Q4 2014 www.businessmonitor.com AUSTRALIA INFORMATION TECHNOLOGY REPORT INCLUDES 5-YEAR FORECASTS TO 2018 ISSN 2041-7160 Published by:Business Monitor International Australia Information Technology Report Q4 2014 INCLUDES 5-YEAR FORECASTS TO 2018 Part of BMI’s Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: September 2014 Business Monitor International Senator House 85 Queen Victoria Street London EC4V 4AB United Kingdom Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com © 2014 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. Australia Information Technology Report Q4 2014 CONTENTS BMI Industry View . IT SWOT Wireline SWOT . 11 Political . 13 Economic . 14 Business Environment 15 Industry Forecast 17 Table: IT Industry - Historical Data And Forecasts (Australia 2011-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Macroeconomic Forecasts . 23 Economic Analysis . Chinese Reform Efforts To Weigh On Export Growth Consumption Growth To Slow Further . Residential Investment To Fall Short 23 24 25 26 Table: Economic Activity (Australia 2009-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Industry Risk Reward Ratings 28 Table: APAC IT Risk/Reward Ratings - Q4 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Market Overview . 32 Hardware . 32 Software . 40 Services 45 Industry Trends And Developments 53 Regulatory Development 58 Table: Government Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Government Initiatives 58 Regulatory News 60 Competitive Landscape 64 International Companies . 64 Table: Dell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Table: Datacom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Table: SAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Table: Panasonic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Local Company . 68 Table: The Good Guys . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Company Profile 69 © Business Monitor International Page Australia Information Technology Report Q4 2014 SAP 69 Hewlett-Packard . 75 Table: Hewlett-Packard Financial Performance By Division: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Regional Overview 84 Asia Pacific Overview 84 Demographic Forecast . 89 Table: Australia's Population By Age Group, 1990-2020 ('000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 Table: Australia's Population By Age Group, 1990-2020 (% of total) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Table: Australia's Key Population Ratios, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Table: Australia's Rural And Urban Population, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Methodology 93 Industry Forecast Methodology 93 Sources 94 Risk/Reward Ratings Methodology 95 Table: It Risk/Reward Ratings Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Table: Weighting Of Components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 © Business Monitor International Page Australia Information Technology Report Q4 2014 BMI Industry View BMI View: Due to high labour costs BMI believes Australian enterprises could be among the early adopters for AI applications such as IBM's Ask Watson service, which has already been trialled by ANZ Bank. Emerging technologies aside the growth outlook is relatively weak in Australia. This is in part a consequence of market maturity, meaning growth will underperform the APAC average, which is weighted to emerging markets but there is also macroeconomic downside as BMI expects economic growth to slow over the medium term. Headline Expenditure Projections Computer Hardware Sales: AUD7.9bn in 2013 to AUD8.2bn in 2014, up 3.6% in local currency terms. Slowdown in tablet demand due to market saturation will be offset by a stabilisation in desktop and notebook sales in 2014 due to XP support withdrawal and design innovation in the hybrid notebook market. Software Sales: AUD4.3bn in 2013 to AUD4.7bn in 2014, up 8.8% in local currency terms. Security software will outperform, particularly for small and medium-sized enterprises (SMEs) and consumers - but it is XP enterprise upgrades that will make software the outperforming segment in 2014. IT Services Sales: AUD9.2bn in 2013 to AUD9.7bn in 2014, up 6.3% in local currency terms. IT services will be fastest growth area of the IT market over the medium term, with cloud services the key growth driver as local companies try to use efficiencies enabled by the National Broadband Network (NBN). © Business Monitor International Page Australia Information Technology Report Q4 2014 Key Trends And Developments After a sustained boom since 2012 the Australian tablet market appears to have peaked, in-line with BMI's expectations. High-street consumer electronics retailer JB Hi-Fi reported that sales in