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IT Market Trends in the Baltics and Central & Eastern Europe

Torben Pedersen CEMA Research Analyst IDC Infobalt 2002 IT Conference Vilnius, Lithuania October 21, 2002. IT Market Trends in the Baltics and Central & Eastern Europe. Agenda. IT Market Trends in CEE Developments by Technology Area Comparative Country Developments in the CEE region

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IT Market Trends in the Baltics and Central & Eastern Europe

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  1. Torben Pedersen CEMA Research Analyst IDC Infobalt 2002 IT Conference Vilnius, Lithuania October 21, 2002 IT Market Trends in the Baltics and Central & Eastern Europe

  2. Agenda • IT Market Trends in CEE • Developments by Technology Area • Comparative Country Developments in the CEE region • A Closer Look at the Baltic IT Markets • Future IT Market Drivers • Conclusions & Q/A • IDC Research

  3. Western Europe $307.2 billion (27.9% of WW) CEE Europe: $13.3 billion (1.2%) MEA $14.8 billion (1.3%) Worldwide IT Market Spending, 2001 Total = ca. $1 trillion

  4. CEE Region: What Crisis? (US$Bn) IT Spending • Island of Stability and Growth • Variety Factors Driving IT Spending, not Just Economic • Slowdown in WE - Some Spillover in CE Countries • WE Woes May Be CEE’s Gains • Ongoing Growth Projected Previous New Scenario Source: IDC, 2002

  5. First Era Third Era Second Era (1950s-1970s) (1995-2010) (1970s-1990s) “Trigger” Mainframe/ terminal Multimedia public net PC/LAN (WWW) New Class Customers Consumers Front-office Back-office employees Of Users Affluent home Added Key Apps. Accounting Cost reduction Online Commerce Customer service ATMs added Customer er self-service Decision-support Entertainment Order - processing Education Home productivity IT Market Growth Drivers in Transition Technology Where’s CEE Today?

  6. Technology Comparison of IT Spending in CEE, 2002* Total = $15.5 billion - 10% Growth YoY *Preliminary estimates, August 2002

  7. CEE Hardware Market Developments • Moderate Slow Down in Business PC and Server Sales, but Reflects Two-tier Market • Larger CEE Countries Illustrate Signs of Maturity with Replacement Representing Key Demand Force • Smaller Countries Illustrate Double Digit Growth Rates • Expectation that Strong Demand Will Persist in 2003 • Markets are Less Saturated than WE and USA - Consequently Demand for Initial Shipments and Upgrades Persists • Untapped Potential Demand in SME and Home Segments • Global Companies (FDI) May Cut Back on Investment • More eGovernment and Education Sector Development

  8. Value CAGR: 8.4% Overview of IT Hardware Spending in Central & Eastern Europe, 2001-2006 Regional IT Hardware Market to Exceed $12 billion by 2006 Source: IDC Black Book, August 2002

  9. CEE Software Market Developments • Software Spending Less Affected than Hardware - But Linked • Falling Piracy Rates Mean Greater Initial Spending on Packaged Applications • Transition from In-house Developed Applications to Packaged Continues Unabated, as Wage Rates Rise and Technology Becomes More Sophisticated • Major Move Towards Integrated Enterprise Applications Taking Place in Region - But Limited Spending on Extended Modules (Yet to Come) • XP and W2K Adoption Will Facilitate Some Spending as CEE Stays on the Tech Curve

  10. Value CAGR: ca. 13% Overview of Packaged Software Spending in Central and Eastern Europe, 2001-2006 Software Market to Double in Size by 2006 = $4.1 Bn Source: IDC Black Book, August 2002

  11. CEE IT Services Market Developments • Least Affected IT Sector, as Long as Currencies Remain Stable - Higher Nominal Growth in Local Currencies • Any Impact of Dollar on Exchange Rates May Mean Higher or Lower Dollar Denominated IT Services Spending Depending on Development (Devaluation/Appreciation) • Services Companies Are Not Suffering from Over-Capacity - Local Companies and Int. Vendors Continue to Move into Regional Services Space • Short Term Contracts and Discrete Consulting Reflect Timing and Rollout of Large Infrastructure Projects in Govt. and the Corporate Sector • Demand Continues to Expand in Isolated Local SME Segment • Ongoing Demand for Basic Network Comms Development, Packaged Software Implementation and Outsourcing Continue to Drive Spending on Services

  12. Value CAGR: ca. 16% IT Services Market Spending (US$M) in Central and Eastern Europe, 2001-2006 $7.6 Bn Regional Opportunity by 2006 Business Solutions are Hot! Source: IDC Black Book, August 2002

  13. Country Market Comparison of IT Spending in Central & Eastern Europe, 2002* *Preliminary estimates, August 2002 Total = $15.5 billion - 10% Growth YoY

  14. Development in CEE IT markets, 2001 Czech Republic Hungary Slovakia Baltics Slovenia Croatia Bulgaria Poland Russia Romania Baltic States still Playing Catch-up

  15. Country Market Comparison of IT Spending in the Baltic States, 2001 Total = $458 million - 10% Growth YoY

  16. IT Market in the Baltic States: On the Path of Growth • 10% Growth in 2001, after ca. 7% in 2000 • Moved to Next Stage of Market Development • Hardware Illustrates Maturity - Replacement • Software Most Dynamic Segment • Software & Services Illustrate Highest Growth Rates • Currency Stability Key for IT Services Market Development 2001 Revenue = $458 million

