View from the top:

Issue 1: October 2010

global technology
trends and performance
“Smart mobility may well represent the biggest change of
our generation for businesses and for personal lifestyles.
What started as a technology transformation has spread,
and is now in the process of transforming everything,
from entertainment to health care. Increasingly, any activity
you can think of you will be able to do from wherever you
happen to be — enabled by mobile technology.”
Pat Hyek
Global Technology Industry Leader
Ernst & Young

Contents
4 Overview: the ride of your life
The top 100 global technology
companies are managing through
multiple concurrent disruptive
innovations in 2010, while the
macro economy and its currencies
fluctuate with increasing volatility.
It all makes for quite a ride.
8 Top 25 diversified companies
The global top 25 diversified technology
companies are agile and innovative; in
many cases, they are setting the pace
of change and shaping the future. Here
we shed light on how they are doing so
vis-à-vis the disruptive megatrend of
smart mobility.
14 Sector view
These snapshots of how each sector
is faring show resilience in the face of
disruptive change and macroeconomic
volatility. We offer sector views on:
communications equipment, page 14;
computers, peripherals and electronics,
page 16; internet, page 18; IT services,
page 20; semiconductors, page 22; and
software, page 24.
26 Top of mind: building business value
from smart mobile innovation
Global technology companies face a
breathtaking landscape of opportunity
to develop and deliver the mobile
products and services that their
enterprise and consumer customers
demand. Managing the development
of those products and services presents
some daunting challenges. Here we
describe Product Innovation and
Lifecycle Management (PILM), an
approach to overcoming the challenges
and seizing the opportunities.
28 Outlook
Innovative new technology has moved
from the “nice to have” to the “must
have” list for most businesses and
consumers. That enhances optimism
about the future of the global
technology industry, regardless of
near-term macroeconomic uncertainty.
30 Source notes
31 Methodology

View from the top: global technology trends and performance

 View from the top:
global technology trends and performance

In an industry as multifaceted, economically influential and

extraordinarily fluid as the global technology industry, managing
high-growth businesses is a challenge — to say the least. Our aim in
creating this report is to provide benchmarks, insights and questions
that stimulate thoughtful discussion to help senior management in
technology companies meet that challenge more successfully. We’ve
focused much of our discussion around smart mobility, the megatrend
driving the near-term future of most technology industry sectors.

“Whether the larger
global economic context
is good, bad or uncertain,
technology companies
continue to globalize and
invest in the future.”
Ed Grabowy
Ernst & Young
Asia-Pacific
As its name implies, View from the top:
global technology trends and performance
analyzes business strategies and financial
performance data from the top 100 global
technology companies. The strategies and
actions of these leading companies help
shape the competitive landscape for the
rest of the industry and, often, for
companies in other industries where
technology is enabling transformational
innovation, such as health care, automotive
and smart grid. The performance of the
top 100 companies often sets benchmarks
against which others can measure their
own success.
We chose the top 100 by ranking all public
technology companies in every region of the
world by sales and by market capitalization,
and then averaging the two ranks together
into a single ranked list. Our report includes
a separate look at the top 25 companies
because the vast majority of them have a
special characteristic: they are either highly
diversified or moving toward diversification,
participating in and influencing many
industry sectors beyond the sector in
which they originated.
The resulting condensed insights paint
a clear picture of where the industry is
and, more important, where it is heading.
We hope you agree.

Issue 1: October 2010 3

 Overview: the ride of your life
The “roller coaster” metaphor may never be more apt than it is
for describing the global technology industry in 2010. Technology
companies began the year on the upswing: the macro economy was
powering ahead after difficult times and, by the second calendar quarter,
semiconductor demand — a bellwether indicator for the rest of the
technology industry — outstripped supply for many key components.

Before the second quarter drew to a close,
however, global economies reporting mixed
results caused fears of a double-dip
recession to rise and equities markets to
fluctuate. Soon after, technology companies
began reducing forecasts for the rest of the
year even as they reported stellar results
during the second quarter earnings season.
Figure 1: NASDAQ composite,
January-August 2010 In fact, the daily closing values for the
technology-heavy NASDAQ composite
2600 index looks like a particularly exciting roller
coaster in the second quarter of 2010. It
2500
begins with a 5.5% climb to 2530.15 on
2400 23 April, and then rolls through six peaks
2300
and valleys before ending the quarter 16.6%
lower at 2109.24 on 30 June. The ride has
2200 continued in 3Q10 as well, though the
2100
thrilling ups and downs have been confined
(so far) to a range between approximately
2000 2100 and 2300 (Figure 1, adjacent).
1900
Further, volatile currency fluctuations have
1800 heightened the highs and lowered the lows
Jan Feb Mar Apr May Jun Jul Aug
for technology companies, depending on
Source: Ernst & Young analysis of Capital IQ data, their sector and region. Some companies
last accessed on 23 September 2010. benefited, reporting revenue growth due to
JANUARY–AUGUST 2010
MACRO EVENTS TIMELINE
the actions of currency fluctuations. Others,
however, attributed restrained forecasts to
strengthening home-country currencies —
particularly those that report results in
Japanese yen or Indian rupees, which have
gained strength versus euros and US dollars.
Difficult as they are, however, such
macroeconomic factors have become
typical for global technology companies.
They are ready for this.
After a decade of hard-earned experience,
the world’s largest technology companies
have learned to be agile. Commencing with
the dotcom bust and its aftermath, leading
technology companies have learned how
to manage through tough times, whether
driven by macroeconomics, the continuous
cycles of disruptive innovation that are the
nature of their business, or both. They have
learned to grow revenue, while maintaining
their focus on operational excellence and
ongoing innovation, regardless of external
conditions. The top 100 global technology
companies have done more than ride that
roller coaster — they have helped guide it.

Macro-level events early in 2010 showed increasing optimism about a global economic recovery,
but with a twist: emerging market economies were seen leading the way instead of developed
economies. Other major events that could influence the future shape of the technology industry
included major governments’ reviews of merger and acquisition (M&A) guidelines, international
hacking incidents, the ongoing push-pull between social media businesses and privacy advocates
and the debut of the US Federal Communications Commission’s (FCC) National Broadband Plan.

Optimism about the global economic recovery gave way to mixed emotions during the second
quarter of 2010, as sovereign debt expanded rapidly and credit markets stumbled. Other major
events influencing the future shape of the technology industry included the ongoing US battle
over broadband regulation, the up-and-down volatility of equities markets, new privacy concerns
and rising wages in emerging economies that could cause global technology prices to rise — but
could lead to new consumer markets, too.

4 View from the top: global technology trends and performance

Mobility drives demand across for chips used in infrastructure equipment disruptive technology innovations.
the industry to serve them: wireless broadband Although they don’t necessarily represent
In 2010, for example, the drivers behind communications infrastructure and data breakthroughs from a strict technological
the major upswing in semiconductor center servers that provide application point of view, many innovative technologies
demand — even as the macro economy services to mobile devices. that have been gathering momentum in
began to waver — were smart mobility recent years now appear ready to disrupt
and the resurgence in PC and server Clouds, social networks and internet traditional business models, thus changing
sales (Semiconductors, page 22). Strong video also disrupt the ways in which people work and
demand for new mobile smartphones, Although the transition to a mobile-enabled furthering the expectation that more kinds
tablet computers and e-readers was world is plenty to deal with, the top of work can be done from any location and
the impetus not only for increased sales 100 global technology companies are at any time. These include cloud computing
of the chips used by those devices, but also simultaneously managing through multiple and its most talked about component,
software as a service (SaaS); social
networking, which promises to provide
Figure 2: Total sales and market value (MV) of the top 100 global technology companies
new information that could not heretofore
$ billions
be collected and analyzed to empower
$3,500 new content, advertising and e-commerce
business models; and video-over-the-web,
$3,000 including mobile video, which has been
percolating for years but emerged in 2010
$2,500
as a fiercely competitive arena in which
$2,000 many technology companies, content
producers and cable, satellite and TV network
$1,500 services are contending. For example,
internet video alternatives and the weak
$1,000
economy combined to make 2Q10 the first
$500 quarter ever in which there was a net drop
in US paid television subscribers.1
0
Sales MV Sales MV Sales MV Sales MV Sales MV
2Q09 3Q09 4Q09 1Q10 2Q10

Software Internet IT services Communications equipment Semiconductors

Computers, peripherals and electronics Diversified

In a very difficult 12-month period marked by macroeconomic uncertainty, volatile technology markets and
much disruptive change, the top 100 global technology companies managed to increase their aggregate
sales by 9.9% YOY and their aggregate market value by 15.7%.
Note: in this report, “sales” encompasses the total revenue of a company; “MV” represents the share price x the
outstanding shares at a specific point in time.
Source: Ernst & Young analysis of Capital IQ data, last accessed on 31 August 2010.