July 2014 fell by 5.5% year-on-year (y-o-y), mainly due to a significant slump in demand for new and replacement tablet computers. We believe this data reflects the level of consumer satisfaction with existing products and the slower rate of innovation by leading vendors such as Apple and Samsung that have produced iterative improvements rather than significant changes in recent announcements. Although a small uptick is expected in 2016 as mobile network operators seek to attract customers to their new 4G mobile broadband networks by including tablets in new service bundles, sales are expected to fall in the following years as the operational lives of high-spec devices - as well as their high cost - obviates the need to buy a replacement in the short to medium term. In contrast to the slowdown in tablet demand the Australian cloud computing growth story has plenty of momentum remaining. The latest research by the Australian Communications and Media Authority (ACMA) showed the adoption of cloud computing services continued in 2013. In March 2014 the ACMA claimed that 36% of SMEs actively using cloud services believed that such services provided easier or more convenient access to data and key resources (36%), assisted in making key productivity tools accessible from multiple locations (15%) and that disaster recovery would be facilitated through the use of cloud-based platforms (11%). © Business Monitor International Page Australia Information Technology Report Q4 2014 IT SWOT SWOT Analysis Strengths ■ High incomes and strong supporting infrastructure drive high levels of IT spending per capita. ■ Strong government support for ICT programmes. ■ IT-literate population with high levels of PC ownership and a propensity for premium devices. ■ Strong financial sector, a large source of demand for enterprise software and services. Weaknesses ■ Tablet boom has offset the decline in desktop and notebook sales. ■ Australia has a relatively mature domestic market, with correspondingly slow growth rates. Opportunities ■ Sensitive to volatility in the global economy. ■ High labour costs and proximity of low-cost competition make Australia a fertile market for automation technologies such as IBM's Watson and other personal assistant products. ■ Considerable demand for cloud computing services from both the public and enterprise sector. ■ Government cloud computing strategy creates opportunities for vendors in the public and SME sectors. Threats ■ Potential for a rebound in notebook sales as hybrid designs evolve. ■ Other major IT projects in areas such as healthcare, education and smart cards. ■ A cheaper Australian dollar would affect consumer and business demand in the import-dependent IT market, with downside weighted towards the latter years of our forecast. © Business Monitor International Page Australia Information Technology Report Q4 2014 SWOT Analysis - Continued ■ Vendors face threat of parliamentary enquiry into product pricing and are coming under pressure regarding tax arrangements. ■ Data from retailers indicate a sharp slowdown in the tablet market in 2014, in-line with our long-held view that saturation and slower rate of innovation would result in longer replacement cycles. © Business Monitor International Page 10 Australia Information Technology Report Q4 2014 Number of employees Company Details ■ October 2011: 349,600 ■ Hewlett-Packard Company ■ 3000 Hanover Street Palo Alto California 94304 United States ■ Tel: +1 650 857 1501/ ■ www.hp.com © Business Monitor International Page 83 Australia Information Technology Report Q4 2014 Regional Overview Asia Pacific Overview BMI forecasts Asia Pacific will be the outperforming region in terms of IT market growth rates over the duration of our medium term forecast to 2018. This is in line with overall economic trends as the region has become an important engine of global growth. Asia is home to not only the two largest emerging markets in India and China, but also a host of rapidly developing frontier markets - making it a prime target for expansion by global vendors. The outlook is however far from homogeneous, there is a wide spread of development levels from Australia, Hong Kong and Singapore through to APAC Forecast To Outperform Annual IT Market Growth In USD (%) Indonesia, Pakistan and Sri Lanka. There is also intense competition between markets in the region vying to attract foreign expertise and investment - as well as promoting domestic industry. Low Hanging Fruit BMI forecasts outperformance for APAC over the medium term as emerging markets are in a sustained period of catch-up growth. The more developed markets in the region - Australia, Hong Kong, Singapore and South Korea - will not experience the e/f - BMI