  17. Shipments of Personal Computers in the Baltic States, 2001-2006 The BS PC Market is Expected to Reach 267K Units in 2006

  18. Computer Server Market Spending (US$M) in the Baltic States, 2000-2003 Annual Market of ca. $38 million - NT/Unix Dichotomy

  19. Overview of EAS Software Spending in the Baltic States, 2001-2006

  20. On the Horizon……….

  21. Government Says... Economic Development Reduce Costs Improve Public Service Delivery Create Employment Reduce Red Tape ROI Business Says... Improve Market Reach Reduce Costs Increase Productivity Improve Customer Satisfaction Essential to Corporate Strategy Expand Geographic Scope ROI Why IT and the Internet are Important for the Baltic States • Opportunity for Greater Investment in Information Technology

  22. Information Society Growth Helps Governments . . • Key Challenge - Public Sector Reform: enhance level and breadth of public services, while capping burgeoning expenditures, particularly for personnel, in an effort to support monetary stability and increase productivity…...

  23. Healthcare Utilities Natural Resources Telecommunications Transport Insurance Heavy Industry Banking Public Sector Key Role of the State in CEE IT Markets State Decisions Government Accounts from 25% to 50% of IT Spending in Most CEE Countries

  24. Storage & Storage Management: Watch Out! • Storage Related Spending Reaches $1.2 billion in CEE region in 2001 • Keen Interest of Global Players in CEE Markets (Veritas, EMC, Fujitsu Softek, etc.) • Hot area of investment by key verticals: banking, insurance, telco, utilities and the government • In Longer Term, Significant Revenue Stream from Storage Services • Currently Under-developed Area - IDC Outlook Quite Optimistic

  25. Stepping Up IT Security • Corporations will reset their IT security plans in 2002 Prediction • Throughout the world, September 11 has corporations rethinking security in all aspects. Call it the “Bin Laden Effect.” The focus of IT security will shift from the “Three As” (authentication, authorization, administration) to business continuity. • Physical and IT security will become part of the same whole. This will provide opportunity for suppliers of IT services and products – but create challenges for CIOs and IT managers Rationale

  26. Opportunity: All Things Mobile • 63,000 Portable PCs Shipped in 2001 - 56% Unit Growth YoY • 20% Growth Forecast for 2002 • Mobile Telephony Penetration: 66% (includes multiple SIM) • SHD Shipments on the Rise • Smart Phone Sales Boom • Growth in Sales of Devices for Specific Verticals Enterprises will have to Wake up to Wireless This Year – Creating Pent-up Demand for Technology and Services

  27. Fixed and Mobile Telephony Comparison • Baltic fixed line networks will continue to develop, but slowly. • ISDN will be main driver of fixed-line connection growth • Mobile subscriber base expanding rapidly-- passing the fixed subscriber base in 2002.

  28. Telephony Revenues • Mobile revenues to climb from $389M in 2001 to over $1bn in 2005 due to expanding subscriber base • SMS and other mobile data services will also create new revenue streams - about 20% of mobile revenues in 2005 • Fixed-line revenues to climb from $489M in 2001 to nearly $700M in 2005 • Fixed-line market needs to upsell customers to ISDN, complete tariff rebalancing and stimulate traffic growth (especially fixed-to-mobile and Internet) • Fixed-line operators will also need to focus on developing newer services, such as ADSL (not included here)

  29. Mobile Penetration Across Europe • Growth of subscriber base slows in Western Europe due to market saturation • Leading Central and Eastern European markets beginning to catch up-- Estonia above 50%; Czech R. closer to 70% • Most of Central and Eastern Europe will climb past 60% penetration in the next few years • Falling prices and increased competition are key drivers

  30. Opportunity: Riding the FDI Wave FDI (US$Bn) in the Baltics • >$8.6 bn in FDI through 2001 - Always IT Component • Key Inflows to IT High Usage Sectors, e.g. Manufacturing, Telcos, Banking/Finance, Oil/gas • Telcoms Notable Source of Demand as Usage Booms • Next Major Sector is Utilities Along with Privatization • FDI Changes Country IT Market Profile, Notable Spillover into Other Segments = Opportunity

  31. Opportunity: Small and Medium-sized Businesses SME Share of CEE PC Market (% Units) - 2000-2001 • SME Segment is Generally Under-computerized • Extremely Price Sensitive in More Price Sensitive Region • Willingness to Invest in Hardware - Rising Costs for Software and IT Services Fees are Prohibitive • Low-end Technology Focus - Requires Specific Consistent Approach - Combination of Dedicated Team and Channel • Lead in with PC Business • Not Very Profitable Business in Short Term • The Next eBusiness Wave?

  32. ca. $24 Billion Market by 2006 CEE IT Market Development 70,0% Overall Market Growth of 11-12% Annually 60,0% 50,0% 40,0% CAGR 01/06 9.7% CAGR 01/06 11.4% CAGR 2001-2006 CAGR 01/06 7.9% CAGR 01/06 13.2% 30,0% CAGR 01/06 8.9% CAGR 01/06 16.2% 20,0% Implementation App. Tools. App. Solutions. SIAS Operations. IT Consulting Software Services 10,0% Storage Datacoms Multiuser Single user 0,0%

  33. Market Shift The Next Level of IT Market Development in the Baltics….

  34. Contact Details Torben PedersenResearch Analyst IDC CEMA Direct: +42 02 21 42 31 49tpedersen@idc.com

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