Macro events timeline continued

• Tenor at the Consumer Electronics Show reflects global optimism
over the technology industry recovery — and its ability to lead the
global economy out of the downturn.
• Analysts predict global IT spending in 2010 will grow 8% or more,
reversing a similar 2009 decline.2
• The International Monetary Fund (IMF) reports the global economy
is recovering faster than expected, led by China and other developing
economies.
• International hacking incident revealed, involving approximately
three dozen companies. Because the attacks are believed to
originate from China, at least one major US search engine company
considers leaving the Chinese market.
• Bellwether technology companies begin reporting strong earnings
results, which continue throughout the first half of the year; weaker
companies continue restructuring efforts.
• European Union (EU) regulators approve Oracle’s acquisition of Sun
Microsystems 10 months after deal announcement; some observers
say the delay may have diminished the deal’s competitive value.
• Emerging markets’ share of global consumer spending in 2010
(33.6%) will surpass that of the US (27.15%) for the first time,
according to a projection by leading economists.3
• After falling 7.5% for the first five weeks of the year, the NASDAQ
composite index reverses course, eventually finishing 1Q10 up 5.7%.4
• European economies report weak results and euro-zone debt
concerns begin to emerge.
• Multiple internet social media businesses continue an uneasy dance
with users and regulators over privacy issues. Volatility emerges
as social media businesses push the boundary lines of personal
information sharing, but take occasional steps back in reaction to
public response.

Issue 1: October 2010 5

The top 100 demonstrate agility
However, the top 100 global technology
companies are managing through all these
transitions, and the difficult economy, with
mostly improving financial metrics. At a
macro level, the group of 100 companies
grew their aggregate sales 9.9% year-over-
year (YOY) in 2Q10, and saw their
aggregate market value increase 15.7%
(Figure 2, page 5). In addition, throughout
this report our briefs on individual technology
sectors (beginning on page 14) describe
markets working through disruptive change,
while improving financial performance on
many fronts. It’s a testament to sound
management practices and agility.
Yet such large companies are not often
thought of as agile. In fact, not long ago the
idea of a giant multinational corporation
being agile was derided as “teaching
elephants to dance.” Now, as the data and
analysis in this report suggest, the ranks
of the top global technology companies
comprise mostly “dancing giants.”
Consider the top 25 technology companies,
most of which are diversified multinationals
whose product and service lines blur across
multiple technology industry sectors and
into other industries as well. The median
revenue of this group is approximately
$46 billion, and they have aggregate cash
and investments totaling $467 billion
(Figure 4, page 8). Yet when it comes to
smart mobility, the most disruptive
innovation of the last decade and probably
the next, this group is driving innovation,
not merely reacting to it (page 8).
Communications at the center of change
Although all technology sectors are
experiencing disruption, the communications
equipment sector is at the vortex of industry
change because the fixed and mobile
broadband networks that come out of this
sector are responsible for much of the
industry convergence and blur rippling
through other sectors. Companies in this
sector exhibit a broad range of performance,
as some are leading the sector’s two major
transitions (the mainstreaming of advanced
smartphones and the migration of public
networks from mainly fixed to mainly
mobile — and data-intensive) and others
have to catch up (page 14).
Other sectors managing disruptions, too
The computers, peripherals and electronics
sector is experiencing a surge in demand for
servers and storage to store and analyze
exponentially growing volumes of business
data. At the same time, companies in this
sector are entering the smartphone market
in force; tablet computers and e-readers
are influencing the development of next-
generation laptop, netbook and smartphone
products; and 3-D displays are emerging as
potentially disruptive (page 16).
Mobile broadband, social networking and
location-based services appeared to be
disrupting the always-evolving internet
sector’s “traditional” advertising and
e-commerce business models in the first
half of 2010 (page 18). Meanwhile,
IT services, where companies have been
targeted for acquisition in recent years by
others in search of growth, was the only
sector to record a YOY decline in median
revenue in 2Q10, based on our top 100
company sector view (page 20).
In the semiconductors sector, the demand
spike already mentioned drove median
sector margins to increase YOY from one-
tenth of 1% to 10.6% in 2Q10 (page 22).
In software, by contrast, the disruption
represented by SaaS may be taking a toll:
the software sector was the only sector to
experience a YOY decline (-6%) in median
market value in 2Q10 (page 24).
Mobile opportunities and challenges
As this overview shows, our report
describes a breathtaking landscape of
opportunities for technology companies;
yet, at the same time, we find that companies
face many challenges in developing innovative
products to take advantage of those
opportunities. Smart mobility represents
the largest of these opportunities — and
challenges. Therefore, we provide a detailed
look at how companies may best develop
and deliver the mobile products and services
that empower the visions of their enterprise
and consumer customers in the context of
their overall product line (page 26).
Cautious optimism remains
Because continuous waves of disruptive
innovation are the norm in technology,
there are always grounds for an optimistic
outlook for growth — even when tempered
by caution due to macroeconomic
uncertainty. For example, although venture
capital funding of technology start-ups
declined YOY in 1H10, $6 billion in venture

• US corporate bond sales increase, suggesting credit markets
there are returning to relative health.
• The UK and China join the US in announcing planned reviews
of their M&A guidelines.
• The US FCC releases its National Broadband Plan, including
support for “net neutrality” — rules that prevent service providers
from prioritizing among the different types of traffic passing
through their networks.
• Markets climb for the first three weeks in April, reflecting growing
optimism for strong recovery.
• Index of leading economic indicators for 29 of 30 Organisation
for Economic Co-operation and Development (OECD) countries
hits highest level in 30 years.
• US Appeals Court calls “net neutrality” regulation into question —
rules that US FCC overstepped its authority in sanctioning service
provider that slowed traffic for high-bandwidth applications.
• Low-cost credit markets lure many technology companies to “bulk up
on debt” for first time.
• IMF warns that extraordinarily high sovereign debt levels in
“advanced countries” could impact global financial stability.
• To preserve “net neutrality” policy, US FCC proposes to regulate
broadband lines under old telephone rules; US Congress warns FCC
against the move.
• Start-ups find buyers again: 15 (mostly technology) venture-
backed companies change hands in one week in May, a notable
increase over recent activity.

6 View from the top: global technology trends and performance

funding was still invested in the half —
and funding even increased in the
semiconductors sector and, regionally,
in China (page 28). Globally, investors
have embraced initial public offerings of
technology company stocks: new technology
offerings in the US, for example, gained
7.2% on their opening day compared with
6% for all other offerings.5 Investors
share the optimism; they are heartened
by technology’s revenue growth through
the downturn and anticipate stronger
growth ahead due to pent-up demand.
In closing, here’s an interesting footnote
regarding optimism: the top 100 global
technology companies increased share
buybacks 22% YOY in 2Q10, purchasing
$61 billion worth of their own stock. The top
25 diversified companies increased even
more, by 29% YOY (Figure 22, page 29).
Technology’s leading companies have the
confidence to bet their own money on their
industry’s — and their own — future.

Figure 3: Technology industry at a glance

• Mobility: emerging ecosystem mobilizes information, media and
services to meet the demands of the consumer and enterprise
• Blur and convergence: blurring of sector, industry and
work-life boundaries
• Smart everything: migration of industries and consumers to smart
products and services
• Cloud: adoption of cloud computing accelerates
• Diversification: leading diversified companies direct
s
er
• Technology: smartphones, tablet computers, e-readers, video-over-
the-web and mobile video, clean technology and 3-D displays
• Business models: personalized forms of advertising and e-commerce
are emerging; location-based content and services gain traction;
cloud drives “on-demand” subscription and usage-based models,
i.e., to replace purchase and install models; micropayment models
for content continue to evolve
• Delivery channels:

In
change and pace of change in technology
iv

• Application stores (“app stores”)

no
dr

• Disruptive innovation: waves of innovation

va
• Niche market focus on the rise
t
ke

are accelerating
tio
ar

n
M

ce

• Agility and flexibility: speed to market; • Results:

Ke

an

identifying market shifts and having the operational

y

• Global technology industry, in general, has

m
is

or

and financial flexibility to respond quickly fared better than most

su

rf
es

Pe

• Cost containment: managing costs effectively and • Sitting on a lot of cash

having the ability to scale up or down • Acquiring inexpensive debt
• Integration: making acquisitions and non-traditional • Consolidation: consolidation of weaker players continues
partnerships and alliances work and deliver a positive ROI
• Outlook: overall cautious in near-term; long-term optimism
• Innovation: managing innovation, product portfolios/lifecycles
• Risk: managing increased risks associated with new markets
• Dividends: investor pressure intensifies for companies to offer
or increase dividends
• Tax: global cash management and tax minimization

Source: Ernst & Young analysis.