estimate/forecast. Source: BMI. same growth rates, underperforming emerging Asia. This is because in several key product categories these markets are already mature, including retail hardware (desktops, notebook and tablets), as well as enterprise software deployments. However, in emerging Asia there is scope for rapid medium term growth as incomes rise and device prices continue to decline. Whereas developed markets took several decades to reach high levels of IT product and solution penetration among consumers, enterprises and the public sector, in emerging markets this transition is expected to be much faster due to price erosion increasing affordability, and lessons learned from early developers in terms of policy and best practice. © Business Monitor International Page 84 Australia Information Technology Report Q4 2014 The area catch-up growth will be most visible is in the retail hardware market where the rapid decline in notebook prices over the past decade, and in tablets since 2012, has deepened the market considerably even before income growth is factored in. Looking ahead, with Microsoft reducing Windows licensing costs for low-end devices, and Android partner vendors competing aggressively on price, effectively commoditising the low-and-mid end of the tablet market, we see the foundation for a significant broadening of device ownership rates over the medium term. Less visible but equally important is the continued investment in IT solutions by enterprises and government. Enterprise modernisation through informatisation is being promoted by governments across the region in order to improve competitiveness, driving basic ERP deployments and other efficiency saving solutions. Meanwhile, in the public sector government's are utilising the latest e-government and service delivery enhancing solutions, leapfrogging the legacy infrastructure in more developed markets. A development that could drive spending growth even higher is the upgrade spending on operating systems as Microsoft withdraws support for XP from 2014. The magnitude of contribution to spending growth is uncertain, but with the latest Statcounter data showing 23.6% of APAC browsing traffic came from devices running XP there is certainly scope for a wave of upgrades in enterprises and public administration. Strong demand in emerging Asia Pacific markets from the retail, enterprise and public sectors will combine to ensure the region is the outperformer over the medium term. Competing Clouds Another area where Asia has an attractive outlook in part because of lower development levels is in cloud computing. The lower level of legacy on-site enterprise and infrastructure deployments makes the region fertile ground for rapid cloud adoption. Furthermore, the pricing models of cloud services are well suited to modernising enterprises that are likely to have less complex requirements and lack the resources for on-site deployments. © Business Monitor International Page 85 Australia Information Technology Report Q4 2014 APAC PC Browsing Traffic By OS (%) And Y-o-Y Change March 2014 Source: Statcounter. © Business Monitor International Page 86 Australia Information Technology Report Q4 2014 The cloud computing market in emerging Asia Pacific will continue to be weighted towards less complex services over the medium term, but adoption rates are forecast to increase markedly. Data Boom Driving Cloud Demand APAC Mobile Data Volume Forecast (TB per Month) This has attracted major international investment right across the region - for instance companies such as Google, NetSuite, Salesforce, RightNow, Oracle and Zoho have already established their presence in the Indonesian market primarily through channel partners. Meanwhile, international brand names that have entered the Thai market include Amazon Web Services, NTT Communications, Adobe and Google - facing local competition from TRUE Internet Data Centre, CAT, DTAC and TOT. Finally, in the Philippines local telecoms operators have made major investments in datacentre capacity, Source: Cisco VNI 2014 with PLDT announcing in March 2014 that it will spend PHP3bn on the construction of two new data centres, one in metropolitan Makati and a second, to be opened in 2015, in Paranaque. Its data centres business grew by 60% in 2013 and the new facilities will continue that growth momentum. While the focus in emerging Asia will be on low-level deployments, there is also a dynamic of competition between developed markets in the region vying to be regional centres for cloud services and other emerging technologies. The competition between Hong Kong and Singapore to become regional cloud computing hubs is well known, with large scale inward investment both to tap demand from the large and