bmi canada information technology report q2 2012

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Q2 2012

Publisd b Businss Mni Inninl Ld.

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INforMatIoN techNoLogy rePort

ISSN 2044-5555

Publisd b Businss Mni Inninl Ld.

caNaDa

INCLUDES BMI'S FORECASTS


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CANADA INFORMATIONTECHNOLOGY REPORT

Q2 2012INCLUDES 5-YEAR FORECASTS TO 2016

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: April 2012


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Canada Information Technology Report Q2 2012

Business Monitor International Ltd Page 2


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CONTENTS

Executive Summary ......................................................................................................................................... 5SWOT Analysis ................................................................................................................................................. 7

Canada IT Sector SWOT ........................................................................................................................................................................................ 7Canada Political SWOT ......................................................................................................................................................................................... 8Canada Economic SWOT ...................................................................................................................................................................................... 8

IT Risk/Reward Ratings ................................................................................................................................... 9Table: Regional IT Risk/Reward Ratings Q212 ................................................................................................................................................... 12

IT Markets Overview ....................................................................................................................................... 13IT Penetration ............ ............. ............. ............. ............. ............. ............. ............. ............. ............ ............. ............. ............. ............. ............. ..... 13Sectors And Verticals ........................................................................................................................................................................................... 17

Canada Market Overview ............................................................................................................................... 21Hardware ............. ............. ............. ............. ............. ............. ............. ............. ............. ............ ............. ............. ............. ............ ............. ............ 22Software ............................................................................................................................................................................................................... 25Services ................................................................................................................................................................................................................ 28Industry Developments .................... ............. ............. ............ ............. ............. ............. ............. ............. ............. ............. ............. ............ .......... 30

Industry Forecast ........................................................................................................................................... 31Table: Canada IT Sector Historical Data & Forecasts , 2008-2016 ............. ............. ............. ............. ............. ............ ............. ............. .......... 34

Industry Forecast Internet ............................................................................................................................. 35Telecoms Sector Internet Historical Data & Forecasts , 2009-2016.............................................................................................................. 35

Macroeconomic Forecast .............................................................................................................................. 37Table: Canada Economic Activity ............ ............. ............ ............. ............. ............ ............. .............. ............. ............ ............. ............. ............ 39

Competitive Landscape ................................................................................................................................. 40Hardware ............. ............. ............. ............. ............. ............. ............. ............. ............. ............ ............. ............. ............. ............ ............. ............ 40Software ............................................................................................................................................................................................................... 42Services ................................................................................................................................................................................................................ 44

Country Snapshot: Canada Demographic Data .......................................................................................... 46Section 1: Population ........................................................................................................................................................................................... 46Table: Demographic Indicators, 2005-2030 ........................................................................................................................................................ 46

Table: Rural/Urban Breakdown, 2005-2030 ....................................................................................................................................................... 47Section 2: Education And Healthcare .................................................................................................................................................................. 47Table: Education, 2000-2003 .............................................................................................................................................................................. 47Table: Vital Statistics, 2005-2030 ........................................................................................................................................................................ 47Section 3: Labour Market And Spending Power .................................................................................................................................................. 48Table: Employment Indicators, 2001-2006 .......................................................................................................................................................... 48Table: Consumer Expenditure, 2000-2012 (US$) ................................................................................................................................................ 49Table: Average Annual Manufacturing Wages, 2000-2012 ................................................................................................................................. 49


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BMI Methodology ........................................................................................................................................... 50How We Generate Our Industry Forecasts ............. ............. ............. ............. ............. ............. ............. ............. ............. ............. ............ ............ 50Transport Industry ............................................................................................................................................................................................... 50

Sources ..................................................................................................................................................................................................................... 51


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Executive Summary

BMI View: Canadian IT spending is expected to reach US$3.5bn in 2012, up 4%, with BMI downwardly

revising its forecast due to expectations of a macroeconomic cooling in H112. Government spending will

continue to be constrained by a focus on cutting costs, with cost reviews being conducted by Toronto and

Ontario, but there have been a spate of large tenders, highlighting continued opportunities within the

sector. BMI expects Canada's IT market to continue to report moderate overall growth in 2012, although

much will depend on the overall business environment.

Headline Expenditure Projections

Computer hardware sales: US$14.9bn in 2011 to US$15.2bn in 2012, +2.5% in US dollar terms.

Forecast in US dollar terms downwardly revised due to macroeconomic factors, although Canadian

PC sales reported positive growth in 2011.

Software sales: US$9.3bn in 2011 to US$9.8bn in 2012, +5.3% in US dollar terms. Forecast in US

dollar terms upwardly revised due to analyst modification but given the large public sector deficits,

vendors will need to provide clients with ways to reduce costs by increasing efficiency.

IT Services sales: US$2.14bn in 2011 to US$22.3bn in 2012, +4.5% in US dollar terms. Forecast in US

dollar terms upwardly revised due to analyst modification with the market shaped by a continued

move towards distributed computing and service-oriented architectures.

Risk/Reward Ratings: Canada's score was 70.7 out of 100.0. Canada ranks second in our latest RRR

table, behind the US, but still ahead of Latin American giants such as Brazil and Mexico. The country

ranked third for its Industry Rewards score, but its overall rating was boosted by a relatively high Country

Rewards score of 90.

Key Trends & Developments.

New outsourcing and IT services contracts in both public and private sectors have pointed to the

underlying demand potential, and growing interest in cloud computing services is another driver.

Canadian institutions in key IT spending sectors such as financial services, distribution and

transport will continue to embark on complex IT projects

Fiscal constraints faced by the Ontario government in particular represent a challenging

environment for vendors. Meanwhile Toronto authorities have also launched a Core Spending

Review targeted, which could have negative implications for IT spending. However a focus, by


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Ontario and other authorities, on deficit reduction through public services delivery reforms

should also potentially represent an opportunity for IT vendors.

Growing interest in cloud computing is expected, with Canada currently lagging the US and

some other advanced markets. The market in Canada remains fairly small. A 2011 survey

commissioned by Microsoft Canada found that nearly 73% of Canadian SMEs understood that

cloud-based services was a cost-effective delivery model, but that just 30% were investing in

such services.


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SWOT Analysis

Canada IT Sector SWOT

Strengths An affluent and technologically advanced IT market, worth an estimated US$44.7bn in2011.

The federal digital economy strategy and Chief Information Officer Branch help driveinformation society development.

Weaknesses IT spend per capita is less than the US level.

Levels of IT investment are higher in greater Montreal than in the rest of the country.

The 32% pirated software rate is relatively high for a developed market.

Government focus on purchasing components rather than services, due to problems in

the past with large projects.

Opportunities Ultra-thin notebooks, or power-saving notebook computers, can bridge the dividebetween netbooks and fully-fledged notebooks.

Demand for industry-specific solutions in verticals such as health, education, mobiletelecoms and retail.

E-health is a key area of opportunity, with US$500mn funding pledged in the 2009budget.

Growing internet/broadband penetration as government continues to fund itsBroadband Canada programme.

Move of telecoms operators such as Rogers Communications into the PC retail space.