Macro events timeline continued

• Governments worldwide launch investigations into “accidental”
collection of personal information by various technology companies.
• Credit markets reel due to sovereign debt concerns: debt sales by
investment-grade companies shrink to lowest level since October 2008.6
• Scientists reveal creation of microscopic robots that “walk, follow
instructions and work together to assemble simple products on
an atomic-scale assembly line.”
• Privacy continues as headline-making issue: security flaws that make
personal information vulnerable over mobile networks are exposed.
• The World Trade Organization orders the EU to rescind import tariffs
on billions of dollars worth of set-top boxes that provide internet
access, flat-panel displays and multifunction printers; the EU
previously argued that these were consumer goods not covered by
a 1996 technology trade agreement.

• Chinese technology workers win large wage increases — some
double pay.
• Earnings reports reveal strong wage growth in India.
• World Bank says sovereign debt issues could cause global economic
growth to stall again.
• Asian companies hurt by falling euro, causing losses on orders
placed last year that are still being fulfilled.
• The US Department of Commerce reports that so far this year, US
consumers have increased spending on technology compared with
the pre-recession during the first half of 2007, but decreased
spending on furniture and household appliances.
• Interest rates on corporate debt gets so low they make news when
debt is sold by IBM at 1% in the US and by NEC at 0.5% in Japan.7
• Many companies express caution about performance for the rest of
the year due to unusual levels of uncertainty in the macro economy.

Issue 1: October 2010 7

 Top 25 diversified companies
It is common knowledge that the lifeblood of the technology industry is
its continuous cycles of innovation. Technology companies, large and small,
grow by advancing technology, disrupting markets and developing new
business models. Ultimately, they expect such advances to drive long-term
improvement in worker productivity and global living standards by making
more information even more accessible and actionable with every new
cycle of innovation.

Innovation, disruption, diversification mobile phone or the even more recently

“The top 25 technology
companies have the will
and the resources to lead
innovation and influence
the direction, concentration
and pace of development
throughout the rest of
the industry.”
Karl Havers
Ernst & Young
UK
and growth
In fact, advances in technology are
disrupting far more than just markets and
business models. Changing technology also
has come to affect commonly held social
mores and regulatory policies, which
typically lag innovation. A significant and
complex example playing out globally right
now is the impact of mobile location
tracking, mapping technology and social
media on society’s notions of privacy, and
the diverse reactions of the young, the old,
regulatory authorities and nations.
Disruptive technology innovation is often
seen as the grand enabler; few would wish,
for example, to return to life before the
developed smartphone. People enjoy living
in the “connected society” — a mobile-
enabled world where they have come to
expect access to people and information
anytime, anywhere, instantly, “on demand.”
And because people expect more of it all
the time, mobile technology innovation
continues apace: already this year we’ve
witnessed the disruptive commercial
introduction of tablet computers and 3-D
displays. Both advances have come not
from emerging start-ups but from members
of the top 25 — multinational giants that,
despite their size and diversity, have learned
how to be agile and to lead innovation.
These companies are setting the pace and
shaping the future.

Figure 4: Total cash, short- and long-term investments of the top 25 technology companies

$500 One reason the top 25 diversified companies have

+25% $467b the wherewithal to pursue innovation and carve out
$450 paths for others to follow is their large and growing
stockpiles of cash. As of August 2010, the top 25
technology companies had aggregate cash and
$400 investments of $467 billion — an average of $18.7 billion
$374b
per company. They use their cash to fund innovative
$350 $202b products and services, to rapidly acquire innovative
companies as suggested by their corporate strategies
+13% and as a hedge against the disruptive challenges they
$300
may face from so much rapid change.
$178b
Source: Ernst & Young analysis of Capital IQ data.
$250

$200

$150
$265b
+35%
$100 $196b

$50
Next 15

Top 10
$0
2Q09* 2Q10*

*Based on Capital IQ data, last accessed on 31 August 2010.

8 View from the top: global technology trends and performance

Figure 5: How top 25 technology companies are shaping the business landscape

As the figure shows, the top 25

Semiconductors
• Demand is driving capital
investment to provide specific
chip types needed for mobile
computing and communications
devices
• Driving research that is advancing
core technology innovation, such
as optical, 3-D and DNA-based
chips
• Pushing low-power chips for
mobile and “green” server uses
diversified technology companies are
directly amplifying the force of the big
Software three technology trends — mobility,
• Escalating demand for smart smart products and services and
mobile-enabled applications increasingly industry and sector blur — and
concentrating development focus on specific
emerging platforms thereby defining how the
• Renewed investment in videogame software megatrends shape the
based on advancing technology (3-D and industry sectors.
motion-sensing controllers) and social network models
• Accelerating SaaS adoption
• Focus on virtualization software helps
customers increase ROI on
equipment purchases

Internet
• Driving development of mobile content
DRIVING Computers, peripherals and electronics
• Blurring and redefining of client devices
• Accelerating development of cloud services FORCE OF within and across subsectors, desktop,
• Driving development of new payment
services
• Driving development of new business
TOP laptop, tablet, e-readers, netbook and
communications equipment
• Driving demand for virtualization and security

25
models, including ad-supported mobile in an increasingly mobile environment
advertising and content • Shifting investment emphasis toward
• Accelerating development of new services smart mobile computing devices
for mobile devices and users • Shrinking the pool of available developer
• Fostering growth of online and resources for other than the current
social games most popular platform focus

IT services Communications equipment

• Largely through M&A, the top
25 have entered the market
significantly increasing
competiveness and putting
pressure on margins
• Blurring of smartphones together
with mobile computing devices leading to
smart mobility; by driving expansion of the
“app store” model, they are leading to handsets
being evaluated based on available software
• Their products are driving increased bandwidth
demand (especially mobile), which is then driving
growth in infrastructure equipment upgrades
• Concentrated focus on a few disruptive
product platforms is limiting resource
allocation for other products
• Increasing competitive pressure
on “pure play” companies

Source: Ernst & Young analysis.

ABOUT THE TOP 25

The top 25 technology companies are
diversified multinational giants whose product
and service lines blur across multiple technology
industry sectors and into other industries as
well. They are “diversified” because most
operate in many technology industry sectors —
and the few that remain in one sector are
headed into others, as suggested this summer,
for example, by Intel’s acquisition of McAfee.
The top 25 were chosen by ranking each
company by sales and by market capitalization
as of 31 December 2009, and then averaging
the two ranks together to produce one ranking.
The industry’s diversified companies are
typically the ones to take individual
innovations, some of which are originated by
small emerging growth companies, and weave
them into the complex mosaic of technologies,
business processes and business models that
comprise modern corporations. It takes
diversified technology companies — with their
cross-sector experiences and their diverse
competencies — to seamlessly address the
business requirements of today’s complex,
modern enterprise and develop technology
solutions that are as holistic as they are efficient.
Likewise, about two-thirds of the top diversified
companies offer consumer products and
services, further extending their influence —
and their challenges. Consumer leadership
eludes all but a few.
When established and emerging growth
technology companies work together via
alliances, partnerships or M&A, the potential
for productivity growth and rising living
standards is transformed into real gains —
as evidenced by what is happening today
as technology-enabled mobility transforms
industries as diverse as media and health care.
For the full report methodology, see page 31.

