South Africa Information Technology Report Q2 2008

Market Overview The IT market is projected to continue growing robustly in 2008, driven mainly by the IT services and software sectors, despite BMI's projection that economic activity is likely to slow this year. High inflation and weakening external demand may precipitate a more cautious approach by many organisations, but IT spending will be sustained by investments related to the 2010 World Cup and other projects. The total size of the South Africa IT market is expected by BMI to increase from US$8bn in 2007 to around US$11.6bn in 2012. This is faster than real GDP growth, which is forecast by BMI in the 4-5% range.

The 2010 World Cup and other major infrastructure and transport projects provide a framework for faster spending growth during the forecast period. Underlined by the government's recent stated intention to develop South Africa's capabilities in the business process outsourcing (BPO) area, outsourcing will continue as a significant revenue generator over the next few years. However, traditional services such as desktop support are still the mainstay of the IT services market, while applications services support are less developed.

IT spending CAGR is expected to be in the higher region of 8%. The State Information Technology Agency (SITA) is currently overseeing tenders in areas ranging from financial systems to healthcare.

Meanwhile, provincial governments, particularly Gauteng, are increasingly following an agenda of using IT to tackle fundamental challenges such as healthcare reform. While government remains the single largest spender, there will also be major opportunities in other verticals such as financial services, where South African financial institutions face pressure to comply with government regulations on money laundering, and Telecoms, where licensing of a second national operator represents an opportunity.

Industry Developments With the 2010 World Cup on the horizon, opportunities for IT vendors will include not just investments in IT systems directly linked to the games, but those driven by associated investments in areas such as infrastructure. Several sectors are likely to be particularly profitable for vendors, including construction and transport. The Gautrain rapid rail link and La Mercy International Airport are examples of ambitious transport projects that will involve considerable IT layout South Africa's security and law and order infrastructure is another destination for spending. The 'Strategic Plan for the South Africa Police Service' (SAPS) (2005-2010) identified a number of ICT priorities. Recently the police have begun implementing various trial solutions, and there are also acquisitions elsewhere within the criminal justice system. Currently only a relatively small proportion of police have access to computers.

In 2007 national and provincial government budgets positioned ICT as an important part of South Africa's strategy to drive economic growth across all sectors. President Mbeki set the tone in his State of the Union address when he said that concrete steps would be taken to reduce the country's high telecommunications costs, and make South Africa more competitive in the global business process outsourcing (BPO) area.

Competitive Landscape A significant win by Gijima AST once again showed the success of local IT companies in landing government contracts. One of the largest software tenders in South Africa's history was recently awarded to Gijima by the Department of Home Affairs to build a citizen-centric application to support the Department's 'Who Am I' online services. Local companies such as Business Connexion, Dimension Data and Telkom have all been selected as preferred bidders for recent IT services tenders.

With the fastest growth in software and services, the relatively sluggish PC hardware sector is attracting less attention. Declining prices and intensifying competition have made life harder for many vendors.

However, Lenovo sees new opportunities in South Africa's retail PC market, estimated at around 500,000 unit sales a year, and has announced a new distribution partnership to target this segment. The Chinese vendor will sell its notebooks and desktops through Incredible Connection, a national retailer with the capacity to handle after-sales support.

Computer Sales South Africa's computer market, valued by BMI at US$2.9bn in 2007, is set for steady growth over the forecast period, but is one of the slower growing segments of the IT market. The main drivers will be falling prices and more ready credit availability, combined with more distribution channels and government initiatives. The market is expected to grow at a CAGR of 7% between 2007 and 2012. The market remains extremely price sensitive and dependent on government spending, with the purchase of a computer beyond the majority of the population, despite the introduction of a number of cheap PC programmes. While growth is modest, the desktop market is benefiting from increasing business spending and attractive bundles promoting home digital entertainment, which has fuelled overall desktop growth.

Sales of both desktops and notebooks should benefit from initiatives to drive broadband and internet penetration, including the Johannesburg public broadband network programme.

Software South Africa's software market is maturing, with growth of around 8% in 2007 to a total market value of more than US$1.4bn, despite the issue of software piracy, which still accounts for around 36% of software. The higher end of the market is maturing to the point where a new concern for integrated platforms is emerging and likely to be a driver of spending over the next few years. Larger companies have also begun to demonstrate an interest in business intelligence systems to support decision making.

The market is expected to grow to more than US$1.6bn this year, and to have a CAGR of around 9% over the 2007-2012 period. A number of government departments, including the State Information Technology Agency and the Presidential National Commission on Information Society for Africa's Development, are encouraging open-source software in tenders. Proprietary software vendors, particularly Microsoft, are responding by introducing lower-priced 'streamlined' software to drive lower-cost computing. The financial vertical should be a strong source of opportunity, with banks moving to integrate their IT systems and look to enhance their ability to launch new products and services rapidly, as well as ensuring good recovery plans and security.

IT Services The IT services market was worth an estimated slightly more than US$2.9bn in 2007, and is expected to grow to more than US$3.1bn in 2008. CAGR for the 2007-2012 period is estimated at 8%. The growing popularity of South Africa as a global outsourcing destination is creating opportunities for IT vendors and attracting new investments. The government is keen for the country to win a larger share of the global outsourcing spend, and it has been estimated that the call centre industry in South Africa may create over 100,000 jobs by 2010. Traditionally the barrier to faster development of this sector has been South Africa's relatively high telecommunications costs, but the situation is generally considered to have improved. Underlined by the government's recent stated intention to develop South Africa's capabilities in the business process outsourcing (BPO) area, outsourcing will continue as one of the most significant revenue generators over the next few years. However, traditional services such as desktop support remain the mainstay of the market, while applications services support is less developed.

E-Readiness Internet penetration in South Africa is by far the highest on the continent with more than 7mn users, representing upwards of 16% of the population. The proportion of households with internet access is estimated to grow to 27% by 2012. However, broadband penetration is currently little more than 3%, with only around 1.5mn users.

Despite the opportunities, prospects for the IT market remain constrained by high communication costs and uneven infrastructure development. The government launched a new series of initiatives in 2007 to tackle this issue, including a new policy on broadband spectrum licensing that may positively influence growth and plans for a second national operator. However, there are doubts as to whether the government has the will to tackle the key question of termination rates and pricing implications.