More investment expected to be in utility software and serviced-oriented architecturesrather than traditionally packaged PC software.

Demand for outsourcing reaching beyond traditional sectors, such as financialservices, to other sectors, such as telecoms, auto and chemical.

Threats Ontario government IT spending may be inhibited by fiscal restraints.

Falling prices may undermine margins and profitability.


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Canada Political SWOT

Strengths Stable long-term parliamentary democracy with vigorous political culture. High

economic growth and moderate unemployment increase the potential for consensualpolitical dialogue and reduce chances of polarisation.

Weaknesses A tradition of Qubcois separatism has in the past divided the political culture andled to long periods of introspective constitutional negotiations between the federalcentre and the provinces.

Opportunities Although the deadlock remains unbroken, Canada still has a chance to launch afresh initiative to resolve bilateral disputes with the US.

Threats With the US a target for international terrorist attack, Canada is simultaneously atarget by geographic and political association as well as vulnerable to the

shockwaves (as it was to the fallout from the 9/11 attacks in 2001).

Canada Economic SWOT

Strengths Advanced high-tech industrial economy, with high living standards and abundantnatural resources. Close integration with the US economy through the NorthAmerican Free Trade Agreement, which has triggered a dramatic increase in tradeand investment in the decade since 1994.

Weaknesses Vulnerability to US downturns and a dependence on commodity-related industries asa major driver of growth.

Opportunities Assuming the global economy and emerging markets in particular sustains itsrecovery, over the long term, Canada is well placed to benefit from high internationaloil prices as a net oil exporting country. With a recent history of budget surpluses anda low debt-to-GDP ratio, the country is uniquely positioned to prepare for the longer-term fiscal challenges facing most advanced economies, such as the loomingpensions crisis.

Threats High household indebtedness threatens to crimp private consumption. The federalstructure, with individual provinces sometimes pulling in different directions, couldcreate new and unexpected calls on the federal budget and risk eroding the fiscaldeficit.


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IT Risk/Reward Ratings

BMI's Americas IT Risk/Reward Ratings (RRRs) compare the potential of a selection of the region's

markets over our forecast period to 2016. 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.

The US retains its top position in our regional rankings as by far the largest IT market in the region and

the world, accounting for about 25% of global IT spending. In the 'Limits of potential returns' arena,

Industry Rewards has fallen marginally while Country Rewards has not changed. This reflects our view

that the relatively strong growth witnessed in 2011 will slow slightly through 2012, while there has been

little change to the demography of the country.

The US is likely to retain its position at the top of our table through 2012, given the sheer size and

advanced nature of its IT market. However, in 2012, it is expected that the IT sector as a % of GDP will

drop 0.1pps, but return to its current level in 2013 (0.6%). We believe this year will be a stormy one for

IT firms, with economic uncertainty affecting IT investments.

However, there will be opportunities for expansion in this market, and one major possibility will be

demand from private and public sector organisations aiming to use cloud computing services. In 2012

further contracts for cloud computing provision are likely to be signed, while the rate of growth in

traditional big-spending IT verticals such as financial services, retail and manufacturing will depend on

confidence in a sustainable economic recovery.

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. It is likely to be the second fastest

growing market worldwide, second only to China.

Canada is in second place for another quarter in our IT RRRs. The country maintains this position from

Q112. The country's Industry Rewards score fell this quarter, however, as we predict the IT market to

deteriorate over the course of the year. The Canadian IT market revenues expanded by 6% in 2011, but

we believe this number will drop to just 0.2% in 2012, as the country struggles to bolster demand.

However, there may be growth in IT expenditure driven by Canada's broadband plan. One key initiative is

Broadband Canada, which has a mandate to expand broadband coverage to underserved areas. Further,

despite Canada being relatively mature, BMI believes software vendors across industries such as

consumer products, telecommunications, energy, engineering, construction, transport and food and


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beverage still have plenty of potential for growth. Growing interest in cloud computing is expected, with

Canada currently lagging the US and some other advanced markets.

Out of the Latin American countries, Brazil is the highest ranked IT market. We expect Brazil's growth

trajectory to stay strong throughout 2012 and beyond as the government continues to support the

widespread development of IT infrastructure, particularly in the telecoms sector. The Brazilian

Development Bank (BNDES) has made available a number of loans to telecoms firms looking to expand

into less developed regions of the country and as a result equipment vendors have capitalised on this.

Further, the country will continue to invest in the modernisation of services ahead of the World Cup in

2014 and Olympics in 2016. This will buoy up expenditure on IT services.

Mexico follows Brazil, and has enjoyed minor rises in Industry Rewards this quarter. This is the result of

strong H211 sales, although these remain less than half the size of Brazil's. However, we believe that

Mexican expenditure on IT is to grow at a double-digit compound annual growth rate (CAGR) in our

forecast period to 2016.

Brazil and Mexico together account for around 75% of PC sales in Latin America. Brazil's much bigger

market is already estimated to be the fifth largest PC market in the world. Despite this, 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.

Expenditure on IT projects in Brazil is likely to be very high over the coming years, as the country

promotes its national broadband plan, the PNBL, and also develops mobile network in more remote areas.

Further, the promotion of e-government services is likely to drive growth in business for technology firms

in the years to come.

Another driver of growth in the Latin American IT market is outsourcing. Given strong trade links

between Mexico and the US, Mexico stands to benefit from this growth, as seen in cities such as

Monterrey. However, due to the escalating drug-related violence in the city, many companies are

increasingly less willing to operate there. While we continue to believe it will remain a hub for

outsourcing, we believe these problems may impact on the potential for stronger growth in the market.

However, Brazil is also not without problems, with issues such as inequality and unnecessary bureaucracy

hindering rapid development of services.

Chile takes fifth place once again in our rankings. Chile experienced gains in its Country Risk and

Country Rewards scores, while there was no change in industry outlook. The country has an excellent

track record of fiscal discipline, although it may return to fiscal deficit in 2012 on the back of falls in

copper prices and an increase in public spending. Despite this, we do not see this as much of a threat and


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believe the counter-cyclical policies to stimulate private consumption in the country will continue to have

positive benefits to the IT industry.

President Sebastin Piera highlighted the importance of the information society in Chile in November

2012, when he underlined his 'Estrategia Digital' for the years ahead. Chile's fifth 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 11% until 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 2010

earthquake diverted consumer funds from technology to other priorities, but reconstruction offers

opportunities for government agencies to advance IT modernisation.

However, PC penetration is still relatively low below 20%. Chile is propelled to a relatively high

position in our RRRs due to the fact that it has the highest Country Risk rating of any of the Latin

American states. Despite this, there is notable room for expansion.

Peru is next in our rankings, but has suffered falls to its Country Rewards score. The market has a free

trade agreement with the US, which is likely to lead to an increase in demand for IT in the country. The

IT market represents approximately 0.8% of GDP, with the market worth US$1.4bn in 2011. CAGR is

high 11% and there is huge potential for growth in the market.