lucrative financial sectors and to serve as a base for service provision across the region. For instance, in Q114 Pacnet and Digital Ocean opened new data centre facilities in Singapore, with both firms stating that regional opportunities were behind the choice of Singapore as a location for data centres. Meanwhile, Hong Kong has attracted investment from global leaders such as NTT Communications, Savvis, IBM and Rackspace. There is however also competition in Asia to position as hubs for emerging technologies such as big data analytics. For instance In March 2014 the South Korean Science, ICT and Future Planning Ministry announced it would inject KRW4.9trn (US$4.6bn) in information infrastructure in 2014. The ministry will invest KRW3.9trn in 786 projects headed by government bodies, with a further KRW978bn invested in © Business Monitor International Page 87 Australia Information Technology Report Q4 2014 5,990 projects by provincial authorities. Key areas targeted for investment in 2014 include KRW302bn for cyber security, KRW68bn for mobile technologies and KRW243bn for Internet of Things (machine-tomachine communications). However, South Korea is some way behind Singapore. In August 2013, the Infocomm Development Authority of Singapore (IDA) partnered with Revolution Analytics, a commercial provider of software, services and support for the open source 'R' project, to form a business analytics centre of excellence. The centre will operate as a channel through which local companies can reach the expertise of global organisations to develop new solutions. The IDA's efforts are likely to help Singaporean enterprises use big data, and lay the foundations for expanding across the region. The opportunity in data analytics is huge, with 80% of enterprises surveyed by EMC stating that use of big data will lead to better decision making in their organisation. The survey, released in September 2013, questioned 130 respondents, of which 63% believed that big data will be a key factor determining winners and losers, while 37% stated they had already benefited from competitive advantage via the use of big data. The areas respondents believed big data will prove most beneficial were data centre automation (83%) and cyber security (64%). While the outperformance of Asia in terms of market growth will primarily be underpinned by low-hanging fruit and catch-up growth, there is also significant activity at the technological frontier that means emerging technologies are also expected to be an important component of the medium term growth story. © Business Monitor International Page 88 Australia Information Technology Report Q4 2014 Demographic Forecast Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model. Not only is the total population of a country a key variable in consumer demand, but an understanding of the demographic profile is key to understanding issues ranging from future population trends to productivity growth and government spending requirements. The accompanying charts detail Australia's population pyramid for 2013, the change in the structure of the population between 2013 and 2050 and the total population between 1990 and 2050, as well as life expectancy. The tables show key datapoints from all of these charts, in addition to important metrics including the dependency ratio and the urban/rural split. Population Pyramid 2013 (LHS) And 2013 Versus 2050 (RHS) Source: World Bank, UN, BMI © Business Monitor International Page 89 Australia Information Technology Report Q4 2014 Population Indicators Population (mn, LHS) And Life Expectancy (years, RHS) Source: World Bank, UN, BMI Table: Australia's Population By Age Group, 1990-2020 ('000) 1990 1995 2000 2005 2010 2013e 2015f 2020f 17,097 18,124 19,259 20,521 22,404 23,343 23,923 25,440 0-4 years 1,262 1,302 1,290 1,299 1,458 1,555 1,604 1,664 5-9 years 1,263 1,298 1,358 1,347 1,373 1,459 1,530 1,677 10-14 years 1,241 1,299 1,347 1,409 1,413 1,423 1,450 1,607 15-19 years 1,398 1,277 1,335 1,409 1,508 1,510 1,504 1,541 20-24 years 1,366 1,427 1,303 1,444 1,651 1,638 1,608 1,605 25-29 years 1,422 1,388 1,448 1,383 1,665 1,739 1,745 1,703 30-34 years 1,398 1,464 1,442 1,517 1,536 1,659 1,746 1,827 35-39 years 1,316 1,429 1,512 1,498 1,622 1,596 1,598 1,809 40-44 years 1,260 1,338 1,458 1,550 1,559 1,625 1,658 1,635 45-49 years 985 1,255 1,348 1,474 1,586 1,573 1,571 1,670 50-54 years 822 974 1,262 1,346 1,476 1,549 1,576 1,563 55-59 years 729 804 969 1,242 1,331 1,401 1,453 1,554 60-64 years 738 712 801 950 1,216 1,272 1,296 1,418 65-69 years 663 691 681 766 911 1,073 1,166 1,247 70-74 years 493 595 636 629 713 783 852 1,096 Total © Business Monitor International Page 90 Australia Information Technology Report Q4 2014 Australia's