Issue 1: October 2010 9

 “It’s almost a cliché So, we’ve chosen to focus this section
on technology innovation that enables
to say that leading mobility because at this moment in history,
technology companies smart mobility — the evolution of mobile
devices into handheld networked computers —
focus even harder on is the grandest of the technology
innovation in down megatrends that are disrupting businesses,
lifestyles and society. And we’ve chosen to
economies — but the look at mobility innovation through the
mobility-focused lens of the top 25 diversified technology
companies because they are the ones
innovations of the last year leading this charge.
or two show it’s true.”
Mobility — the biggest source of innovation
Björn Rosén Smart mobility is the largest and most
Ernst & Young important technology megatrend because
Sweden of the way it is combining with other
industry trends to create multiple technology
and business model disruptions. Virtually all
of the top 25 diversified companies have an
important stake in smart mobility, and many
are leading mobile innovation in one or
more dimensions. The most obvious
innovators may be Apple, with its original
2007 iPhone and its “incredibly disruptive”8
iPad tablet — both of which have redefined
computer interfaces for mobile use — and
Google, whose Android mobile software
platform has become the operating system
of choice for dozens of smartphones and
tablet computers.9
The smart mobile ecosystem, however, is
large and diverse, and demands innovation
on many fronts. Mobile microprocessors
and memory, for example, come from
companies such as Intel, Qualcomm and
Samsung — and many of the most popular
mobile microprocessors are based on designs
licensed from ARM Holdings. A major theme
this year of mobile semiconductor innovation
has been driving down the power consumption
of mobile chips so that devices last longer
between charges.
In addition to Apple, the diversified
companies offering smartphones, tablet
computers or both include Cisco, Dell,
Hewlett-Packard (via its Palm acquisition),
LG Electronics, Nokia, Research In Motion
(RIM), Samsung and Sony-Ericsson (not
itself a top 25 diversified company, but
both its parents are). Many are exploring
different innovations to compete more

Figure 6: Key performance indicators for top 25 technology companies (median value)

Sector median Constituent companies

$ millions 2Q 2009 Q2 Q3 Q4 Q1 Q2 2Q 2010 % Change Trend Notable High value Low value
Market value $40,438 $46,431 15% ▲ $228,877 $11,064
Sales $43,605 $45,883 5% ▲ $128,125 $10,729
R&D $2,531 $2,500 -1% ▼ $8,714 $362
Levered free cash flow $2,447 $3,802 55% ▲ ■ $16,345 $615
Cash, ST and LT investments $12,197 $13,829 13% ▲ $69,784 $1,874
Equity $18,272 $19,848 9% ▲ $66,833 $5,857
Debt $5,098 $6,007 18% ▲ ■ $34,927 $0
Capital expenditures $1,221 $1,217 0% ▼ $9,357 $230
Inventory $2,785 $2,721 -2% ▼ $15,134 $259
%
Operating margin 10.6 10.9 2% ▲ 39.5 3.0
Debt-to-equity 28.6 30.5 7% ▲ 228.4 0.0
ROIC 9.6 10.6 11% ▲ ■ 31.4 1.3
R&D as a % of sales 10.2 8.8 -14% ▼ ● 23.3 0.3
Days
Days sales outstanding (DSO) 50 53 5% ▲ 129 11
Days payable outstanding (DPO) 57 63 11% ▲ 134 13

The top 25 global technology companies grew median sales by 5% YOY in the second quarter of 2Q10 and grew market value by 15%, even though both medians fell
slightly from 1Q10. Meanwhile, YOY median capital expenditures fell less than 1% and R&D as a percentage of sales dropped 14%, enabling free cash flow to grow
55% and increasing return on invested capital (ROIC) by 11%. Also, as happened throughout the industry, top 25 companies took advantage of inexpensive debt
with an 18% median debt increase.
Worth noting is that these companies are delivering a large number of innovative new products despite holding R&D spending flat. This is a reminder that R&D
spending is not always synonymous with innovation. For example, one company widely known for breakthrough products typically spends approximately a third less
in R&D than the $2.5 billion median in the chart above, whereas other companies that have been criticized for lacking innovation spend three times the median.
In addition, top 25 companies have the wherewithal to purchase innovation, when necessary, through acquisitions.
Note: median is based on companies reporting the metric (i.e., inventory is fewer than 25 companies as select software and internet companies do not report inventory).
The percent values noted above may differ due to rounding.
Source: Ernst & Young analysis of Capital IQ data, last accessed on 31 August 2010.

10 View from the top: global technology trends and performance

effectively, from Dell’s tablet that doubles
as a mobile phone to Nokia’s focus on
mobile content, applications and services.
All the major mobile software platforms
vying in the marketplace come from the
diversified companies, whether they are
manufacturer-specific platforms such as
those from Apple, RIM and Hewlett-
Packard’s Palm, or platforms deployed
by multiple manufacturers such as Google’s
Android, Microsoft’s Windows Mobile
and Nokia’s Symbian OS. Across the
board, innovation in this area is focused
on human interface qualities and on
application development.
Mobile middleware is often hidden from
public view — especially when it is done
well. But such software plays a key role
in making the mobile ecosystem smart;
depending on the particular middleware, it
can provide a platform for the development
of mobile applications that access enterprise
databases, provide mobile payment
services, enhance information security or
enable collaborative mobile messaging.
Besides the software platform vendors
Fact: Despite enormous
themselves, top 25 diversified companies
IBM, Oracle and SAP are all innovating cash reserves, the top
in this area — or are buying companies
25 diversified technology
that do — based on the belief that mobile
productivity tools have become necessary companies opportunistically
to the success of modern businesses.
increased median debt 18%
A dynamic duo — smart mobility and YOY in 2Q10.
cloud computing
Even other trends that are independently
potent end up influencing, or being influenced
by, the significant move toward mobile
business and lifestyles. For example, cloud
computing is one such trend that, even
without considering mobility, is a major
initiative at most diversified companies.
Some have joined the cloud computing
movement grudgingly, while others believe
it is one of those fundamental technology
transitions that will reshape society by
making greater and greater computing
power easier to manage and use, while
lowering its cost.

Figure 7: Key initiatives and issues of the top 25 global technology companies

Key initiatives and issues

Margin and expense management

International expansion; expansion into emerging markets; strengthening global revenue portfolio

Increasing R&D investments; enhancing product development capabilities; ramping up product introductions

Supply chain management; inventory management improvement

Product portfolio expansion

Managing foreign exchange volatility (revenue, earnings and operational costs)

Cost-reduction initiatives; managing cost pressures

Cash flow management

Price competition; managing pricing pressures; highly competitive environment

Expanding distribution channels; enhancing channel partnerships; expanding joint ventures

The initiatives and issues most concerning the top 25 global technology companies — derived from analysis of earnings call transcripts — show the irresistible force
of difficult macroeconomic times meeting the immovable object of rapid technology innovation. As other data in this report attests, the top 25 companies continue
to rapidly bring innovative new products to market, even while carefully husbanding their inventory, supply chains and financial resources.
Despite their expressed desire to increase R&D spending, however, it has remained flat (Figure 6, page 10) even as they stockpiled cash. Leading companies across
all industries have done the same, increasing cash whenever possible as a cushion against macroeconomic uncertainty.
Source: Ernst & Young analysis of second quarter 2010 earnings call transcripts.

