THE ECONOMIC IMPACT OF IT, SOFTWARE, AND THE MICROSOFT ECOSYSTEM ON THE GLOBAL ECONOMY

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1 Addendum THE ECONOMIC IMPACT OF IT, SOFTWARE, AND THE MICROSOFT ECOSYSTEM ON THE GLOBAL ECONOMY METHODOLOGY AND DEFINITIONS Global Headquarters: 5 Speen Street Framingham, MA USA P F October 2009 Sponsored by Microsoft OVERVIEW This document is a companion to IDC's 52-country study entitled Aid to Recovery: The Economic Impact of IT, Software, and the Microsoft Ecosystem on the Global Economy, October That study builds on a base of work begun in Since that time, IDC has been conducting studies on the economic impact of IT, software, and the Microsoft ecosystem on local economies. This impact comes in the form of job creation, related tax revenues, company formation, and increased IT spending. The 52 countries covered are: North America Latin America Western Europe Central and Eastern Europe Middle East & Africa Asia-Pacific Canada Argentina Austria Bulgaria Egypt Australia United States Brazil Belgium Croatia Israel China Chile Denmark Czech republic Saudi Arabia Hong Kong Colombia Finland Greece South Africa India Mexico France Hungary Turkey Indonesia Peru Germany Poland UAE Japan Venezuela Ireland Romania Korea Italy Russia Malaysia Netherlands New Zealand Norway Philippines Portugal Singapore Spain Taiwan Sweden Thailand Switzerland Vietnam United Kingdom The two cornerstones of the research are IDC's Economic Impact Model (EIM), which takes inputs from IDC's market research around the globe on IT spending, adjusts for exchange rates, and gathers other country level inputs, such as GDP, tax rates, and overall labor force from other sources. The EIM represents a global version of separate projects that were conducted in the early 2000s on IT workforce for the European Union, and governments and trade associations in Asia and North America.

2 The IDC Microsoft Footprint Model (FPM), which determines the percentage of IT spending and employment related to Microsoft software and solutions based on Microsoft software. The purpose of the EIM is to generate IT company and employee counts by country and tie them to IT spending, net of imports and exports. By thus tying the model output to real world statistics and IT spending, it allows us to forecast companies, employees, and taxes, because we have the underlying forecasts for spending. The purpose of the FPM is to provide a current year view of the size of the Microsoft ecosystem, which can be used to compute Microsoft-related employment and ecosystem revenues and investment. Key inputs to the two models include: IDC forecasts of IT spending by hardware, software, and services. IDC routinely publishes such information for the countries studied. IDC estimates of imports and exports of hardware, software, and services. These are modeled using government statistics and local information. Macroeconomic data on GDP workforce, population, tax rates, and total government tax receipts. These are obtained from third party sources, chief among them the Economist Intelligence Unit (EIU), the U.S. Bureau of Labor Statistics, and the U.S. Census Bureau. IDC estimates of the % of hardware and software products that run on Microsoft software. IDC routinely publishes such information by product. Estimates of Microsoft revenue. Figure 1 illustrates the methodological flow of the study. The term local validation means that the IDC EIM has been explained to and mapped to local employment statistics within the last several years. Figure 1 Economic Impact Methodology Local IT Production Domestic Spending Export Distribution IT Spending By BB Category MS% IDC CIS and Tracker Research Hardware Software Services Channels Microsoft Related Domestic Spending Jobs Taxes MS$ Pro Forma or Local Estimates Economic Impact Model Revenue per Head Local Validation Software-Related Domestic Spending Jobs Taxes Microsoft Ecosystem Footprint Non Software- Related Software SW-rel IT Services SW-rel Channels IDC 2009 EIM 2 IDC Economic Impact Study, IDC

