is considerable room for growth in both countries.
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In sixth place, Argentina’s IT spending is projected by BMI to grow at a CAGR of 14% in 2010-2014.
Recovery after 2010 will be driven by rising incomes, expanding retail channels and more flexible terms
from retailers. The Argentine market is dominated by the capital Buenos Aires, which accounts for about
one-quarter of computer sales. Continued growth in PC sales is expected and IT spending is driven by
factors such as greater credit availability and growing broadband penetration.

Educational tenders will be a particular area of opportunity for the Argentine market, with a tender to
deliver 3mn PCs to public schools, due to be implemented over the 2010-2012 period. Another driver will
be the introduction of new regulatory compliance laws for electronic invoicing.
Peru and Colombia are in fifth and seventh positions respectively. Peru’s free trade agreement (FTA) with
the US will boost demand for IT products and services. The regional structure of the Peruvian market will
evolve, with slower growth likely in Lima compared with other Peruvian provinces.
Colombia’s consumer-driven economic boom of the past few years has faded, but a PC penetration rate of
about 10% is one of the lowest in the region and indicates untapped potential. Investment in datacentres,
information management and security solutions are expected to be growth areas in the large company
segment. Peru and Colombia offer opportunities despite some business environment risks. Besides the
boost from the US FTA, there are opportunities in Peru across the banking and financial services,
telecoms, retail, and mining sectors as well as small- and medium-sized enterprises (SMEs).
Government programmes are also a factor, particularly PCs for schools. In Colombia, the government
regards ICT as a way to advance its strategic goal of helping reintegrate disaffected groups. The
government’s new Vive Digital programme offers a potential boost to the IT market, with a pledge to
eliminate import tariffs on connectivity devices take measures to enhance credit availability for such
devices.
Venezuela’s last place in our rankings reflects our judgement that the economic situation and business
environment in the country are unfavourable for IT spending growth. The consumer-driven growth is also
slowing because of economic uncertainty, the collapse of oil prices and currency devaluation. The steep
devaluation of the bolívar for non-essential imports such as computers will depress spending, as
consumers grapple with the erosion of real wages. There will continue to be areas of opportunity, such as
SMEs, but BMI expects another difficult year in 2011.
In 2010 the growth of Venezuela’s computer shipments lagged behind other countries in the region, but
sales should still grow during the forecast period, due to the government’s 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 launching e-infrastructure projects.
Meanwhile, the anti-private business policies of the Chávez government inhibit business investment.
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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

Peru 53

55

54

45

68

59

55.4

5

Argentina 48

70

56

45

53

50

54.2

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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United States 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.
 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.
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 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
IT Spending

–

20
10


IT Segments

(US$bn)

2010
0
100000
200000
300000
400000
500000
600000
USA China Brazil India Russia


Hardware
27%
Softw are
29%
Services
44%

Source: BMI


Source: BMI

The US accounts for around 25% of global IT spending in terms of both shipments and value.
Despite continued economic uncertainty, 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.
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BMI estimated US IT spending at over
US$508bn in 2010. 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 comprises 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 2015,
pushing desktops down to less than one-fifth of
unit sales. However, rival and even more
portable form factors such as tablets are
expected to restrain growth of traditional
notebooks.
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 a 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.
PC Spending

–

Segments

2010
Des ktops
33%
Notebooks
67%

Source: BMI
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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.
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. BMI estimates IT spend/capita was US$1,641 in 2010. 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 forecasts that the US computer and accessories market grow around 5% in 2011, similar to 2010.
We have downwardly revised our projection after PC sales contracted in Q410, compared with the same
period of 2009, after strong growth in the first half of last year. The computer hardware market’s 2011-
2015 CAGR is projected at 3.1% and market value could reach US$163.6bn by 2015.
Market Trends
US PC sales slipped into negative y-o-y growth territory in the final quarter of 2010, dragging down the
growth rate for the year as a whole. The commercial refresh segment showed signs of vitality, with steady
growth in replacement purchases, but consumers were spending less. Shipments were down by around
5% compared with the same period of 2009, as holiday season sales failed to meet expectations.
In 2011, BMI expects continued restraint in the consumer segment, due to intensifying competition for
PCs from tablets and smartphones, and a fall-off in netbook demand. After double-digit growth in the first
half of 2010, PC market growth had already slowed significantly in Q310, a period when consumer sales
are usually boosted by back-to-school sales.
Software Spending