Argentina is seventh in our rankings, but like Peru, suffered falls in our Q212 rankings. This was due to a

reduction in Industry Rewards scores, the result of a decrease in projected CAGR from 15% last quarter

to 11% from 2011-2015. There are strong doubts that the expansionary fiscal policy eagerly pursued by

the government is sustainable. This may pose a serious threat to public expenditure on IT over the coming

years, despite government tenders appearing to dominate the market in 2012.

Most IT expenditure in Argentina happens in Buenos Aires, where approximately one quarter of

computer sales take place. IT spending is driven by the expanding availability of credit, increasing

broadband penetration and social policies to promote the information society. However, escalating

inflation is causing costs to rise, deterring investors and raising doubt over the sustainability of the

government's profligate spending habits.

In eighth place is Colombia, which experienced a marginal rise in Industry Rewards, but a larger fall in

Country Rewards, which overall brings its scores down. The country had been enjoying strong growth in

consumer electronics sales, but this is beginning to slow down. While we expect the Colombian IT

market to be worth US$3bn in 2012, lower levels of investment in the sector when compared to its peers

puts Colombia nearer the bottom of our RRRs.


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However, we believe the market has great growth potential, and the economy continues to grow strongly.

With PC penetration only at 10% of the population, there exist great opportunities to expand on this.

There are also growth opportunities through government programmes, and it is clear that these are a

priority for the Santos administration. The president has outlined objectives to expand infrastructure in the

country, promoting the network rollout while increasing access to the internet. The government aims to

triple the number of municipalities from 200 to 700 by 2014, and increase internet connections from

2.2mn to 8.8mn by the same year. This growth will have future benefits for the Colombian IT market and

we would expect to see the country climb in our table over the coming years.

At the bottom of the ratings is Venezuela, and unfortunately we do not expect the Venezuelan market to

enjoy anywhere near the same growth as we predict for Colombia. The country suffers severe balance of

payments problems, with rising concern over government appropriation and potential devaluation of the

fixed exchange rate a mounting possibility. While the government is doing its best to avoid capital flight

in attempts to avoid this devaluation, the financial account deficit continues to grow and poses an ever

greater threat to the stability of the bolvar. This serves to deter investors from Venezuela, and the IT

market will be reliant on public programmes to sustain it. We believe there will be flat or negative growth

over our forecast period, despite improvements in PC penetration, which will arise from programmes to

promote low-cost PCs for low income households.

Table: Regional IT Risk/Reward Ratings Q212

Limits of potential returns Risks to realisation of returns

IndustryRewards

CountryRewards Limits

IndustryRisks

CountryRisk Risks IT RRR

RegionalRanking

United States 82.5 90.0 85.1 50.0 59.2 55.5 76.25 1

Canada 65.8 90.0 74.3 50.0 70.3 62.2 70.66 2

Brazil 73.3 70.0 72.2 45.0 43.7 44.2 63.78 3

Mexico 65.8 60.0 63.8 52.5 60.5 57.3 61.84 4

Chile 55.8 70.0 60.8 50.0 73.5 64.1 61.78 5

Peru 55.0 50.0 53.3 45.0 67.9 58.7 54.89 6

Argentina 46.7 70.0 54.8 45.0 53.4 50.0 53.39 7

Colombia 53.3 50 52.1 47.5 56.3 52.75 52.34 8

Venezuela 38.3 70.0 49.4 40.0 47.6 44.5 47.95 9

Scores are weighted as follows: 'Rewards': 70%, of which Industry Rewards 65% and Country Rewards 35%; 'Risks': 30%, of whichIndustry Risks 40% and Country Risks 60%. The 'Rewards' rating evaluates the size and growth potential of a telecoms market in anygiven state, and country's broader economic/socio-demographic characteristics that impact the industry's development; the 'Risks'rating evaluates industry-specific dangers and those emanating from the state's political/economic profile, based on BMI's proprietaryCountry Risk Ratings that could affect the realisation of anticipated returns. Source: BMI


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IT Markets Overview

IT Penetration

A mixed regional picture is found with relation to internet penetration. In the US and Canada, internet

penetration in 2011 was estimated at 83.4% and 85.5% respectively. In Latin America, the highest rate in

2011 was in Colombia (53.2%), having experienced solid recent progress on this indicator. One feature of

Latin America is that a large amount of internet access occurs outside the home. For example, data

suggest 68% of Mexican internet users go online from places such as schools, workplaces and internet

cafs. Recent data from Peru suggest nearly 75% of internet users use a public access point.

The fastest growth in internet penetration is expected in Peru, while Brazil and Colombia will also see a

solid advance. Dial-up technology is still the dominant access method. However, the number of

broadband subscribers continues to increase, with progress expected in all markets. Brazil's National

Broadband Plan announced in May 2010 should help to drive future growth in demand for IT products

and services.

Canada was estimated to have the region's

highest broadband penetration in 2011, of

42.8%, which should rise to 58.5% by

2015. Broadband penetration in the USwas

estimated at 28.1% in 2010, and is forecast

to reach 32.5% by 2015.

Meanwhile, in Latin American markets,

broadband penetration is on course to

reach as high as 23.1% in Argentina and

18.7% in Mexico, and to pass 10% in

Brazil, Chile, Colombia and Venezuela

within our forecast period. However, much

broadband penetration growth is now

being driven by mobile broadband users, thanks to the continued expansion of 3G mobile services across

the region.

Across Latin America, low average incomes and low PC penetration rates restrain information society

development, and thousands of towns and villages still lack access to information communication

technology (ICT). While some cities and regions stand out, there is a general pattern of underdeveloped

potential, with IT spending as a percentage of GDP well below 2% in countries covered by BMI.

Broadband Penetration

Per 100 Population

e/f = estimate/forecast. Source: BMI


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However, government initiatives and growing PC affordability are now driving improvements on many

ICT indicators. In Brazil, a National Broadband Plan announced in May 2010, and modernisation ahead

of Brazil's hosting of the 2014 FIFA World Cup and 2016 Summer Olympics, should help to drive ICT

utilisation.

Growing affluence has brought computers within the reach of a greater proportion of the population. PC

penetration is around 30% in Brazil, but is set to rise to above 40% by 2015, while Argentina is forecast

to progress from a current rate of 25% to at least 32% in 2015. A similar situation prevails in Chile and

Mexico, where PC penetration is estimated to be below 25%. Colombia's PC penetration reached 12.8%

as of mid-2009, surpassing the government's previous 2010 target of 10.8%. BMI estimates PC

penetration in Peru could reach 25% within the forecast period, from less than 20% currently.

ICT initiatives are central to the development plans of many regional governments. In 2010, the

Argentine government launched a tender to provide 3mn PCs to public schools nationwide. In Brazil,

thousands of rural schools have received computers and in December 2010, Brazilian states and

municipalities began to receive funds awarded under the 'computer for every student' programme. In

Chile in 2010, the government launched a programme called 'Yo Eiljo mi PC' ('I choose my PC').

Meanwhile, Colombia's Zona Clic programme is expected to involve the requisition of as many as 90,000

computers over the next few years.

Most governments also have a particular focus on promoting IT use by small and medium-sized

enterprises (SMEs), as Latin American SMEs typically invest less in IT than comparable companies

elsewhere. A recent study by the Getulio Vargas Foundation found that Brazilian companies on average

spent around 5.5% of revenues on IT investments, compared with 7% globally. Studies in Chile have

shown that around a quarter of companies have no computers.