Population By Age Group, 1990-2020 ('000) - Continued 1990 1995 2000 2005 2010 2013e 2015f 2020f 75-79 years 376 407 511 551 555 596 636 766 80-84 years 222 278 315 403 430 439 452 524 85-89 years 101 132 171 205 273 291 297 319 90-94 years 34 44 59 80 103 126 141 159 95-99 years 10 12 17 26 30 34 49 100+ years e/f = BMI estimate/forecast. Source: World Bank, UN, BMI Table: Australia's Population By Age Group, 1990-2020 (% of total) 1990 1995 2000 2005 2010 2013e 2015f 2020f 0-4 years 7.38 7.19 6.70 6.33 6.51 6.66 6.71 6.54 5-9 years 7.39 7.16 7.05 6.56 6.13 6.25 6.39 6.59 10-14 years 7.26 7.17 6.99 6.86 6.31 6.10 6.06 6.32 15-19 years 8.18 7.05 6.93 6.87 6.73 6.47 6.29 6.06 20-24 years 7.99 7.87 6.76 7.04 7.37 7.02 6.72 6.31 25-29 years 8.31 7.66 7.52 6.74 7.43 7.45 7.30 6.69 30-34 years 8.18 8.08 7.49 7.39 6.85 7.11 7.30 7.18 35-39 years 7.70 7.88 7.85 7.30 7.24 6.84 6.68 7.11 40-44 years 7.37 7.38 7.57 7.55 6.96 6.96 6.93 6.43 45-49 years 5.76 6.93 7.00 7.18 7.08 6.74 6.57 6.57 50-54 years 4.81 5.38 6.55 6.56 6.59 6.64 6.59 6.14 55-59 years 4.26 4.44 5.03 6.05 5.94 6.00 6.07 6.11 60-64 years 4.32 3.93 4.16 4.63 5.43 5.45 5.42 5.57 65-69 years 3.88 3.81 3.54 3.73 4.07 4.60 4.87 4.90 70-74 years 2.88 3.28 3.30 3.06 3.18 3.35 3.56 4.31 75-79 years 2.20 2.25 2.65 2.69 2.48 2.55 2.66 3.01 80-84 years 1.30 1.54 1.64 1.96 1.92 1.88 1.89 2.06 85-89 years 0.59 0.73 0.89 1.00 1.22 1.25 1.24 1.25 90-94 years 0.20 0.24 0.30 0.39 0.46 0.54 0.59 0.62 95-99 years 0.05 0.05 0.06 0.08 0.11 0.13 0.14 0.19 © Business Monitor International Page 91 Australia Information Technology Report Q4 2014 Australia's Population By Age Group, 1990-2020 (% of total) - Continued 100+ years 1990 1995 2000 2005 2010 2013e 2015f 2020f 0.01 0.01 0.01 0.01 0.01 0.02 0.02 0.03 e/f = BMI estimate/forecast. Source: World Bank, UN, BMI Table: Australia's Key Population Ratios, 1990-2020 1990 1995 2000 2005 2010 2013e 2015f 2020f 49.5 50.2 49.6 48.6 47.9 50.0 51.8 55.8 5,664 6,056 6,381 6,707 7,257 7,779 8,167 9,115 Active population, % of total 66.9 66.6 66.9 67.3 67.6 66.7 65.9 64.2 Active population, total, '000 11,433 12,068 12,878 13,814 15,147 15,563 15,756 16,324 32.9 32.3 31.0 29.3 28.0 28.5 29.1 30.3 3,767 3,899 3,995 4,054 4,244 4,437 4,585 4,948 Pensionable population, % of total working age 16.6 17.9 18.5 19.2 19.9 21.5 22.7 25.5 Pensionable population, total, '000 1,897 2,158 2,387 2,653 3,013 3,342 3,583 4,167 Dependent ratio, % of total working age Dependent population, total, '000 Youth population, % of total working age Youth population, total, '000 e/f = BMI estimate/forecast. Source: World Bank, UN, BMI Table: Australia's Rural And Urban Population, 1990-2020 1990 1995 2000 2005 2010 2013e 2015f 2020f Urban population, % of total 85.4 86.1 87.2 88.2 89.0 89.5 89.8 90.4 Rural population, % of total 14.6 13.9 12.8 11.8 11.0 10.5 10.2 9.6 Urban population, total, '000 14,601 15,606 16,787 18,096 19,950 20,888 21,477 22,992 Rural population, total, '000 2,496 2,518 2,472 2,425 2,454 2,455 2,446 2,447 e/f = BMI estimate/forecast. Source: World Bank, UN, BMI © Business Monitor International Page 92 Australia Information Technology Report Q4 2014 Methodology Industry Forecast Methodology BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and causal/econometric modelling. The precise form of 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. Common to our analysis of every industry is the use of vector autoregressions. They allow us to forecast a variable using more than its 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. We mainly use OLS estimators and in order to avoid relying on subjective views and encourage the use of objective views, BMI uses a 'general-to-specific' method. BMI mainly uses a linear model, but simple nonlinear models, such as the log-linear model, are used when necessary. During periods of 'industry shock', for example poor weather conditions impeding agricultural output, dummy variables are used to determine the level of impact. Effective forecasting depends on appropriately selected regression models. BMI selects the best model according to various different criteria and tests, including but not exclusive to: ■ R2 tests explanatory power; adjusted R2 takes degree of freedom into account; ■ Testing the directional movement and magnitude of coefficients; ■ Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value); ■ All results are assessed to alleviate issues related to auto-correlation and multi-collinearity;. © Business Monitor International Page 93 Australia Information Technology Report Q4 2014 BMI uses the selected best model to perform forecasting. Human intervention plays a necessary and desirable role in all of BMI's industry forecasting. Experience, expertise and knowledge of industry data and trends ensure analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not. Sector-Specific Methodology A number of criteria 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 affected by consideration of a variety of internal and external political and economic factors. Within best-practice techniques of time-series modelling, our 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 our own macroeconomic and demographic forecasts. 