–

Segments

2010
Source: BMI

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The market appeared to be affected by uncertainty about job growth and the economic recovery, which
led consumers to delay purchases. Meanwhile, publicity about new model releases and form factors,
such as tablets, may also have contributed to a ‘wait and see’ mentality. Annualised shipments growth
dropped to mid single-digits, compared with the double-digit rates seen earlier in the year.
PC sales had rebounded strongly in H110, but unit sales were estimated by BMI at around 17mn units in
the third quarter, with limited growth compared with the same period of 2009. The main factor was a
softening of consumer demand. BMI still estimated that the market was on course for full-year total PC
sales of around 83mn units, up from around 69mn in 2009. Shipments are projected to reach 124mn by
2015.
The US addressable market for PCs and accessories is estimated by BMI at US$123.1bn in 2011,
with mid-single-digit growth compared with 2010. In H110, sales were boosted by a revival of the
business PC market, which was expected to gather pace in the second half of 2010. Business demand
remained sluggish going into 2010, due to uncertainty about the economic recovery, but there was a boost
from computer hardware tenders delayed from 2009. Migrations to Windows 7 was less of a driver of PC
sales in H110 than had been hoped.
The PC market 2011 growth rate will suffer from base effects compared with 2010, when the market
bounced back thanks to pent up demand in the wake of the global economic crisis. However, commercial
updates, expected to gather pace in the second half of the year, should help to keep overall growth on
track. Overall modest growth in budgets is expected in 2011, with the private sector stronger than the

public sector, where national and local government spending is subject to fiscal retrenchment.
Impact of Recession
Following the impact of the recession, the US PC market had finally shown signs of recovery in H209,
with low single-digit growth in Q309, following three consecutive quarters of shipments decline. Sales
leapt forward in Q409, due to stronger than expected holiday sales, and were up by at least 25% y-o-y
according to market research firms Gartner and IDC.
The downside to this was significant downwards pressure on prices, with consumers unwilling to pay big
money 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 under US$500 range. Average PC
selling prices were estimated to have fallen by around 20% between 2008 and H109. However, prices
were more stable in 2010.
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Drivers
Total PC sales were estimated at around 78mn units in 2011. One additional driver of increased sales and
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.
Migrations to Microsoft’s new Windows 7 operating system and new Intel Core technology have the
potential to help sustain the current 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.

The continuing build-out of Wi-Fi networks in major cities is 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.
Segments
Desktop shipments were estimated at around 26mn units in 2010 and could rise to 28mn by 2015. In 2010
commercial sales of desktops and notebooks were stronger after falling by a double-digit factor in 2009
due to the economic slowdown. Commercial desktop purchases were also down, before stabilising in the
second half of the year. Desktop sales in both consumer and commercial segments and are expected to
comprise less than one-quarter of the PC market by 2015.
Notebooks are the fastest-growing PC market segment and accounted for an estimated 67% of unit sales
in 2010. Notebook sales were estimated at around 53mn units in 2010 and could pass 89mn by 2015. The
popularity of netbooks was a big factor keeping notebook sales in positive territory during the recession
in 2008-2009 and accounted for about 80% of notebook segment growth.
However the netbook growth trajectory flattened in 2010 as the price differential with fully featured
notebooks became less significant. Meanwhile, enhanced versions of netbooks with features such as
larger screens and more powerful processors should further blur the line between the two categories. The
emergence of tablets has also undermined demand for netbooks. At their peak, netbooks are estimated to
have accounted for about 12% of notebook sales in the US in 2009, with estimated unit sales of more than
6mn.
While the popularity of netbooks was well timed to help offset PC market stagnation during the global
economic slowdown, some vendors expressed concerns that the cheaper portable computers would erode
margins for the industry. The recession boosted the fortunes of lower priced Taiwanese vendor Acer in
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the US, while traditionally higher end vendors suffered. Notebook prices in the US$500-600 range are
already common, with intense competition and a reduction in component prices and manufacturing costs

among the drivers of low prices.
A future industry trend is likely to be vendor concentration on ultra-thin or power-saving notebooks,
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.
However, netbooks and notebooks face competition from other form factors. Smartphones from the likes
of Palm, RIM, Apple and other vendors are being offered by vendors as alternative connectivity
solutions and often include a Wi-FI option.
Tablet Notebooks
2010 saw the emergence of a new generation of tablet PCs, spearheaded by Apple’s iPad. Initial sales of
the iPad, which launched worldwide in March 2010, were strong, with around 2mn units sold worldwide
within the first two months. Other vendors are expected to follow Apple in releasing net tablet devices
that have a form factor between the size of a smartphone and a netbook. US sales of tablet notebooks
were projected to pass 3mn units in 2010. An estimate by market research firm IDC put Apple’s share of
the US PC market at above 10% in Q310, based largely on iPad sales.
In 2010 many other vendors such as Dell, HP, Samsung and Lenovo announced or presented some type
of tablet computer. Tablets are being designed to appeal to consumers who find a smartphone
inconvenient for watching videos or using the internet, but for whom a netbook is still too big or heavy.
The much-hyped iPad2 was due to be released in March 2011.Other vendors have followed Apple in
releasing net tablet devices, which have a form factor between the size of a smartphone and a netbook.
The arrival of Android-based tablets like the Samsung Galaxy Tab should find a market among those
who wish to share their Wi-Fi connection with other devices, something not permitted by the iPad.
Whereas it was once thought that notebook growth would be sustained by consumers purchasing second
or third computers as personal mobile devices, it now appears likely that they will purchase tablets and
other mobile devices as alternatives. Tablets, originally seen as primarily for consumers, are also forecast
to experience increasing take-up in the business segment. Some analysts forecast that tablet sales could
overtake sales of netbooks within the next two to three years and be well ahead of desktops.
As of the end of 2010, analysts had different views about whether tablets had significantly impacted on
the US PC market. However, it is projected that tablet sales could be equivalent to around 20% of the PC
market in 2011. Moreover, PCs face a growing challenge not only from tablets but also other devices such
as smartphones, which are being offered by vendors as alternative connectivity solutions and often

