Chile Information Technology Report Q2 2008

Market Overview The Chilean IT market is one of the most developed in the Latin America region and is projected to grow at a compound annual growth rate (CAGR) of 10% over the 2007-2012 period. While only around 1/10 the size of Brazil's IT market, the total value of Chilean domestic spending on IT products and services should pass US$2bn in 2008 and US$3bn by 2012.

The overall economic outlook is likely to become more difficult in the near term, with economic activity easing amid inflationary pressures and a global slowdown. BMI's view, however, remains that the fundamentals support a steady expansion of demand for IT products and services, due to higher real incomes, more financing options for consumers, and more choice. Despite regional leader rankings in many ICT infrastructure indicators, a PC penetration rate of around 18% indicates plenty of room for organic growth.

Given the economic context, government programmes provide an important context for market development in the next few years. The government's Digital Agenda 2.0 (for 2007-2010) groups together multiple initiatives to promote technology use in areas ranging from e-government to education and businesses. New money to support informatisation for SMEs highlights another key segment. The enterprise sector represents an evolving opportunity in the forecast period, with relatively low levels of investment currently relative to some countries in the region.

However, a number of risks pertain to our forecast scenario, with many of the government's ICT development plans and programmes still in a nascent stage. The government's plans to develop Chile as an offshoring hub are arguably somewhat late and the country may struggle to differentiate itself from larger competitors in the region.

Industry Developments In 2008 Chile is likely to see changes to its intellectual property legal framework, with new anti-piracy bills under review by Congress. Changes to Chile's IP laws were made as recently as January 2007, but were widely considered insufficient. Despite general agreement on the need for further reform however, the current anti-piracy proposals have attracted criticism from IT companies for being too lenient.

In another important initiative, Chile's state development agency CORFO has launched a programme to provide funding for projects that implement ICT for local SMEs. Applications for funding, which will be delivered through CORFO's IT innovation programme Innova Chile, are now being invited. SME informatisation appears to be a particular focus for CORFO at present.

Competitive Landscape One driver of PC sales is growing internet and broadband penetration. In August 2007 the Chilean unit of Lenovo signed a bundling agreement with Chilean triple play (fixed telecoms, broadband and mobile) service provider VTR. Under the agreement, any VTR client signing up for triple play services has an option to hire a Lenovo laptop for three years.

Turning to software, European giant SAP is among those enterprise software vendors positioning themselves to benefit from the introduction of International Financial Reporting Standards (IFRS) in Chile in 2009. In 2008 SAP Chile is also planning to increase its focus on mid-sized and smaller companies. The company has launched a web portal specially focused on SMEs and providing detailed information about SAP's solutions for the segment.

The fastest growing segment of the IT market is expected to be IT services, and in 2007 leading local IT services company Sonda continued to win a series of increasingly large outsourcing tenders. However, Chile's comptroller general has requested the National Registry to reevaluate the award to Indian IT services giant Tata Consultancy Services (TCS) of a US$69mn IT tender which was later annulled. Both Sonda and local competitor Quintec, which is contesting the decision, reportedly submitted cheaper proposals than TCS.

Computer Sales BMI is projecting that Chile's computer and accessories market will have a CAGR of at least 7% over the 2007-2012 period. Computer sales in 2007 were put at US$753mn, and should pass the US$1bn mark by 2012. The main drivers of growth in the PC segment are lower prices and greater affordability. Sales should rise about 10% in US dollar terms in 2008 to reach US$831mn. The fastest growing segment is notebook sales, which were around 600,000 units in 2007 and already account for around 50% of the market by value. Government announcements of new funding to subsidise internet coverage expansion in 2008-2009 should bring support to the PC market. Broadband service provider VTR's recent co-operation with Lenovo on a triple play bundling agreement shows the potential here.

Software Chile's software market is estimated to have been worth US$289bn in 2007, and the figure for 2008 is expected to come out at a little more than US$329bn. Software CAGR for 2007-2012 is projected at around 11%. Software has opportunities for growth over the next few years, despite a relatively high software piracy rate. Software piracy was estimated to account for 69% of software in 2006, but last year the government mounted a more sustained campaign to reduce this. Growth will be driven by a number of particular factors, but sources of opportunity in the near term are likely to be the introduction of International Financial Reporting Standards (IFRS) in Chile as of January 1, 2009 and potential new antipiracy laws.

IT Services Chile's IT services market is estimated to have grown around 18% in 2007 to a value just above US$720mn, with continued growth expected in 2008. For a developing market, the percentage of IT market revenues generated by services is currently around 37%, high by emerging market standards but corresponding to other countries in the region such as Brazil. The majority of demand, around 75%, still comes from the large company sector, but smaller companies are also now becoming more sophisticated in their demand. Led by the financial, telecoms and retail sectors in particular there is a trend towards bigger managed service and outsourcing deals in the local market.

E-Readiness Today Chile still enjoys some of the best telecommunications infrastructure in South America and rates highly on many regional e-readiness indicators. The World Economic Forum ranked Chile 31st in the world in its most recent survey of 'degree of preparation to participate in and benefit from information and communications technology'; the highest ranking in the Latin America region.

In Q407, the government allocated US$80mn to support projects aimed at boosting internet coverage. The money will be spent in 2008-2009. The telecommunications regulator Subtel is also planning to launch a new universal access fund in 2008.

According to BMI estimates, internet penetration reached 33.9% in 2007 and is expected to pass 40% by 2012. Broadband penetration is currently rather lower at around 7%, but the government is planning to increase options by possibly auctioning 3G mobile and fixed wireless (WiMAX) spectrum in 2008.