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 © Business Monitor International Page 94 Australia Information Technology Report Q4 2014 Union (ITU), officially released company results and figures, and international and national industry news agencies. Risk/Reward Ratings Methodology BMI's Risk/Reward Ratings (RRR) provide a comparative regional ranking system evaluating the ease of doing business and the industry-specific opportunities and limitations for potential investors in a given market. The RRR system divides into two distinct areas: Rewards: Evaluation of sector's size and growth potential in each state, and also broader industry/state characteristics that may inhibit its development. This is further broken down into two sub categories: ■ Industry Rewards (an industry-specific category taking into account current industry size and growth forecasts, the openness of market to new entrants and foreign investors, to provide an overall score for potential returns for investors). • Country Rewards (a country-specific category, factoring in favourable political and economic conditions for the industry). Risks: 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. This is broken down into two sub categories: ■ Industry Risks (an industry-specific category whose score covers potential operational risks to investors, regulatory issues inhibiting the industry and the relative maturity of a market). • Country Risks (a country-specific category in which political and economic instability, unfavourable legislation and a poor overall business environment are evaluated to provide an overall score). We take a weighted average, combining industry and country risks, or industry and country rewards. These two results in turn provide an overall Risk/Reward Rating, which is used to create our regional ranking system for the risks and rewards of involvement in a specific industry in a particular country. For each category and sub-category, each state is scored out of 100 (100 being the best), with the overall Risk/Reward Rating a weighted average of the total score. As most of the countries and territories evaluated are considered by BMI to be 'emerging markets', our rating is revised on a quarterly basis. This ensures the rating draws on the latest information and data across our broad range of sources, and the expertise of our analysts. © Business Monitor International Page 95 Australia Information Technology Report Q4 2014 Sector-Specific Methodology In constructing these ratings, the following indicators have been used. Almost all indicators are objectively based. Table: It Risk/Reward Ratings Indicators Rationale Rewards Industry IT market value, US$bn Denotes breadth of IT market. Large markets score higher than smaller ones. Sector value growth, % year-on-year (y-o-y) 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 Urban-rural split Urbanisation is used as a proxy for development. Mainly rural states score lower. GDP per capita, US$ A high GDP per capita supports long-term industry prospects. Overall score for Country Rewards is also affected by the coverage of the power transmission network across the state. Risks Industry Intellectual property (IP) laws Markets with fair and enforced IP regulations score higher than those with endemic counterfeiting. ICT policy Subjective evaluation of official policy towards IT development, as enshrined in statute and tax code. Country Short-term external risk Rating from BMI's Country Risk Ratings (CRR). It 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 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 Rating from CRR to denote ease of trading with the state. Legal framework Rating from CRR denotes the strength of legal institutions in each state - security of investment can be a key risk in some emerging markets. Bureaucracy Rating from CRR denotes ease of conducting business in the state. Corruption 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 Page 96 Australia Information Technology Report Q4 2014 Weighting Given the number of indicators/datasets used, it would be wholly inappropriate to give all sub-components equal weight. The following weighting has been adopted: Table: Weighting Of Components Component Rewards Weighting, % 70, of which - Industry 65 - Country 35 Risks to 30, of which - Industry 40 - Country 60 Source: BMI © Business Monitor International Page 97 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. [...]