Chile's state development agency, the Corporacin de Fomento de la Produccin de Chile (CORFO), has

launched a programme to provide funding for projects that implement ICT for local SMEs, and similar

initiatives have been seen in Mexico and elsewhere.


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Market Growth And Drivers

Across the Americas, in 2011, a greater

range of financing options for consumers

and more flexible terms from retailers will

be the main drivers of consumer IT

spending growth. Key IT market drivers

will include growing mobile and fixed

broadband penetration, product innovation

such as feature-rich netbooks, technology

innovation such as 3G technology and

services, and economic recovery.

However, in Canada and the United States

consumers remain in a phase of

retrenchment thanks to the often stretched

state of household balance sheets.

Businesses are expected to increase their

IT investments in 2011 thanks to a general

economic recovery and improved credit

availability. There will be a boost from

tenders previously delayed as a result of

the economic situation. Meanwhile,

improved bank profitability should support

more demand from this key IT-spending

vertical. Migrations to Microsoft's

Windows 7 operating system, and new

Intel core technology, should help to

trigger new cycles of hardware upgrades,

but in the US and Canada, some of this

pent-up demand may not be realised in2011 due to doubts about the strength of the economic recovery. Across the region, small and medium-

sized enterprises (SMEs) have great potential to drive enterprise application spending over the next few

years. Brazil still has an estimated 400,000 small businesses that do not have more than a very basic IT

system. In the US market, too, in early 2011, there were indications of improved SME confidence.

In some countries such as Colombia, government programmes and growing computer affordability will

support more spending on IT products and services. In Argentina in 2011, a number of IT tenders at

federal and provincial levels were expected to be bid on ahead of October's presidential elections. The

IT Market Sizes

2011e (US$mn)

e = forecast. Source: BMI

IT Market Sizes

As % Of National GDPs



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Brazilian government's US$344mn modernisation strategy should mean enhanced IT spending in 2011

and over the next few years.

Some structural risks pertain to our forecast scenario. Many Latin American markets, from Argentina to

Mexico, are characterised by significant income and geographical disparities. Mexico's underpenetrated

south east and Pacific regions are expected to offer growth opportunities over BMI's five-year forecast

period, particularly in the south east. The Argentine market is dominated by the capital Buenos Aires,

which has higher per capita income and

education levels compared with the rest of

the country.

Brazil's IT market also has a distinct

regional structure, with most spending

accounted for by the south east region,

which includes So Paulo as well as Rio de

Janeiro. So Paulo alone accounts for

around 35% of spending and Rio de

Janeiro, Esprito Santo and Minas Gerais

for 25%. Brazil remains on course to

become one of the top four computer

markets as an expanding economy lifts

millions into a middle class. The

fundamentals of rising computer

penetration and growing affordability should keep the market on an upward path.

Colombia's IT market continued to grow during the global economic slowdown as government

programmes and growing computer affordability help to sustain spending on IT products and services.

Meanwhile, Chile retains some strong IT market fundamentals including consumer affluence and a

relatively favourable business environment. Mexico's close economic ties to the US represent

vulnerability as well as opportunity. There are opportunities in key IT verticals such as financial services,telecoms and government, with other growth sectors including healthcare, utilities and SMEs.

Aside from regional trends, particular factors are forecast to market demand in individual markets.

Infrastructure investments following 2009's award of the 2016 Olympic Games to Rio de Janeiro is

expected to drive new Brazilian market spending on IT systems and solutions, as happened in South

Africa when it hosted the 2010 FIFA World Cup. In Venezuela, the steep devaluation of the bolvar for

non-essential imports such as computers will depress spending as consumers grapple with runaway

inflation and the attendant erosion of real wages. Meanwhile, following the Chilean earthquake,

rebuilding began apace in H210.

IT Markets Compound Growth

2011e-2015f (%)



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The largest IT market in the region is, vastly, the US, with spending estimated at US$529.3bn in 2011,

while Canada is a distant second with US$44.7bn. Brazil is estimated at US$27.8bn in 2011, making it

the largest IT market in the Latin American region, and a major global market in its own right. Mexico is

the second largest Latin American market with an estimated value in 2011 of US$14.4bn. Argentina and

Brazil are set to be the fastest-growing markets with projected 2011-2015 compound growth of 78% and

66% respectively. This compares with a compound growth rate for the United States over the same period

of 22%. The slowest growing market is forecast to be Venezuela, with a -3% growth rate in US dollar

terms.

Sectors And Verticals

Hardware accounts for less than one-third of IT spending in the United States (27%). In contrast, Latin

American IT markets remain hardware centric, with hardware accounting for between 43% (in Brazil)

and 67% (in Venezuela) of the total spending in these markets.

Sales of computer hardware are projected to report solid growth in 2011, consolidating a strong PC

market rebound in 2010.However, in all markets spending on software and services is projected to

increase its share of the IT spend by 2015.

Notebook sales are growing much faster than the PC market as a whole, but there will be intensifying

competition for PCs from tablets and smartphones, and a fall-off in netbook demand. 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.

Tablets will be a growth area across the region in 2011, with robust sales of the first generation iPad in

2010 followed by strong early interest in the iPad2 ahead of its April 2011 launch. In the US market, a

Morgan Stanley report in H111 found that some 51% of CIOs expected to buy tablets for their

employees in 2011. However, tablets, at prices of US$400-800, are expensive relative to average salaries

in most Latin Americas countries. The Latin American tablet market should receive a boost in 2011 from

expanding locally based production of tablets, in Argentina, Brazil and elsewhere. In Brazil, the

Communications Ministry has suggested the inclusion of tablets in digital inclusion programmes.

With the rise of tablets, the netbook surge may have reached a plateau in most markets, with some

vendors reporting a sharp drop in 2010. In 2010, Canadian netbook sales were down by around 25%

compared with the previous year. One additional pan-regional driver both of increased notebook sales and

of lower prices is the move of telecoms operators into the PC retail space.


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Software is estimated to account for 12-19% of IT spending in Latin American markets covered by BMI,

compared with 29% in the United States. Despite the economic downturn, there are expected to be

opportunities for software vendors in most markets. Across the region, companies are investing

to improve decision making and optimise performance. Mobility, smart devices, broadband and cloud

services are among the trends encouraging more software spending by Mexican SMEs, which have to

deal with increasing data flow. Migrations to Microsoft's Windows 7 operating system will continue to

drive revenues in 2011. As of July 2010, around 500,000 Windows 7 licences were estimated to have sold

in the Argentine market.

Some markets, particularly Venezuela, will be influenced by their governments' drives to promote open

source software. Following criticism of the initial programme, the second phase of Argentina's Mi PC

was widened to offer consumers the option of purchasing PCs with Linux operating systems. In the US

the 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.

In general, enterprise resource planning (ERP) and other e-business products still dominate the Latin

American enterprise software market, but vendors are also looking to other areas where faster growth is

possible. In Argentina, ERP solutions are estimated to represent more than 80% of the enterprise software

total. Customer relationship management (CRM), the next largest category, is still less than 10% of the

total. Demand for ERP solutions will remain robust in the near term due to the large potential market

represented by SMEs in many parts of the country.

