We expect the Philippine IT market to be a regional outperformer over the next few years, with spending increasing from a projected US$2.5bn in 2010 to around US$4.0bn in 2014. The Philippines has a lower PC penetration than many other Asian countries and offers correspondingly high growth potential over the forecast period, particularly with support from government digital divide and other ICT programmes.

We estimate IT spending compound annual growth rate (CAGR) at 12% for 2010-2014, reflecting the fundamental market equation of rising incomes and low PC penetration. Per capita IT spend was estimated at just US$26 in 2009, far lower than in other Asian countries such as Malaysia, and even China. It is forecast to rise to US$41 by 2014. Remittances held up better than expected last year, and wage rises for civil servants in the 2010 budget should help to boost consumer spending. The business process outsourcing (BPO) industry, which accounts for around 30% of IT spending, continues to grow. Surveys last year indicated that many of the Philippines' BPO executives felt that the impact of the global economic crisis had not significantly slowed expansion.

Industry Developments
In July 2009, the Commission on Information and Communications Technology (CIFT) unveiled a new low-cost desktop that it described as integral to the government's ICT programmes. The Nettop ng Bayan, developed in co-operation with Intel, comes with a widescreen LCD monitor, but no bundled internet connection or software. The new computer is to be affordably priced at around PHP10,800, and it is hoped that this will attract price-sensitive consumers.

In 2009, despite the economic crisis, various government organisations proceeded with projects designed to facilitate delivery of e-services. The Bureau of Customs announced in September 2009 that its Electronic-to-Mobile (e2m) project, to introduce paperless transactions for processing imports documents, will have been implemented in nine ports by the end of the year. The e2m project is just one part of the PHP500mn computerisation programme being undertaken by the bureau, which accounts for around 25% of the government's tax revenues.

One of the biggest challenges for the government is to continue to ensure a supply of HR with appropriate IT skills. In a policy address in August 2009, President Arroyo cited the provision of low-cost desktops to public high school teachers and students as one of six priority areas for her cabinet. The Department of Education, under Chief Jesli Lapus, has unveiled a plan to provide computers in an additional 200 schools, split evenly between elementary and high schools.

Company News
HP and Acer remain the leading PC brands in a market where 'white boxes' dominate. In H109, multinatinal PC vendors were generally optimistic about the Philippine market, despite the slowdown. Acer claimed to have largely escaped any local market impact from the global economic crisis and expanded its presence across desktop and notebook segments with more product releases. Meanwhile, Lenovo said in mid-2009 that signs of recovery were now in sight and was focused on opportunities in the small and medium-sized enterprise (SME) sector, which is anticipated to become a fierce battleground for vendors.

In 2009 Microsoft continued to lay the groundwork for the launch of its new operating system, Windows 7. Microsoft anticipated that support from leading PC makers would underpin success for the new system. However, the vendor had to overcome some scepticism from businesses, following the perceived problems with Microsoft's Vista operating system. Microsoft Philippines said that SMEs, which comprise over 90% of registered businesses in the country, were its fastest-growing segment. IBM Philippines has also said that SMEs will be a major focus for it in the country, commenting that they have found 'huge potential'. A key part of IBM's strategy for the sector is to provide financial assistance through IBM Global Financing (IFG). Meanwhile, Oracle is also marketing e-business suite applications for SMEs with the selling point that the applications are platform independent.

Computer Sales
We forecast 2010 Philippines computer hardware spending of around US$1.6bn, which is expected to rise to US$2.5bn by 2014. Consumer demand exceeded expectations in 2009, and the launch of the Windows 7 operating system has the potential to help trigger a new cycle of hardware upgrades. In 2009 Intel estimated that around 35% of home computers in the Philippines were more than three years old and would need to be replaced soon.

Jobs in the IT industry, particularly the BPO sector, are projected to grow by 20-25%, thus driving demand for hardware. Government procurements are also providing relief, with a number of egovernment and public sector computerisation programmes. Education initiatives such as the Department of Education's new Laptop for Teachers programme will help to sustain spending in this segment.

Software
We estimate that the addressable Philippines software market will increase to US$278mn in 2010. Growth should be maintained over the next few years, as we project a CAGR for the software sector over 2010-2014 of 12%. Software accounted for about 11% of IT spending in 2009 estimates, and sales will grow as higher PC ownership and internet penetration fuels demand for software. Vendors are exploring new channels to reach the SME segment, such as Saleforce.com and Intel's current co-operation with telecoms company PLDT. Much will depend on success in combating the software piracy rate, which was put by the Business Software Association at 69% in 2008. Open source software is on the rise and is being pre-installed in the PCs to be sold under the PC4ALL programme.

Services
Growth in the IT services sector continues to be driven by the IT-enabled services sector, particularly BPO and call centre services. We forecast a value of US$657mn in 2010, up from US$608mn in 2009. Due to evolving demand, vendors have to pay more attention to value-added services such as technical support and product troubleshooting, or basic IT and hardware consulting. Call centres are, unsurprisingly, projected to be the biggest single source of earnings for IT service providers, accounting for around 25% of revenues. After call centres, telecommunications, financial services and manufacturing are the next most important sectors.

E-Readiness
The overall number of local internet users has grown steadily over the last five years. Falling prices of PCs and internet subscription rates, partly as a result of greater market competition, have driven this growth. However, low PC and internet penetration rates, along with low telephone density and security concerns, still hold back the development of e-commerce.