3 DEFINITIONS AND METHODOLOGY Economic Impact IT Spending Spending by consumers, businesses, governments, or educational institutions on information technology, including hardware, software, services, and data networking, as measured in IDC's Worldwide IT Spending Trends reports (The Worldwide Black Book) or local versions. This spending excludes all telecommunications revenues and some smaller emerging technology areas, such as console videogames, personal digital recorders, robotics, or RFID. The spending data for this study was updated as of August Previous years have been restated in the average 2008 exchange rate and future years are forecasted at that exchange rate. IT Employment The number of people employed (full-time equivalent) in hardware, software, services, or channel firms and those managing IT resources in an IT-using organization (e.g., programmers, help desk, IT managers). Note that employees at vendor organizations include all employees, from management, sales, and finance to marketing, production, sales, and administration. Headcounts by category, beginning with predecessor work mentioned, were first modeled based on estimated IT revenue per employee for hardware, software, or services companies based on standard ratios, and by levels of spending per employee by technology type for channels employees and IT professionals. Over time, these headcounts have been validated with governments and other sources, although they often vary from these sources as a result of definitional differences. (The revenues per employee are, in the U.S., comparable to but not the same as those yielded by the U.S. Bureau of Labor Statistics Employment Requirements Index, and range, based on company type, from $250,000 to more than $1 million. External IT spending per employee in the U.S. is about $75,000, derived from budget surveys.) IT Employment Forecasts. In equating growth in IT spending to growth in IT employment, IDC was conservative in how much growth (or decline) in IT spending would result in IT employment. For example, if IT spending (actually, production) were to grow 10%, IT employment might grow only 7% or less. This varied by category. There is the question, especially in an economic downturn, as to whether increased spending would create actual jobs or whether companies would simply require more output from the same labor force. This is addressed, in part, by the lower employment growth rate than spending growth rate, as well as by the use of full-time-equivalency to equal a job. In addition, IDC conducted research on employment multipliers in the U.S. Bureau of Labor Statistics Employment Requirements Index during the last economic downturn and determined that the multipliers actually go UP during a downturn presumably because there are no labor shortages or constraints that would conspire against the multipliers. Finally, many of the jobs computed in the EIM are labor intensive service, support, distribution and perform functions that can t simply be put off or omitted in bad economic times. Channel Revenues. Within calculations of employment, IDC used a figure for channel revenues to drive estimates of employment. In this case, channel revenues were equated to 100% of IT spending. Most of that goes back to the hardware, software and IT services suppliers, but it is that revenue that funds employment, albeit at a high revenue per head IDC IDC Economic Impact Study,

4 Taxes VAT or sales tax revenues from the sale of IT hardware, software, or services; business and personal income, social, and consumption taxes. The basic approach was to first take total income, profit, and social taxes within a country and determine what proportion was attributable to IT activities. The totals for taxes and employment were gathered from published statistics, the total IT employment was taken from the IDC Economic Impact Model. Adjustments were made then based on assumptions that IT employees have higher income than the average employee in a country. For the most part, income and social taxes paid by individuals account for much more than taxes paid by companies or through VAT or sales taxes. Software-Related Revenues, Employment, and Taxes This is the percentage of spending or employment that can be associated with creating, installing, servicing, or distributing software. It comprises three components: (1) packaged software spending, employment, or taxes; (2) services spending, employment, or taxes that relate to software and (3) channels spending, employment, or taxes that relates to software. For software-related activity IDC first analyzed 13 service categories sized in IDC market research and used additional IDC research to determine the percentage of that activity devoted to software (e.g., what percentage of IT outsourcing is managing software and what percentage is managing hardware?). This led to a ratio of services spending to software spending. For the purposes of allocating employment, internal IT departments were assumed to resemble external service organizations and headcount is allocated accordingly. The allocation of channels activity to software is the midpoint between the percentage of software spending to the total of software and hardware spending and the percentage of IT services that is software related. Because software is more complex to service, maintain, and distribute than hardware, in general software-related activity is about twice the % of total activity that packaged software is of IT spending. Microsoft Ecosystem Related Economic Impact Ecosystem activities. Microsoft ecosystem-related spending, employment and taxes were derived using country-level estimates of the percentage of IT spending in 2009 by IT category for products running on Microsoft software platforms or for services supporting them. IDC routinely publishes the operating systems on which servers, PCs, storage systems, smart handhelds, and software packages operate. For instance, in % of all servers shipped ran on Windows, as did 56% of packaged software. For services we counted all services related to the design, deployment, management, support, and training for Microsoft software and third party software running on Microsoft software, but excluded maintenance and support on hardware. This was under the assumption that maintenance was more likely to be related to equipment failures. These allocations of IT spending to Microsoft-related spending were then applied to employment levels and taxes. Microsoft Revenues. The estimates by country of Microsoft revenues are pro forma derivations based on the distribution of PCs and servers by country and the distribution of software by country. They are 4 IDC Economic Impact Study, IDC