Vendors will increasingly look, however, to applications such as CRM and business intelligence, where

faster growth is projected. The business intelligence segment is another strong performer, with sales of

databases growing steadily. High single-digit growth is forecast in 2011, as data proliferation continues to

be a priority issue for chief technology officers, fuelled by an uptick in merger and acquisition (M&A)

activity and new regulations. Looking ahead, security software also should provide opportunities, with

some demand for more sophisticated security solutions.

Software-as-a-service (SaaS) has enjoyed steady growth in most markets, and improved broadband

infrastructure will assist the popularisation of the rented software model. Brazil is thought to be one of the

most promising regional markets for the SaaS model, with growing demand in sectors such as retail,

finance and healthcare. There are estimates that around 50% of Mexico's large companies have conducted

cloud pilots. In Chile, too, vendors have reported that large companies have been the most enthusiastic

early adopters of cloud solutions.


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Market Structure (% Of Total IT Market)

2011e 2015f



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Canada Market Overview

Government Authority Chief Information Officer Branch

Chief Information Officer Corinne Charette

Canada's Chief Information Officer Branch (CIOB) has a brief to provide strategic direction and

leadership for information management and IT in the government of Canada. The institution of the CIOB

has been credited with helping Canada to regularly achieve a leading position in global surveys of e-

government development.

The CIOB works collaboratively with other federal government departments and agencies. Specific tasks

with which the CIOB is charged include policy development and monitoring and management oversight,

as well as community development and capacity building initiatives in information management, IT,

identity management and security.

Background

Canada's IT market including computer hardware, packaged software and IT services was valued at

US$45.6bn in 2011, compared with an estimated value of US$529.3bn for the US market that year.

IT services is the largest IT market segment in Canada, accounting for around 46% of spending in 2011.Software was valued at US$9.3bn that year, equivalent to around 20% of spending. Computer hardware,

including PC hardware and accessories, comprised 34% of spending.

Canadian IT spend per capita was estimated at around US$1,336 in 2011. However, this still trailed that

of the world's largest IT market, the US, where the equivalent figure in 2011 was US$1,706. According to

data from the Information Technology Association of Canada (ITAC), Canadian SMEs still lag behind

their US counterparts in terms of ICT investment, with half of Canadian SMEs having two or fewer ICT

staff on their payroll.

Canada is an affluent and technologically advanced country, where many businesses have a history of

multiple generations of IT investments. The market benefits from sophisticated IT and

telecommunications infrastructure, as well as a relatively affluent population that can afford the latest IT

products.

The Greater Montreal region accounts for a high proportion of IT investment, due to its concentration of

large foreign and domestic companies. The provinces of Ontario and Alberta are the leaders in climate-


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friendly technology investments, according to the Conference Board of Canada, with such spending

projected to reach US$2bn in Ontario between 2010 and 2014.

The two largest IT verticals in Canada are financial services and government, with telecommunications

being another high-spending sector. Canada's regulation of its financial sector has helped to attract ICT

investments.

ICT Sector

The ICT sector is one of the largest economic sectors in Canada and accounts for around 5% of GDP,

according to ITAC. Around 572,500 people are employed in the sector, with the Greater Montreal area

having the largest amount of people employed by the sector. Canada's largest ICT companies account for

around 70% of the sector's jobs. Industry revenues were estimated at around US$155bn, with US$30bn in

exports and US11bn in capital expenditure annually.

Major domestic ICT industry segments include telecommunications and internet service, represented by

Canadian multinationals such as Nortel. Other segments include ICT consulting, hardware,

microelectronics, software and electronic content. Canadian ICT exports contribute around US$30bn

annually to the Canadian economy, while annual research and development spending by the industry is

around US$11.8bn.

Hardware

BMI forecasts that Canada's addressable computer hardware market will be worth around US$15.2bn in

2012, up from an estimated US$14.9bn in 2011. Total PC revenues including notebooks and desktops and

accessories are estimated at US$6.9bn for 2011 and are expected to rise to US$7.2bn by 2016, at a dollar

CAGR of around 1%.

Market Trends

Canadian PC sales are forecast to grow by around 2.5% in 2012. BMI expects restraint in the consumer

segment, due to intensifying competition for PCs from tablets and smartphones, the slackening of the

netbook trend and price erosion. Consumers also remain in a phase of retrenchment thanks to the

increasingly stretched state of household balance sheets.

BMI forecasts 2012 PC sales to come in at around 7.3mn units. The 2011 growth rate of about 1%

suffered from base effects compared with 2010, when the market bounced back strongly thanks to pent-

up demand in the wake of the global economic crisis. However, Canada still managed to defy the negative

PC sales trend in other mature markets to remain in positive growth territory. In Q411, strong growth in

mobile computer sales pushed Canada PC sales into a net gain for the year, despite further weakness in

desktop sales.


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In H111, around 3.7mn PCs had been sold in the Canadian market, as retail demand continued to be fairly

strong. However, sales were flat or slightly negative compared with the record sales recorded in 2010.

Notebooks were the main driver in the first half of 2011, and notebook shipments recorded year-on-year

growth, fuelled by a growing commercial segment preference for notebooks. Commercial updates helped

keep overall growth on track.

Canadian PC sales had grown particularly strongly in 2010, with unit sales in H110 estimated by BMI at

more than 3mn units, representing at least 15% growth on the same period of 2009. In the first half of the

year, sales were boosted by a revival of the business PC, with both desktops and notebooks posted

double-digit shipments growth in Canada. Shipments growth was in high single digits H210,

consolidating gains in the first half of the year, as the market posted record shipments. The strongest

growth was in the desktop segment, as corporate procurements rebounded following the global economic

crisis of 2008-2009.

In 2012, the SMB segment is expected to be one of the fastest-growing areas of the market, after

reporting double-digit growth in H211. The business PC market received a boost from computer hardware

tenders previously delayed due to the economic situation. Migrations to Microsoft's Windows 7

operating system have the potential to continue to sustain the current cycle of hardware upgrades.

The federal government's stimulus measures allowing business tax payers to expense all of the value of

their investment in computers and systems in one year is expected to have a major impact on the IT

market over the next two years. Much, though, will depend on business confidence in the economic

recovery.

The economic situation had a particular impact in 2009 on PC demand in the business segment. The

replacement rate for desktop PCs stretched from four years to five years, and for notebooks to around

three years, due to the economic uncertainty. Lower business demand was to some extent compensated

for by continued strong performance in the consumer PC segment, although, due to price erosion, value

performance was far more modest.

Segments

Notebooks accounted for a record high of more than 70% of PC shipments in H211, up from around 60%

in 2010. The increased share was largely due to a growing preference for notebooks in the business

segment a traditional stronghold of the desktop. Notebooks had comprised around 60% of PC sales in

the first half of 2010. In Q110, notebooks were the main PC market growth driver. Notebooks had already

surpassed 50% of PC unit sales in 2008, comprising around 52% of shipments. Lower prices in the

notebook segment, driven by the popularity of cheap netbooks, also led to an expanded price differential

with desktops.