Issue 1: October 2010 11

 When mobility and cloud computing are
considered together, however, the result is a
re-imagining of business processes pushed
out to the points of customer contact, and
a universe of consumer services that make
new things possible. Those new possibilities
emerge from the potential of ubiquitous
mobile devices in the hands of consumers
and business users combined with
application services provided to those
devices by the near-unlimited computing
power available via cloud computing.
Mobility, PCs and servers
The impact of mobile smartphones, tablet
computers and e-readers is causing PC makers
to rethink their product lines. Desktop PCs
have only recently given way to laptops as
the primary PC purchase in many developed
economies. Mobility is causing the landscape
to shift again. After all, if people or their
employers are buying smartphones and
tablets, they are less likely to strain their
budgets further to purchase laptop PCs.10
“It used to be that As a result, PC makers among the
diversified companies are fielding dozens of
we monitored emerging new smartphones and tablets, or altering
growth companies laptops and netbooks to make them more
competitive as mobile devices. At present,
to better understand manufacturers are experimenting across a
the disruptive broad spectrum of innovative designs,
features and functions. The ultimate
technology innovations. direction is unclear — i.e., whether there will
Today, however, the be one general-purpose mobile endpoint
device for the majority of users or multiple
diversified technology devices, and what its (or their) primary
companies have design characteristics may be.
institutionalized agility, One factor that is clear, however, is that all
so we watch them those smart mobile devices will require
application services, whether for business
very closely, too.” or personal purposes. In effect, businesses
wishing to exploit the opportunity to
Alice Chan-Loeb
Ernst & Young “mobilize” their enterprise must re-imagine
Asia-Pacific their infrastructure and applications to suit
that purpose. That means enterprises and
cloud computing providers will be beefing
up their data centers to meet the challenge.
Members of the top diversified companies
that sell servers and storage systems to
data centers reported significant YOY sales
12 View from the top: global technology trends and performance
increases in the first half of 2010. Most of
that increase, however, came from a more
general beefing-up of data centers to
support cloud computing services and more
robust web commerce; smart mobile device
proliferation is still in its infancy as a driver
of back-end infrastructure growth.
We anticipate that the contribution of
mobile devices to server and storage
growth will be major. The explosive growth
of data being generated in real time,
combined with rapidly growing multitudes
of mobile devices, will continue to drive
growing demand for computational power,
storage and bandwidth to manage all that
information and analyze it to enhance
business performance.
Mobility and “smart everything”
We have come to think of “smart everything”
as the confluence of two growing and related
trends: the growing use of embedded
sensors, “safety” cameras, electric meters
and other devices that generate information
about the world around them; and the
extraction of new information that heretofore
could not be collected and analyzed, such
as your location or the recommendations
of your social network. In all of these
situations, wireless transmission of the
information has the potential to make new
products and services possible or existing
ones more efficient.
The diversified companies are strongly
pursuing “smart everything” agendas, from
their many experiments in location-based
services, to multiple advertising and
marketing targeting approaches, to alliances
with power utilities and health care services
(the former to transmit electrical usage
information, the latter to transmit patients’
vital signs). The privacy issues raised by
these services, however, have emerged as
major obstacles to mainstream use.
Individuals, municipalities and nations are
wrestling with the questions being raised.
These questions primarily involve whether
to allow people to trade their privacy in
return for valuable services and, if so, where
to draw the line — and who gets to decide
where to draw that line.
Mobility and media
Smart mobility also is furthering the blur
between technology and media companies
that began with the advent of the internet.
Related to the proliferation of smartphones
and tablet computers, multiple top 25
diversified companies are pushing into mobile
advertising and content services — in both
video and other content types. These are
seen as small revenue streams today that
are expected to grow large over the next
several years, particularly as new tablets
and more powerful smartphones drive
increased consumption of mobile video.
A recent flurry of media-related acquisitions
has included several top diversified
companies — Apple, Google, IBM and
Oracle — buying advertising and marketing
companies. The buyout targets include not
only companies that provide technology
platforms, but also others that provide
analytical and other services designed to
optimize the performance of mobile or
online advertising and marketing. Media
industry business models have been among
the earliest and most profoundly disrupted
by recent technology innovation, and it
appears this trend will continue into the
mobile marketing realm, and for the
foreseeable future.
Mobility and e-commerce
Mobility and social networking appeared
to be the primary factors contributing to
innovation in e-commerce during the first
half of 2010. Research analysts project that
US consumers will order $2.2 billion worth
of physical goods via mobile phones in
2010, $1 billion more than 2009 and five
times more than 2008.11 That rapid growth
is being enabled by new applications and
business models — and, in turn, is spurring
the development of more of both.
For example, certain diversified companies
are buying or building services that enable
location-based comparison shopping from
mobile devices. At the same time, retailers
are rapidly tailoring their e-commerce sites
for mobile devices. And many mobile
e-commerce applications integrate social
networking functions, enabling shoppers
to learn what members of their social
networks have purchased or obtain
their recommendations.
Continuously monitoring mobile- Questions
enabled change What connectivity challenges between
The top 25 diversified companies have mobile devices and enterprise applications
become leading innovators — and they represent opportunities for new products
have focused much of their considerable or services?
resources and influence on the development
of mobile technology. Those resources What new business models are made
include an aggregate of $467 billion in possible by the new context of cloud
cash, short-term and increasingly long-term services provided to mobile devices?
investments (Figure 4, page 8). Even while
they put more money into long-term How can our company help corporate
investments in search of higher yield, deep customers move their business processes
pockets enable the diversified companies to to the point of their customer contact via
develop or acquire necessary talent and mobile devices and application services?
technology to set the direction and the pace
of change of the smart mobility megatrend.
The timing is right for diversified companies,
too — in fact, the need of the times is a
factor driving their diversification. The
requirements of modern corporations cross
so many boundaries nowadays that the
broad range of experiences and competencies
of diversified companies are necessary to
the development of seamless solutions.
Of course, it is also likely that the next big
change may come from a hitherto unknown
start-up; they often manifest technology’s
continuous waves of disruptive innovation.
Start-ups also should be watched because
the diverse directions start-ups pursue
expose many possible future scenarios.
The start-ups with proven approaches, of
course, are likely to be highly attractive
candidates for acquisition — and more often
than not the buyer will be one of the top 25
diversified companies.
Therefore, as the diversified companies
continue to increase their agility and their
reaction time to disruptive change, it is by
carefully monitoring these “dancing giants”
that we can best understand the shape of
the rapidly evolving future of technology.
Issue 1: October 2010 13
 Sector view

Communications equipment
Because broadband communications — both mobile and fixed — is
crucial to so many industry-wide and cross-industry trends, the
communications equipment sector is at the center of much technology
industry convergence and blurring. As a result, it is experiencing
significant change, with a broad spectrum of “winners” and “losers.”

The rise of smartphones from relatively
recent market entries such as Apple
and multiple manufacturers using Google’s
Android is affecting the fortunes of
traditional handset manufacturers,
who are feeling their margins squeezed
by increased competitive pressure. At the
same time, netbooks and tablet computers
are blurring into the sector from the
computers, peripherals and electronics
sector, and traditional handset makers
are responding with netbooks and tablet
devices of their own. In addition, the
Android software platform, which has been
licensed by many hardware manufacturers
in need of software to enable a rapid market
entry, achieved a 17.2% share of global
Fact: YOY, the smartphone sales in the second quarter
of 2010, up from just 1.8% in 2Q09 —
communications equipment reminding us of the value of open software.12
sector grew median Finally, smartphones are precipitating cross-
industry blur, too, as some of their makers
operating margins by 7% attempt to broaden their revenue streams
and free cash flow by 98%. by providing content and services.
When it comes to public network
infrastructure equipment, two factors have
led to hard times for many manufacturers.
First, it has been reported that increasing
demand for gear to support smartphones’
thirst for mobile broadband bandwidth is
only partly offsetting falling sales of older
voice-related and landline equipment.
Second, many component and semiconductor
manufacturers, which cut production when
the downturn began, have been unable to
meet an initial rush of renewed demand.13
Core network providers reported that they
could have sold more gear in the first half of
2010 if they had been able to make enough
devices to meet demand. This could be
exacerbated should economic uncertainty
fade and unleash pent-up demand.
Blur, meanwhile, is a primary characteristic
of enterprise network equipment makers.
Formerly “pure play” communications
equipment sector leaders are diversifying
into server and storage offerings for data
centers, and certain computers, peripherals
and electronics manufacturers are
diversifying into enterprise network gear —
all in search of future revenue growth
driven at least in part by the rise of mobile
devices, applications and content.
Leading companies in the sector have also
begun to field products aimed at smart grid
deployments by power utilities.