... Monitor International Page 15 Australia Information Technology Report Q4 2014 SWOT Analysis - Continued reduce the attractiveness of these assets It remains to be seen if the recent implementation of a database to increase transparency around foreign-owned Australian assets will spur more regulation © Business Monitor International Page 16 Australia Information Technology Report Q4 2014 Industry Forecast... forecast for significant weakening of the Australian dollar against the US dollar over the forecast period, the IT market is forecast to grow at a CAGR of just 0.1% in US dollar terms 2014- 2018 © Business Monitor International Page 17 Australia Information Technology Report Q4 2014 2014 Outlook BMI forecasts the IT market will expand by 5.8% in local currency terms in 2014, to reach a value of AUD22.7bn... could squeeze vendor margins For instance, in early 2013 the Australian Government Information Management Office (AGIMO) consolidated its contracts with Microsoft through a single reseller to deliver cost savings of AUD100mn © Business Monitor International Page 21 Australia Information Technology Report Q4 2014 Australia GVA By Vertical (%) 2014f f - BMI forecast Source: BMI, National Statistics, World... Page 31 Australia Information Technology Report Q4 2014 Market Overview Hardware BMI forecasts the Australian computer hardware market value will increase by 3.6% in 2014 to a total of AUD8.2bn, although in US dollar terms we forecast a contraction of 1.3% due to depreciation of the Australian dollar The outlook extends over the medium as we forecast a compound annual growth rate (CAGR) of 3.2% 2014 to... expensive on average in Australia However, IT companies argued that higher Australian prices were not IT-specific They pointed to higher wages and distribution costs, and high prices charged by Australian channel agents © Business Monitor International Page 33 Australia Information Technology Report Q4 2014 Hardware Market (2011-2018) 10,000 7,500 5,000 2,500 0 2011 2012 2013e 2014f Personal computer... feature of the Australian economy which could position it as a leader in emerging technologies is the high labour costs in Australia that will generate demand for services that replace labour For instance, IBM's Ask Watson was adopted by ANZ Bank in H113 to enhance customer services and cut © Business Monitor International Page 19 Australia Information Technology Report Q4 2014 costs Such technology is... consumer electronics retailer JB Hi-Fi reported that sales in July 2014 fell by 5.5% year-on-year (y-o-y), mainly due to a significant slump in demand for new and replacement tablet computers We factored in a slowdown in © Business Monitor International Page 32 Australia Information Technology Report Q4 2014 tablet demand for 2014 in the 2013 reports, against broad consensus at the time, but the market may... cloud portfolio in Sri Lanka in April 2014, following the launch of Amazon Web Services the leading global cloud hosting provider - in December 2013 A continuation of this trend could see Sri Lanka's score improve over the medium term © Business Monitor International Page 30 Australia Information Technology Report Q4 2014 Table: APAC IT Risk/Reward Ratings - Q4 2014 Rewards Country Risks Industry Rewards... machine-tomachine communications, about which BMI holds a positive medium-term view © Business Monitor International Page 18 Australia Information Technology Report Q4 2014 In 2014, uptake of cloud services will continue to increase Surveys indicate that cloud computing is a priority for Australian CIOs, while the release of the government's cloud computing strategy in Q213 should also boost deployments Cloud.. .Australia Information Technology Report Q4 2014 Wireline SWOT Australia Wireline SWOT Strengths ■ Australia' s overall wireline sector is host to a large number of service providers, many of which offer a full range of voice, data and internet services . Q4 2014 www.businessmonitor.com AUSTRALIA INFORMATION TECHNOLOGY REPORT INCLUDES 5-YEAR FORECASTS TO 2018 ISSN 2041-7160 Published by:Business Monitor International Australia Information Technology Report. USB modem-supported services is growing. Australia Information Technology Report Q4 2014 © Business Monitor International Page 11 Australia Wireline SWOT - Continued ■ Australia& apos;s leading broadband. cut Australia Information Technology Report Q4 2014 © Business Monitor International Page 19 costs. Such technology is in the early stages of commercial deployments, but BMI believes that Australia could