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Meanwhile, desktop sales were down by around 10% in some quarters of 2011, due to the growing

demand for portable computers. Desktops units shipments had rebounded in the second half of 2010,

after suffering a further shipments decline in H110 of around 3%. This followed a steep decline in

desktop sales in 2009, particularly in H109, due to sluggish demand from the business sector and an

increased demand for mobility. Average desktop prices reached about US$200 more than an average

notebook. This was partly driven by vendors that saw the desktop market as becoming more of a premium

market for users who wanted to do more things with their computers. However, the market rebounded in

2010, with double-digit shipment growth, thanks to increased business demand.

In 2010, market research firm IDC reported that Canadian netbook sales were down by around 25%

compared with the previous year. In the first half of the year, sales fell by around 250,000 units, in a

growing PC market, compared with the same period of 2009. Netbooks were a key driver of PC sales in

2009, but the netbook growth trajectory stalled in 2010 as the price differential with fully featured

notebooks becomes less significant. Meanwhile, netbooks and notebooks face competition from other

form factors. 2010 saw the emergence of tablet notebooks, spearheaded by Apple's iPad.

Tablets

After going on sale in Canada in May 2010, initial consignments of the iPad quickly sold out at leading

electronics retail outlets. Dual-capability Wi-Fi and 3G-compatible iPads were reported to be more

popular with Canadian consumers than Wi-Fi only models. Demand for tablets should continue to grow

as consumers shift their social networking habits from smartphones and PCs to tablets.

The much-hyped iPad2 was due to be launched at Canadian stores 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 such as 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 being 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 overtake desktops.

As of end-2010, there was no clear evidence that tablets had significantly impacted on the Canadian PC

market. However, it is estimated that tablet sales could have been 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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Drivers

The consumer segment now accounts for almost 60% of PC sales, up from 40% a few years ago. A future

industry trend is likely to be vendor concentration on ultra-thin notebooks, or power-saving notebook

computers, which can potentially bridge the divide between netbooks and fully fledged notebooks.

Netbooks are also likely to be enhanced, with larger screens and hard-drive sizes.

Canadian businesses remained cost-sensitive in 2011. A survey conducted in H110 by IDC found that

45% of PC purchases from Canadian SMEs were made through retail outlets rather than specialised IT

firms with customisation capabilities.

Telecommunications Companies

One additional driver of both increased notebook sales and lower prices is the move of telecoms operators

such as Rogers Communications into the PC retail space. With increasing mobile and fixed broadband

penetration, notebooks and netbooks have become popular wireless connectivity options for consumers.

In 2010, telecoms operators moved into the emerging tablet notebook market to attract new customers

and drive data usage. Canadian telecoms companies competed to offer bundling deals involving Apple's

iPad. Rogers and Bell were both offering plans that gave users 250MB of data for CAD15 per month, as

well as a high-end plan that offered 5GB of data for CAD35 per month. In Q410, Rogers announced that

it would offer Samsung's Android-operating system-based Galaxy Tab and there was speculation that it

would also offer Dell's rival Streak tablet device.

Telecoms operators have also helped to fuel the popularity of netbooks. In 2009, Rogers launched a 30%

discount offer on the price of HP mini-netbook models to customers who signed a two-year data

agreement. Rogers targeted consumers and small business, and cooperated with leading electronics

retailers Best Buy and Future Shop to sell the computers and the data plans.

Software

In 2012, Canadian market software sales are projected by BMI at US$9.8bn and revenues are expected to

rise to US$15.5bn in 2016. Software CAGR for 2012-2016 should be in the region of 4.0%. Given the

uncertain economic climate and large deficits faced by the Ontario government, vendors will need to

provide clients with ways to reduce costs by driving efficiencies.

Overall moderate growth in budgets was 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. However,

Canada lags behind the US and some other markets in its adoption of cloud computing.


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Piracy

Despite Canada being an advanced market, it was estimated by the Business Software Alliance

(BSA) that in 2009, around 29% of software used in Canada was illegal or pirated. This represented a 3%

fall from a rate of 32% in 2008. However, 29% is still high for a developed country, with the US having

just a 20% rate. According to the BSA, total losses from illegal software in the Canadian market were

around US$2.2bn in 2008. The industry continues to call for Canada to make more progress in

establishing an environment of stronger copyright protection.

Market Trends

In 2011, economic recovery and migrations to Windows 7 provided a continued boost to the operating

system market. There was also a boost from systems upgrades deferred from 2009. The global recession

may also have given additional momentum to alternative software delivery models such as SaaS and

cloud computing, with a number of companies and public sector organisations announcing cloud

computing strategies and pilots in 2010.

With the economic and political crisis having an impact in both public and private sectors in 2009, some

vendors and their local partners reported a slowdown in business. More than 75% of Canadian market PC

software deployed in 2009 was estimated to have gone to consumers, as business procurements fell.

Spending opportunities in the finance segment will be driven by regulatory compliance, due to regulations

such as Basel II, HIPPA and the Sarbanes-Oxley Act, despite the global financial crisis. Mobile operators

are investing in new operating support systems to reduce costs and support delivery of new services.

Operating Systems

Microsoft has reported strong uptake of its Windows 7 operating system in the Canadian market with

adopters including Ricoh Canada, Bombardier Aerospace, MMM Group and the government of London,

Ontario. By all accounts, the Windows 7 launch went much more smoothly than that of its predecessor,

Windows Vista, 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.

The economic downturn added 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 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

software. BMI expects this trend to continue with the development of more support infrastructure for the

most important open source applications.


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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

Spending on applications such as ERP, 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, CRM and supply

chain management (SCM). ERP demand drivers include increasing operational efficiency, coordinating

global supply chains and modernising logistics and warehouse functions. Despite being a relatively

mature market, there still remains plenty of potential for ERP implementations in industries such as

consumer products, telecommunications, energy, engineering, construction, transport, food and beverage,

retail and metal working. Meanwhile, CRM is estimated to have an addressable market of around

U$400mn in Canada.

Meanwhile, data integration, business intelligence and other information-enabling software will continue

to be one of the fastest-growing product areas. The explosive proliferation of data has fuelled demand for

lifecycle data management solutions. Export-focused Canadian companies are looking for integrated tools

that enable them to share critical sales and operations data and reduce costs.

Security also continues to be a leading priority for Canadian software users, with growing awareness of

the need for sophisticated solutions. The growth of mobile e-commerce, social networking media and

cloud computing models can be expected to fuel this trend.

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. Flexibility,

cost and durability are priorities for Canadian SMEs. Major application areas such as ERP, CRM and

business intelligence, security and supply chain management are increasingly being delivered by this

method.

Cloud Computing

The economic crisis may have given lasting additional momentum to cloud computing, with sales in this

segment less affected by the downturn. The Canadian market remains relatively small, however, with the

addressable market estimated at around US$400mn in 2011, after a 2008 survey found that only 20% of

firms were considering this business model. Part of the problem appears to be apprehension about change,


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rather than lack of information about the potential benefits of the cloud model. A 2011 survey

commissioned by Microsoft Canada found that nearly 73% of Canadian SMEs understood that cloud-

based services was a cost-effective delivery model, but that just 30% were currently investing in such

services. 83% of SMEs surveyed said that they found it hard to keep pace with new technologies,

suggesting that simpler services may be required.