• A handful of bellwether communications equipment companies
report robust profitable growth, while many other sector
companies continue to report weak earnings
• Rise of the ”app store” business model means that for the first
time, mobile phones are being evaluated based on available software
• Android market acceptance accelerates
• Intellectual property lawsuits become a battleground among
major smartphone providers
• Consolidation and demise of weaker mobile device
companies expected
• Capacity reductions during the downturn now cause widespread
shortage of basic electronics components, which companies
say held back sales of smartphones as well as core network
infrastructure equipment
• Contract manufacturers continue migrating to their own brands:
one former contract-only manufacturer offers two of the second
quarter’s hottest-selling smartphones
• Smartphones drive mobile network operators to begin usage-based
pricing for data
• Security and privacy vulnerabilities emerge from the rising use of
smartphone applications whose data traverses wireless networks

14 View from the top: global technology trends and performance

Figure 8: Key performance indicators for communications equipment (median value)

Sector median Constituent companies

$ millions 2Q 2009 Q2 Q3 Q4 Q1 Q2 2Q 2010 % Change Trend Notable High value Low value
Market value $13,213 $15,049 14% ▲ $228,877 $5,408
Sales $14,140 $15,640 11% ▲ $128,125 $3,000
R&D $1,025 $1,033 1% ▲ $7,168 $263
Levered free cash flow $709 $1,403 98% ▲ ■ $7,664 ($317)
Cash, ST and LT investments $6,715 $7,602 13% ▲ $45,839 $455
Equity $7,071 $9,825 39% ▲ ■ $66,833 $1,744
Debt $2,579 $3,156 22% ▲ ■ $34,927 $0
Capital expenditures $575 $444 -23% ▼ ● $9,357 $39
Inventory $1,025 $1,299 27% ▲ ■ $15,134 $355
%
Operating margin 11.5 12.3 7% ▲ 30.9 0.3
Debt-to-equity 27.9 34.0 22% ▲ ● 228.4 0.0
ROIC 9.3 9.4 1% ▲ 38.2 0.8
R&D as a % of sales 10.5 10.1 -4% ▼ 23.3 0.3
Days
Days sales outstanding (DSO) 62 59 -5% ▼ 168 18
Days payable outstanding (DPO) 55 57 4% ▲ 131 13

The communications equipment sector scorecard suggests rapid and sound management decisions in the face of significant disruptions — both technologic and macroeconomic.
As noted on the facing page, communications equipment sector companies are dealing with two major transitions (in the context of a volatile global economy): the
mainstreaming of advanced smartphones and the migration of public networks from mainly fixed to mainly data-intensive mobile. Some sector companies are leading those
disruptions while others are catching up.
Communications equipment sector companies held R&D spending steady (+1%) and reduced capital expenditures (-23%), two unfortunate necessities in dealing with the
worst part of the downturn (so far) during 2009. In fact, aggregate R&D spending of the 21 sector “pure play” and diversified companies comprising this sector view actually
declined 4% YOY in 2Q10 from 2Q09, while their aggregate capital spending declined 23%. The result, however, was a near-doubling of median free cash flow (+98%) and a
7% improvement in median operating margins to 12.3%, as sales have grown for three consecutive quarters.
Comparing 2Q10 sequentially with 1Q10 shows why many companies sounded cautious notes during the second quarter earnings season: improvements leveled off, and in
some cases metrics declined slightly.
Note: the percent values noted above may differ due to rounding. Source: Ernst & Young analysis of Capital IQ data, last accessed on 31 August 2010.

Figure 9: Communications equipment at a glance, 1H10

• Mobility: migration of public networks from mainly fixed to
mainly data-intensive mobile devices
• Industry blur: communications equipment is at the center
of technology industry convergence and blur
• Diversification: former “pure play” companies diversify into
servers, storage and tablet offerings
• Smart: mainstreaming of smartphones squeezes margins
s
• Technology: netbook and tablet devices introduced by
communications equipment manufacturers and smartphones from
computer manufacturers
• Value-added cloud services: smartphone vendors try to broaden
revenue streams by providing content and services
• Delivery channel: rise of the “app store”
• Business model: usage-based pricing for data begins

of traditional handset manufacturers; Android “open

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• Sales gap: increasing wireless broadband • Results:

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demand in public networks only partially offsets

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• Only a handful of sector leaders

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sales of older landline equipment report robust profitable growth

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• Demand gap: component and semiconductor • R&D holds steady

manufacturers unable to meet renewed demand • Reduction in capital expenditures
• Privacy and security gap: real and perceived concerns intensify • Free cash flow increases
• Improvement in operating margins
• Consolidation: weaker players continue to consolidate

Source: Ernst & Young analysis.

Issue 1: October 2010 15

 Sector view

Computers, peripherals and electronics

The nice surprise for sector companies in the first half of 2010 is the
resurgence in the core business of PCs, servers and storage, driven by
the ongoing growth of the internet, including cloud computing and the
mobile internet.14

Customer requirements for more robust numerous competitive products — nearly a

web servers, and the related need to store
and analyze an exponentially growing
volume of data, drove YOY growth of up
to 30% for servers and storage systems,
although growth varied from company to
company.15 Pent-up replacement demand
by enterprise customers was credited as
the major factor, accounting for up to 20%
growth in PC shipments.16 The sector’s need
to provide virtualized storage to support
Fact: The computers, cloud computing services drove Hewlett-
Packard and Dell into an M&A battle over
peripherals and electronics virtualized storage company 3PAR. HP won
sector experienced a 76% the deal after several back-and-forth bidding
rounds with a $2.35 billion offer — far above
YOY increase in debt — more Dell’s original $1.1 billion.17
than any other sector.
Looking to the future, however, the story
making headlines was the debut of the first
successful tablet computer, Apple’s iPad,
which sold more than three million units in
2Q10.18 The impact of the device is being
felt throughout the sector and beyond.
The iPad has been hailed as the answer for
online magazines, an accelerator of mobile
advertising adoption, a business model
disruptor of e-books and a precursor to
dozen of which have already been announced
by ASUSTek, Cisco, Compal Electronics,
Dell, Lenovo, LG Electronics, Samsung,
Sharp and others. Some companies haven’t
officially “announced,” but their CEOs have
publicly stated their tablet intentions —
most notably Microsoft and Verizon
Wireless, which named Google as its tablet
development partner. And finally, some
official announcements have come from
non-traditional sources: BYD Company,
the Chinese automobile manufacturer
and mobile phone battery maker, said it
would build a tablet.
Elsewhere in the sector, videogame
makers are adopting potentially disruptive
technology such as motion-capture cameras
and 3-D displays, and LCD screen makers
are adding capacity to meet skyrocketing
demand for large and small sizes. In addition,
several companies — most notably Japan’s
Panasonic, Sony and Toshiba — announced
plans to shift production of certain products
to contract manufacturers, a move that
typically aims to increase flexibility in the
market through a supply chain ecosystem.

• A slew of 3-D displays are announced for TVs, laptops, videogames,
cars — including a 3-D webcam
• LCD manufacturers report increasing pricing power as demand spikes
• Multiple PC manufacturers launch, or announce plans to
launch, smartphones
19
• Analysts raise 2010 PC sales growth forecast to 20%
• Imminent tablet computers and e-readers labeled “incredibly
disruptive”
• iPad becomes available on 3 April; 3 millionth sold 80 days later
on 21 June, making it one of the fastest-adopted technology
products ever20
• Earnings reports generally outpace the rest of the economy; even
struggling companies report that they “swung to a profit”
• One representative company reports 31% YOY revenue increase for
server and storage systems in 2Q1021
• 3-D focus increases, specifically for videogames and sports-oriented
television; one display manufacturer says 3-D for mobile handsets,
smartphones and gaming devices will cause 50% of its display
production to be 3-D in the next fiscal year
• Large and small companies alike announce a multitude of tablet
computers and e-readers expected to ship in the coming months —
most plan to use the Android OS

16 View from the top: global technology trends and performance

Figure 10: Key performance indicators for computers, peripherals and electronics (median value)

Sector median Constituent companies

$ millions 2Q 2009 Q2 Q3 Q4 Q1 Q2 2Q 2010 % Change Trend Notable High value Low value
Market value $6,753 $7,752 15% ▲ $228,877 $443
Sales $16,127 $18,542 15% ▲ $123,532 $4,231
R&D $570 $674 18% ▲ $3,432 $30
Levered free cash flow $580 $1,326 129% ▲ ■ $8,574 ($1,203)
Cash, ST and LT investments $2,846 $3,580 26% ▲ ■ $69,784 $88
Equity $4,292 $8,196 91% ▲ ■ $43,111 $1,499
Debt $1,909 $3,352 76% ▲ ■ $20,046 $0
Capital expenditures $409 $379 -7% ▼ $3,847 $83
Inventory $1,256 $1,667 33% ▲ ■ $10,777 $90
%
Operating margin 2.5 6.4 156% ▲ ■ 36.7 -0.4
Debt-to-equity 50.4 47.1 -6% ▼ 156.3 0.0
ROIC 4.0 9.1 129% ▲ ■ 25.7 -4.2
R&D as a % of sales 4.5 5.4 20% ▲ ■ 13.1 0.2
Days
Days sales outstanding (DSO) 50 51 2% ▲ 90 18
Days payable outstanding (DPO) 64 65 3% ▲ 134 27