include a Wi-Fi option.
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Most tablets are expected to be significantly more expensive than smartphones, however, at between
US$400-800. On launch, unlocked Wi-Fi-only models of the iPad cost US$499 of a 16GB version and up
to US$599 fo 64GB. Despite a previously mixed track record, this format is seen as a growth area in
2011. Some analysts forecast that tablet sales could overtake sales of netbooks within the next two to
three years and be well ahead of desktops.

E-Readers
One product segment challenged by tablet notebooks is the e-reader market currently dominated by
Amazon’s Kindle. There are around 450,000 book titles on the Kindle store, compared with around
60,000 on the iBookstore. The Kindle is also cheaper than the iPad, at around US$259 (and this price is
likely to drop further), and its battery life is around two weeks, compared with about 10 hours for the
iPad. However, the layout and user-friendliness are both areas where the iPad outscores rival products.
Software
Software CAGR for 2011-2015 is projected at around 5.9%, as the addressable market reaches around
US$194.5bn. Overall moderate growth in budgets is expected in 2011, with the market stabilising
following the economic slowdown and rebound in 2010. At the same time, the software market will be
influenced by a continued move towards distributed computing, SaaS and service-oriented architectures.
In a still uncertain economic climate, business software vendors will look to pitch efficiency gains, as
companies focus on reducing costs.
Market Trends
It is forecast the US software market will be worth US$154.6bn in 2011, with single-digit growth from
2010. 2010 saw a stabilisation of the market, with pent-up demand as a result of the economic situation in
2008-2009, leading to many vendors reporting strong growth. The recession led some companies to

review IT budgets or look to defer systems updates and may have given additional momentum to the
adoption of cloud computing. In 2010, several private and public sector organisations announced cloud
computing strategies and launched pilot projects.
Over BMI’s five-year forecast period, the number of cloud computing contracts open to vendors is likely
to dramatically increase, presenting a challenge to traditional desktop-centric software models. In Q410,
US companies migrating to new cloud solutions included office supply retail group Staples.
Despite being an advanced market, it is still estimated that around 20% of software used in the US is
illegal or pirated. According to the lobbying group the Business Software Association, total losses from
illegal software in the US market totalled about US$9bn in 2008. The industry continues to push for
stiffer penalties. Legal history was made in 2009 when a 39-year-old woman received a six-month jail
sentence in federal prison for selling illegal software.
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Operating Systems
BMI estimates that operating systems and storage software account for around 10% of the US software
market. Growing PC sales have driven the share up from around 5% a few years ago. PCs account for
about 40% of the operating system segment, with servers, mainframes and storage devices making up the
rest.
Migrations to Microsoft’s Windows 7 operating system were the most significant event for Microsoft
since the launch of Windows 95, and should continue to support software sales in 2011. Microsoft’s
previous operating system 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, generally due to the large amount of
processing power and memory required by Vista. 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.
The new system has attracted 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 XP or Vista. Virtualisation looks set to become an
important trend in IT in the next few years and allows businesses to simplify the management of desktop
PCs by running desktop applications and storing user data within the datacentre. 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
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source software. However, many customers have by now made a realistic assessment of the advantages
and disadvantages of open source and have adopted a practical approach.
Interest in open source is growing in the public sector. In 2010, an increasing number of government IT
managers and service providers were looking at open source software stacks as part of a drive to

consolidate datacentres. Virtualisation has become a major trend in the datacentre, and open source
virtual machine products are becoming popular. Meanwhile, a number of open source tools are already
widely deployed across government.
A key issue and precondition for the more widespread adoption of open source will be the development of
a support infrastructure. Customers are increasingly looking to vendors to offer support for open source
software. BMI expects this trend to continue with the development of more support infrastructure for the
most important open source applications.
Most netbook computers originally came with open source Linux operating systems due to the heavy
systems requirement of Windows Vista. Netbooks were therefore seen as a threat to Microsoft’s revenues.
However, Microsoft has fought back by allowing netbooks to ship Windows XP, bringing its market
share back up, and in Q410 the company was preparing to release a Windows 7-based tablet.
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 in utility
software and serviced-oriented architectures rather than traditionally packaged PC software. Major