A more recent 2010 survey by consultancy KPMG seemed to indicate that Canadian cloud adoption was

relatively low, with usage of the cloud for business information storage at only 13% in Canada, compared

with 24% globally. This was, however, higher than the equivalent figure for the US, which was only 8%.

Demand for SaaS should grow, however, as smaller companies increasingly have to meet performance,

visibility and compliance standards previously expected of larger companies. In 2010-2011, notebooks

with embedded SaaS are expected to be of increasing interest to SMEs. SaaS potentially enables these

smaller companies to meet these needs cost-effectively, enabling them to compete and offer better

services. Canada's telecoms providers such as Rogers, Bell and Telus will partner with vendors to roll out

new cloud computing offerings. Meanwhile, governments at all levels are also expected to be a growing

market for cloud computing services as small towns and cities strive to cut costs and raise efficiency.

Meanwhile, Canadian consumers are also users of cloud computing services, although surveys suggest

that currently few use such services for business information. The report by consultancy KPMG found

that 72% of Canadian consumers use some sort of cloud computing services such as Hotmail and Google

Docs, compared to just 51% of Americans. Relatively low rates of adoption by Canadian businesses may

point to insufficient awareness about cloud services or security concerns.

Services

Canadian IT services spending is forecast to reach around US$22.3bn in 2012, up from US$21.4bn in

2011. The market continued to generate opportunities in 2011, after the economic crisis and political

uncertainty had an impact on services spending in 2009, with projects being put on hold. The

market is projected to approach US$25.4bn by 2016.

Market Trends

In 2011, vendors reported a pick-up in IT project flow in key spending verticals. Given the fiscal

constraints faced by the public sector, private sector demand for IT services should be relatively stronger.

One significant demand driver will be organisations looking for help to utilise efficiencies from cloud

computing, such as SaaS and infrastructure-as-a-service. Particular areas of opportunity for cloud

computing include banking and retailing as organisations in these fields look to save money on hardware

investments. BMI forecasts strong growth in hosting services and cloud computing spending in 2012.


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Overall, BMI projects that the Canadian addressable IT services market will grow by around 6% in 2012.

The most severely hit area during the global economic slowdown were softer project-type spending such

as consulting and software development, and these have the most potential for growth. Contractors were

cut and hiring frozen as customers postponed projects and cut back on short-term spending. Meanwhile,

maintenance spending held up relatively well, as companies increased spending on this area rather than

purchasing new systems.

Drivers and Segments

With growing pressure on prices and margins, Canadian companies are continuing to

examine outsourcing as a tool for reducing costs and boosting efficiency, with Ontario's largest beer

distributor, The Beer Store, among those initiating a new IT outsourcing arrangement. Meanwhile,

hosting services are expected to be one of the fastest-growing segments of the IT services market.

Federal and local governments are one vertical where strong interest in cloud services is being expressed.

Despite the long border with the US, the development cross-border cloud services may be restrained by

uncertainties about differential regulations on the two sides of the border concerning security and data

privacy. A major driver of demand for private cloud services is forecast to be the device proliferation,

which sees growing numbers of employees deploying their own personal devices, such as tablets and

smartphones, and using public cloud applications. This makes it harder for organisations to keep track of

documents and related revisions.

IT services account for at least 46% of total Canadian IT spending. Application services are the biggest

part of this, reflecting the maturity of the market. An evolution in Canadian government IT procurement

is likely over the next few years, with the emphasis shifting back towards procurement of services. It is

estimated that 40% of the public sector is due to retire over the next five years, creating a shortfall of

skills, resources and experience.

Meanwhile, the fiscal pressures faced by Ontario and other governments, with stimulus spending having

added to huge deficits by Canadian standards, should drive a focus on being more cost-effective through

the use of outsourced services. However, the Ontario healthcare tender indicated that major projects will

continue to be commissioned.

Despite the financial crisis, some elements of bank spending were relatively immune, particularly those

driven by regulatory compliance. The need to cut costs may also encourage banks looking to streamline

and consolidate datacentres, and vendors have reported little decline in demand in this area. In 2010,

financial services giant Manulife Financial awarded a new multimillion-dollar IT services contract.

Telecoms is another big spending IT vertical, with mobile operators investing to expand capacity and roll

out new services.


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Outsourcing, which is to some extent countercyclical, was generally less affected, even if the view that

recession actually acts as a driver for outsourcing spending does not necessarily hold up. As

companies have come under cost pressures, they may be more tempted to use outsourcing as a way to

reduce costs.

Industry Developments

Core Spending Review

In 2011, the Toronto government launched a controversial Core Service Review to determine areas for

cost savings. The government faces a challenging fiscal environment and this will continue to act as a

restraint on IT spending. The review was a consultant-led process, which involved public consultations in

May and June 2011.

Meanwhile, Canada's biggest province, Ontario, also faces severe budget challenges. In February 2012,

the province's Finance Minister unveiled severe austerity proposals centred on eliminating Ontario's

deficit, in part through the reform of public services delivery.


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Industry Forecast

The Canadian addressable domestic market for IT products and services is projected by BMI to reach

US$47.4bn in 2012 and US$52.8bn by 2016. Canadian PC sales are expected to report single-digit

growth in 2012, with unit sales projected by BMI at around 7.3mn units.

Government spending will continue to be constrained by a focus on cutting costs, with cost reviews being

conducted by Toronto and Ontario, but there have been a spate of large tenders, highlighting continued

opportunities within the sector.

Market Trends

BMI expects Canada's IT market to continue to report moderate overall growth in 2012, although much

will depend on the overall business environment. The IT market is forecast to grow around 4% in US

dollar terms in 2012, with the private sector stronger than the public sector, due to the latter's fiscal

constraints.

The 2011 growth rate suffered from base effects compared to that of the previous year's growth rate,

when the market bounced back strongly thanks to pent-up demand in the wake of the global economic

crisis. However, in contrast to many other mature markets, the Canadian PC market did at least remain in

positive growth territory. BMI expects continued consumer restraint, due to intensifying competition for

PCs from tablets and smartphones, the slackening of the netbook trend and price erosion.

Commercial segment IT spending should be driven by hardware refreshes, datacentre consolidation and a

growing interest in cloud computing. Migrations to Microsoft's Windows 7 operating system, new form

factors such as tablets notebooks and new Intel Core technology, have the potential to help sustain the

current cycle of business hardware upgrades. Microsoft has reported strong demand for Windows 7 in the

Canadian market.

Fiscal constraints faced by the Ontario government in particular represent a challenging environment for

vendors. Meanwhile Toronto authorities have also launched a Core Spending Review targeted, which

could have negative implications for IT spending. However a focus, by Ontario and other authorities, on

deficit reduction through public services delivery reforms should also potentially represent an opportunity

for IT vendors.