Surging demand in the core business of servers, storage and PCs drove operating margins to more than double YOY in the computers, peripherals and electronics sector.
Median sales growth was 15% YOY, and even though the sales medians in the chart depict a drop-off from the first to the second quarters of 2010, the aggregate sales of
the 30 sector “pure play” and diversified companies comprising this sector view actually increased 4.8% during that period.
Given the combination of sales growth and operating margin improvement to a median of 6.4% in 2Q10 from 2.5% in 2Q09, free cash flow soared 129% YOY. Return on
invested capital grew (coincidentally) by the exact same percentage — 129% YOY. Median cash and investments also grew, by 26% YOY to $3.6 billion.
This sector may need to continue drawing on strong management decisions (as suggested by these scorecard attributes) to manage through emerging disruptions. The
majority of computers, peripherals and electronics companies are scrambling to bring to market innovative tablet computers, smartphones or both — or to update existing
netbooks or laptops — to compete with innovative products that debuted in early 2010. That those efforts are already under way is suggested by almost a full-point increase
in R&D as a percentage of sales, from a median 4.5% in 2Q09 to 5.4% in 2Q10. The availability of record low-cost debt in the first half of 2010 also comes at a good time for
companies in this sector, which may need it to fuel ongoing innovation. The sector saw median debt climb 76%. Since equity increased even more (+91%), however, the
sector’s debt-to-equity ratio dropped 6%.
Note: the percent values noted above may differ due to rounding. Source: Ernst & Young analysis of Capital IQ data, last accessed on 31 August 2010.

Figure 11: Computers, peripherals and electronics at a glance, 1H10

• Mobility: seemingly insatiable demand for smart mobile devices • Technology:

• Industry blur: redefining of devices within and across technology • Tablet computer debut: first successful tablet computer, followed by
sectors and other industries the promise of many competitive tablet computers and e-readers
• Cloud: ongoing growth and evolution of the internet, including cloud • 3-D focus intensifies: 3-D displays on the rise for videogames, sports
computing and mobile internet channels and mobile handsets (smartphones and gaming devices)

• Increased demand due to: • Market expansion: PC manufacturers enter smartphone market

• Need to store/analyze soaring volumes of data • Business model: transition to hardware as a service
s
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• Alliances: effectively managing non-traditional • Core businesses: YOY double-digit sales growth
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alliances is critical for PCs, servers and storage

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• Bidding wars: need to acquire technologies and • Results:

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companies to be competitive • In general, earnings reports outpace

• Flexibility and agility: need for speed and scalability the rest of the economy
demands continuous monitoring of supply chain ecosystem • Improved operating margins
• Developer resources: shrinking pool of developer resources for • Increased R&D as a percent of sales
other than the most popular platforms • Soaring free cash flow
• Opportunistic debt climbs

Source: Ernst & Young analysis.

Issue 1: October 2010 17

 Sector view

Internet
It’s a cliché to say that the rise of the internet caused disruptive change,
but the truth is that as more people and businesses get connected,
and as their connection speeds increase, the nature of what’s possible
in terms of technology innovation and business model disruption
continues to evolve.

Mobile video and video-over-the-internet Two internet mainstay businesses —

has been talked about for a number of
years, but in 2Q10 companies began
experimenting in earnest, announcing both
paid and ad-supported services. These
online video providers are involved in
complex contract arrangements with
traditional TV content networks, which
themselves are trying to figure out how
to participate without cannibalizing their
traditional revenue streams, or at least,
not cannibalizing them too quickly.
e-commerce and online advertising — also
continued to morph in the first half of 2010.
Both are affected by social networking
businesses that are building business
models around extracting intelligence from
a person’s social network to guide product
and ad recommendations. And both are
also affected by emerging location-based
services that are similarly trying to build
business models around extracting
intelligence from a person’s location.

Fact: The internet sector’s A cornucopia of companies continues to
develop cloud computing services, which,
median 12.6% ROIC in 2Q10 although they account for a small fraction
was the highest of any of sector revenue, are particularly popular
among start-up companies. Early enterprise
technology sector. adoption was accelerated by the onset of
the downturn — cloud services are predicted
to cost less than comparable system
purchases — and mainstream adoption is
seen as imminent once enterprises’ specific
information security and management
issues are addressed. Among consumers,
some cloud services are mainstream
services already, even though they aren’t
labeled as such. Popular email services are
cloud-based, as are public blogging
platforms. That familiarity may set the
stage for rapid adoption of more targeted
consumer cloud services.
As a result, long-percolating privacy
issues are emerging as top-of-mind. A new
privacy debate has developed between
the traditional view of securing personal
information against use by businesses
and the view that social networking sites
are in business explicitly to offer benefits
in exchange for the sharing of personal
information — and that their users are
comfortable with the trade-off. Differing
rules and customs from country to country
complicate the issue, as Google discovered
as a result of multiple countries’ investigations
into possible privacy violations in the course
of its StreetView data gathering, and as RIM
discovered as certain governments have
insisted on access to BlackBerry user traffic.
The future of many businesses will depend
on the evolution of these debates.

• The “webification” of TV/video is seen as “real,” but the business
models are still evolving
• Nearly three dozen companies are believed to have been subject
to outside attack by hackers operating out of China
• “Social search” enters industry lexicon as social network sites
begin to approach search engines in terms of sheer size and
market influence
• Privacy becomes headline news as major search engines and
social networks make changes that they later suggest may have
been made too fast
• E-commerce morphs in many dimensions — it becomes more
mobile, more international, more social and more “experiential”
• Social media sites continue to introduce features that share users’
personal information; one site is hit with three privacy lawsuits in
three weeks
• Location-based social media grows around the “check-in” concept,
enabled by smartphone ubiquity
• Sector leader announces “app store” selling only cloud-based software
• More web video products are introduced; one integrates web, search,
television sets and smartphones, enabling functions such as voice-
based web search of video content for display on TV
• Efforts to charge for online newspapers and video gain momentum

18 View from the top: global technology trends and performance

Figure 12: Key performance indicators for internet (median value)

Sector median Constituent companies

$ millions 2Q 2009 Q2 Q3 Q4 Q1 Q2 2Q 2010 % Change Trend Notable High value Low value
Market value $21,948 $28,150 28% ▲ ■ $141,957 $5,334
Sales $7,509 $7,763 3% ▲ $28,665 $2,351
R&D $1,116 $1,147 3% ▲ $3,210 $338
Levered free cash flow $733 $893 22% ▲ ■ $9,309 $330
Cash, ST and LT investments $3,173 $5,916 86% ▲ ■ $30,436 $1,279
Equity $7,578 $8,996 19% ▲ $40,613 $2,296
Debt $98 $136 39% ▲ ■ $895 $0
Capital expenditures $430 $574 33% ▲ ■ $1,123 $116
%
Operating margin 21.9 21.9 0% ▼ 48.8 5.0
Debt-to-equity 2.0 1.7 -16% ▼ ■ 34.4 0.0
ROIC 14.9 12.6 -16% ▼ ● 34.2 3.7
R&D as a % of sales 10.5 10.9 4% ▲ 17.6 5.0
Days
Days sales outstanding (DSO) 42 42 0% ▲ 110 11
Days payable outstanding (DPO) 40 43 8% ▲ 513 13

Despite posting the best or second-best results in most scorecard metrics, the internet sector is rapidly evolving; it has the most potential for disruption from innovative
newcomers. Such disruption was clearly happening in the first half of 2010, with mobile broadband, social networking and location-based services disrupting the sector’s
“traditional” advertising and e-commerce business models.
The internet sector shows the highest median market value ($28.2 billion) of all sectors, the highest median ROIC (12.6%), higher median cash and investments
($5.9 billion) than all but the communications equipment sector and better operating margins (21.9%) than all but the software sector — plus, the internet sector is nearly
debtless with a debt-to-equity ratio of 1.7. These statements remain true despite a large (in percentage terms only) YOY increase in debt and a 16% drop YOY in ROIC. The
internet sector also has higher capital expenditures than any other sector — perhaps for building the massive data centers anticipated for future cloud computing services.
Meager median sales growth of 3% hides a diverse range, from top internet sector companies that showed sales growth of up to 40% YOY to companies that saw revenue
drop. The internet sector requires participants to recognize and adapt quickly as business models change. The internet sector’s famous “network effects” that cause the big
to get bigger are unforgiving should they switch into reverse on a company.
Note: the percent values noted above may differ due to rounding. Source: Ernst & Young analysis of Capital IQ data, last accessed on 31 August 2010.

