South Africa Information Technology Report Q3 2008

Market Overview The IT market is projected to continue to expand during the 2008-2012 period, despite slower economic growth this year. The total size of the South African IT market is expected by BMI to increase from US$8bn in 2007 to around US$11.6bn in 2012. The energy crisis, and weakening external demand, may precipitate a more cautious spending approach by many organisations, but the market will be supported by factors such as the 2010 Soccer World Cup, government digital divide projects, and strong demand from sectors such as Telecoms. As a result, IT spending CAGR is expected to be in the region of 8% during the forecast period.

The 2010 World Cup and other major infrastructure projects such as the Gautrain rapid rail link, provide a framework for faster spending growth during the forecast period. IT services will be the fastest growing segment of spending. 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, consumer demand for computers is gradually increasing, driven by the popularity of notebooks with entertainment features, and growing broadband penetration.

The government has given ICT an important role in its Accelerated Shared Growth initiative, and 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.

The Black Empowerment Charter for the ICT sector will have an important bearing on IT vendor activities in the country, and international vendors are keen to prove their credentials under those criteria.

Industry Developments President Mbeki said in a recent speech that ICT would be an important part of the government's Accelerated and Shared Growth Initiative for South Africa (ASGI-SA). The government's development plan is aimed to stimulating faster economic growth. National and provincial governments have positioned ICT as an important part of South Africa's strategy to drive economic growth across all sectors.

A number of significant government-led initiatives will boost spending on IT in 2008. Most high-profile of all, the 2010 World Cup is on the horizon, and like similar events such as the 2006 Asian Games in Qatar, is likely to lift the IT market. Benefits will include not just investments in IT systems directly linked to the games, but those driven by associated investments in areas such as infrastructure with projects like the Gautrain rail link.

The government is keen to win a larger share of the global outsourcing spending for South Africa and it has been estimated that the call centre industry 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. The trend is demonstrated by reports that companies such as Unisys Africa are considering locating a new global BPO facility in South Africa.

Competitive Landscape Declining prices have made life harder for many PC vendors, particularly smaller ones, but many vendors now see new opportunities in South Africa's retail PC market. HP has steadily expanded its focus on this segment. Eighteen months ago it launched its Pavilion entertainment notebook series in the country, and has seen it become a bestseller. Meanwhile, Lenovo recently announced a new distribution partnership with national retailer Incredible Connection to target the consumer segment.

The growth of the managed services and BPO segment is attracting new vendor investments. IBM has said it plans to invest more than US$120mn in Africa, including building a lab and training graduates. HP has said that it is looking for ways to 'fast track' its services strategy in South Africa. Meanwhile, Indian IT services giant Satyam hopes to reach US$11mn annual revenues and break into the top five IT services companies in the country.

Local vendors have been favoured in a number of recent government IT contracts tendered by IT agency SITA, some of which have proved controversial. 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.

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. The market is expected to grow to more than US$3.1bn in 2008. CAGR for the 2007-2012 period is estimated at 8%.

The roll out of government initiatives at national and province level, and growing popularity of South Africa as a global outsourcing destination is creating opportunities for IT vendors and attracting new investments. 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 15% 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.