New outsourcing and IT services contracts in both public and private sectors have pointed to the

underlying demand potential, and growing interest in cloud computing services is another driver.

Canadian institutions in key IT spending sectors such as financial services, distribution and transport will

continue to embark on complex IT projects.


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Growing interest in cloud computing is expected, with Canada currently lagging the US and some other

advanced markets. Double-digit growth in hosting services is expected, as more service providers enter

the market.

Drivers

Key IT market drivers will include government ICT initiatives and stimulus measures, growing mobile

and fixed broadband penetration, product and technology innovation, as well as economic recovery. The

introduction of a 100% capital cost allowance rate for computer hardware and systems software acquired

between January 27 2009 and February 1 2011 was estimated to represent a potential US$$700mn boost

to the IT market in 2010.

The government's digital economic strategy provides a framework for IT market growth, with a number

of two-year programmes having been confirmed in the federal 2010 budget. One key programme is

Broadband Canada, which has received US$225mn of funding over three years to expand broadband

coverage to under-served areas. The growing popularity of fixed and mobile broadband networks and

applications has emerged as a significant IT market driver.

The popularity of consumer and business broadband applications, ranging from GPS to social networking

to cloud computing, has boosted demand for netbooks and notebooks, which are being increasingly

favoured for connectivity. In the consumer segment, due to consumers' preference to mobility, combined

with lower prices, notebooks will continue to be the driver of the consumer PC market. Telecoms carriers

such as Rogers have played a part in this by bundling subsidised netbooks with service contracts.

The government's stimulus package should drive spending by smaller businesses as they look to take

advantage of this funding. Total government stimulus packages measures introduced in 2009 to support

the ICT sector were estimated to have a total value of US$1.5mn. The government is also pressing ahead

with e-government initiatives.

The economic downturn may also have accelerated the growth of outsourcing of non-core processes.

Already, more and more software developments have been outsourced to India and other locations, and

vendors will be able to make the case that external spending on IT solutions can help the bottom line and

aid efficiency.

Segments

The enterprise sector represents an evolving opportunity in BMI's 2012-2016 forecast period. Despite

Canada being a relatively mature market, there still remains plenty of potential for ERP implementations

in industries such as consumer products, telecommunications, energy, engineering, construction,

transport, food and drink and retail.


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ERP demand drivers include increasing efficiency of global supply chains and logistics functions.

Business intelligence and other information-enabling software will continue to be one of the fastest-

growing enterprise product areas. Companies in sectors such as logistics and retail are looking to realise

efficiencies through sharing operations and sales data across divisions.

Cloud computing has made relatively slow initial headway in Canada compared with the US. The market

in Canada remains relatively small, with a 2011 survey finding that only around 30% of SMEs were using

this business model. However, more investment can be expected in the form of utility software and

serviced-oriented architectures, rather than traditionally packaged PC software. Demand will be spurred

as telecoms companies such as Rogers and Bell partner with vendors to launch cloud computing

offerings.

As a result, data storage and security solutions will be a growth area. Smaller businesses are likely to

prioritise security solutions and increasing data storage capacity. Many smaller businesses are still in the

early stages of adopting more sophisticated high-volume data storage solutions, such as storage-area

network and network-attached storage.

The consumer segment is thought to have remained the main IT market growth driver in 2011, however,

with estimated private consumption growth of 2.3% in 2010 and similar in 2011, pointing to the relative

health of Canadian household balance sheets. Strong consumer sales have become the main driver of the

Canadian PC market, and now account for nearly 60% of sales, up from 40% a few years earlier.

Despite its fiscal constraints, the public sector is expected to be an important source of IT tenders over the

next five years as the government moves ahead with its e-society and e-government agendas. A greater

focus on buying modules and components rather than services has been reported by some vendors, but a

shortage of IT skills and experience in the public sector may promote a reversal of this trend.

A major area of opportunity will be e-health, after US$500mn was assigned in the 2009 budget for this

topic. The government had set a target for 50% of Canadians to have electronic health records by 2010.

Summary

Overall, the hardware market is predicted to grow from US$15.2bn in 2012 to US$15.9bn in 2016, with

PC sales rising from US$6.9bn to US$7.2bn over the same period. Software spending should rise from

US$9.8bn to US$11.5bn and IT services from US$22.3bn to US$25.4bn over the forecast period.


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Table: Canada IT Sector Historical Data & Forecasts , 2008-2016

2008 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f

IT Market (US$mn) 42,800 37,664 4,1807 44,734 47,418 47,513 48,225 49,672 52,404

IT Market (% Of GDP) 2.86 2.69 2.65 2.65 2.66 2.70 2.72 2.73 2.75

Hardware sales (US$mn) 15,408 12,806 14,632 15,341 16,034 15,838 15,843 16,078 16,709

Services (US$mn) 19,260 17,325 19,022 20,557 21,900 22,053 22,499 23,287 24,690

Software (US$mn) 8,132 7,533 8,152 8,835 9,484 9,621 9,886 10,307 11,005

PCs including notebooks(US$mn) 6,934 5,763 6,585 6,904 7,215 7,127 7,129 7,235 7,519

ICT market, nominal

value (% chg y-o-y) 7.00 -12.00 11.00 7.00 6.00 0.20 1.50 3.00 5.50

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


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Industry Forecast Internet

Telecoms Sector Internet Historical Data & Forecasts , 2009-2016

2009 2010 2011 2012f 2013f 2014f 2015f 2016f

No. of Internet Users ('000) 26,225 27,831 29,451 30,555 31,676 33,238 34,354 35,121

No. of Internet Users/100Inhabitants 77.88 81.82 85.74 88.12 90.52 94.13 96.44 97.73

No. of Broadband InternetSubscribers ('000) 12,600 20,100 24,321 27,483 30,002 31,802 33,074 34,728

No. of Broadband InternetSubscribers/

100 Inhabitants 37.42 59.09 70.80 79.26 85.74 90.07 92.84 96.63

f = BMI forecast. Source: BMI, International Telecommunications Union (ITU), CRTC, operators

In 2009 we added mobile broadband

subscribers to our analysis and forecast

for the Canadian broadband market.

There were 10.0mn fixed broadband

connections at the end of 2009, which

bolstered our figures by an estimated

2.6mn active mobile broadband

subscribers. This yielded a total of

12.6mn subscribers. New data from the

CRTC suggest that the number of mobile

broadband subscribers grew rapidly in

2010, reaching 10mn. Adding to the

10.1mn fixed broadband subscribers in

service at that time, this took the total to

20.1mn and made for a penetration rate of 59.1%. This will continue to grow and should approach 100%

during our forecast period.

This does not mean that the entire population will have a broadband subscription, but many will have

more than one form of subscription, a wireless broadband-enabled smartphone and a fixed -line

connection at home, for example. Therefore, we believe that broadband penetration will reach 96.6% by

2016.

Industry Trends Internet Sector

2009-2016

f = BMI forecast. Source: BMI


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Most fixed broadband service providers reported solid, admittedly low single-digit, growth y-o-y to Q411

and the market expanded 4.3% y-o-y. To an extent, this was helped by the fact that a considerable number

of fixed lines remai

bmi canada information technology report q2 2012

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