5 validated by IDC software trackers, available by vendor in some countries, and other local country research. They are not provided by Microsoft. They include ALL Microsoft revenues and total or would, if all countries were studied Microsoft reported global revenues and Wall Street estimates for unreported quarters of Ecosystem Revenues and Investment Levels. Ecosystem revenues are determined by taking total spending on Microsoft-related products and services (see above) and subtracting Microsoft revenues. IDC then used these revenues and applied estimates of investment in R&D, product development, sales and marketing, and customer support to determine Microsoft ecosystem investment levels. These were patterned after standard industry ratios by company type (hardware, software, services, and channels.) Microsoft Partner-Related Revenues per Unit of Microsoft Revenue Within the Microsoft ecosystem is a subset of vendors that are recruited and supported by Microsoft as OEMs and registered partners. They are a diverse group of companies, running the gamut from large international vendors, such as major PC manufacturers, to very small national resellers and software entrepreneurs. These partners often don't go to market as pure hardware, software, or services companies. Many resell software while creating their own, sometimes they resell hardware as well, and often they service both their own software and the hardware and software they resell. Hence, IDC also classifies ecosystem companies by business model, categorizing them into five groups: Product-oriented partners derive 60% or more of their revenue from the sale of internally created products. These may be independent software vendors (ISVs), communications solution vendors, hardware vendors (ranging from major system vendors to non-branded local assemblers), or other types of technology solution vendors. Services-oriented partners derive 60% or more of their revenue from the delivery of internally created services and less than 20% from the resale of third-party products. These include systems integrators and consultants. Value-added resellers (VARs) derive 20% or more of their revenue from product resale and 20% or more from internally created services. They provide turnkey solutions that bundle hardware, software, and services. Logistics-oriented resellers derive 60% or more of their revenue from the resale of third-party products and less than 20% from the delivery of internally created services. They focus on improving the process and reducing the cost of buying third-party products. Retail logistics resellers derive 80% or more of their revenue from the resale of third-party products to consumers. This category is a unique subset of the logistics-oriented category. To aid these partners in interpreting the IDC economic impact and Microsoft footprint research, IDC calculated the revenues each partner type made for every dollar of Microsoft revenue. The methodology was to use IDC research and definitions to assign a percentage of each partner type that was hardware, software, services, or pure resale (channel) and then apply those percentages 2009 IDC IDC Economic Impact Study,

6 against the revenue ratio for those categories of company (hardware, software, services, and channels). The resale percentages include a further breakdown by type of resale, weighted to fit what IDC maps to the distribution of Microsoft software. This exercise yields a ratio of revenue by partner type to a unit of Microsoft revenue, but because of the overlap between partner categories partners buying from and selling to each other the individual partner type ratios cannot be added to obtain a total in the manner that mutually exclusive ratios for hardware, software, and services can. The Economic Benefits of Cloud Services To develop this forecast, IDC went through the following steps: 1. Developed a forecast for the percent of IT spending by country that will be delivered as cloud services. This was done using regional percentages from IDC forecasts. 2. Developed an estimate of the percent of IT spending that could be used for innovation. This was done by applying a measure of IT sophistication to a baseline percentage modeled after the U.S. IDC used the ratio of software and services spending to hardware spending as a proxy. Emerging markets, which have fewer legacy systems and infrastructure to maintain, generally had higher percentages available for innovation. 3. Developed a relationship between IT used for innovation and business revenues. IDC first created a pro forma assumption that the use of Cloud Services would increase the availability of IT budget by 50% above the amount that was spent on those services. IDC then assumed that the amount of new IT spending would generate new GDP based on the standard ratio of GDP to IT spending. IDC then multiplied the GDP by a factor related to value added in the economy to come up with business revenues. This multiplier ranged roughly from 2 to 3. The final figures computed are an admitted first step in forecasting the impact of a new style of computing in its very early days. On the other hand, IDC believes it has been conservative in all of its underlying assumptions. Copyright Notice External Publication of IDC Information and Data Any IDC information that is to be used in advertising, press releases, or promotional materials requires prior written approval from the appropriate IDC Vice President or Country Manager. Copyright 2009 IDC. Reproduction without written permission is completely forbidden. 6 IDC Economic Impact Study, IDC