Figure 13: Internet at a glance, 1H10

• Mobility: e-commerce becomes more mobile, international, social • Technology: mobile video/video-over-the-internet commercialized
and experiential but not yet ubiquitous
• Broadband penetration: as more people and businesses are • Business models:
connected and connection speeds increase, more innovation occurs; • E-commerce and online advertising build business models
internet evolves that extract intelligence from a person’s social network to
• Cloud: downturn of the economy prompts accelerated interest guide product and ad personalization
in cloud computing; start-ups and consumers embrace the • Location-based services extract intelligence from a
cloud; enterprise and government show interest in person’s location
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cloud applications • Distribution channel: some “app stores”

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specialize in cloud computing services

va

• Social networking: the rise of social networks sparks

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a new generation of platforms and applications • Pricing model: paid models for online newspapers/
ar

video content, including micropayments, on the rise

M

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• Agility/adaptability: speed of innovation is • Results:

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escalating, and companies must be able to

y

• Highest median market value of all the sectors

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respond quickly to market shifts • Highest median ROIC

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• Managing innovation: companies must figure out how • Higher median cash and investments than any
to keep from cannibalizing their current revenue streams other sector except communications equipment
too quickly
• Cloud availability and management: IT security, privacy, availability
and information management issues remain
• Interoperability: issue of connecting disparate applications and
databases is key
• Risk management: due to new technologies and new markets

Source: Ernst & Young analysis.

Issue 1: October 2010 19

 Sector view

IT services
IT services companies have been acquisition targets in recent years for
established companies from other sectors in search of growth. Many
factors, however — including increased competitiveness brought on by
those buyouts — are squeezing margins for most sector companies even
as the leaders have managed to eke out minimal margin growth
(Figure 14, page 21).

Fact: At 65%, the median
YOY growth in market value
in 2Q10 for the IT services
sector was highest of all
technology sectors.
Two other factors affecting sector margins
are rising labor costs in developing
economies (particularly India and China)
and currency fluctuations.22
Year-over-year, for example, the Indian
rupee was up nearly 10% versus the
US dollar in the second quarter of 2010,
lowering potential profits from traditional
“offshoring” business derived from US
customers. At the same time, sector wage
increases in the mid-teen percentages or
higher have been widely reported in
multiple emerging regions.
As a result, many leading sector companies
are developing geographically dispersed
workforces, both to find specialized pockets
of talent and to hedge against labor
cost issues.
Yet another potential impact on margins
emerging in the first half of 2010 is that
some companies have reported that
outsource contract lengths are shortening.
Customers prefer shorter-term deals —
five years instead of seven, for example —
because they are wary of being locked into
prices for too long.23 Shorter deals can
potentially squeeze margins because many
contracts cause outsource contractors to
incur more up-front cost.
In addition, discounts given during the
depths of the downturn may be squeezing
margins for new business. Companies are
finding it difficult to return prices to prior
levels in the current improved, but still
uncertain, economic environment.
Further, there is no dominant competitor to
provide a pricing “umbrella.” Recent reports
state that the market leader possessed
less than 8% of sector revenue in 2008,
supporting the lack of a dominant leader and
indicative of a crowded competitive space.24
Taken together, these factors suggest
that the IT services sector is undergoing
important structural change, at least part of
which involves increased market power for
customers. The result of many acquisitions
over the past several years is that most of
the large diversified companies are major
sector competitors, right alongside
traditional services-only firms. Those
diversified companies are motivated by
factors beyond their services-only financial
performance — such as cross-selling
opportunities — which raises competitive
intensity beyond what would otherwise
be expected.

• Sector is increasingly squeezed by rising labor costs and
currency fluctuations
• Major outsourcing companies continue their push to “globalize”
their workforces — creating local work teams in multiple
geographies worldwide
• Rate-cutting during the recession combines with currency
fluctuations to squeeze margins even tighter
• Customers are negotiating tougher deals and renegotiating
more frequently
• Average value of new-contract signings falls
• Customers insist on shorter-term deals
• IT services companies specialize to gain a competitive edge
(e.g., health care information technology (HIT))
• The total number of new services contracts awarded annually more
than doubled globally between 2000 and 2009, but the amount
spent on new contracts fell to $74.5 billion from $90 billion in
the same period25

20 View from the top: global technology trends and performance

Figure 14: Key performance indicators for IT services (median value)

Sector median Constituent companies

$ millions 2Q 2009 Q2 Q3 Q4 Q1 Q2 2Q 2010 % Change Trend Notable High value Low value
Market value $7,881 $13,038 65% ▲ ■ $158,344 $2,596
Sales $8,168 $7,859 -4% ▼ $123,532 $3,821
Levered free cash flow $745 $918 23% ▲ ■ $13,106 $150
Cash, ST and LT investments $1,760 $2,152 22% ▲ ■ $17,655 $95
Equity $3,932 $5,820 48% ▲ ■ $42,535 $1,991
Debt $2,304 $3,215 40% ▲ ■ $26,650 $0
Capital expenditures $258 $235 -9% ▼ $3,847 $53
%
Operating margin 12.5 12.8 2% ▲ 29.9 1.6
Debt-to-equity 39.1 28.8 -26% ▼ ■ 126.5 0.0
ROIC 10.4 10.9 5% ▲ 30.4 -4.2
Days
Days sales outstanding (DSO) 69 70 1% ▲ 129 36
Days payable outstanding (DPO) 49 50 3% ▲ 513 13

IT services was the only sector to see a YOY decline in median sales in the second quarter of 2010, showing just how tough new-contract negotiations have become
(see analysis on opposite page). So far, however, median sector operating margins have held up — and even eked out a 2% YOY improvement.
Given that our view is “from the top” — comprising a universe of sector “pure play” companies and diversified companies that participate in the sector, all derived from our
top 100 list of companies — it is less of a surprise that median scorecard metrics show slight improvements in the face of difficult market dynamics and macroeconomic
uncertainty. There was growth in free cash flow (+23%) and in cash and investments (+22%), while sector companies held the line on capital expenditure, shrinking the
median by 9% YOY. Even median ROIC improved by 5%.
IT services sector companies appear to be among those that took advantage of inexpensive debt available in the first half of 2010, with median debt increasing 40% YOY
in 2Q10. At the same time, the sector’s debt-to-equity ratio dropped 26%, from 39.1 to 28.8.
Note: Three diversified companies included in this sector view recently made major IT services sector acquisitions: Hewlett-Packard, Dell and Xerox. Capital IQ data used for
this chart showed restated financials that included prior sector revenue.
Note: the percent values noted above may differ due to rounding. Source: Ernst & Young analysis of Capital IQ data, last accessed on 31 August 2010.

Figure 15: IT services at a glance, 1H10

• Industry blur: IT services companies continue to be acquisition • Technology: specialty IT – firms develop specialties like HIT to cope
targets for companies in other sectors looking for growth with competitive intensity
• Cloud: rise in cloud computing provides opportunity to outsource • Business model: cloud-based shared services business models
select applications to the cloud begin to surface
• Wages: rising wages and currency fluctuations validate the need
to act
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• Discount fatigue: companies are finding it hard to • Results:

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return to price levels accepted prior to the downturn

y

• New services contracts awarded annually

m
is

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• Workforce: increasing need for a geographically more than doubled between 2000 and 2009,
su

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dispersed work force to tap specialized talent and
balance labor costs
• Contracts: rise in shorter-term deals for outsourcing contracts
• Competition: lack of a dominant leader means no price umbrella —
and intense price competition
but the amount spent on new contracts fell
• Margin squeeze: IT services are increasingly squeezed
by rising labor costs and currency fluctuations
• Consolidation: consolidation activity continues

Source: Ernst & Young analysis.

Issue 1: October 2010 21

 Sector view

Semiconductors
The semiconductor sector appeared to be in a powerful upswing portion
of its traditional recurring boom-bust cycle in the first half of 2010,
fueled by strong demand for smartphone and other mobile device
components and by the resurgence of PC and server sales. Some
companies reported increased prices for the products in most demand,
such as the flash memory used in most mobile devices.

Any scheduled party, however, may be Sector companies are attempting to

short-lived. Even as companies reported
extremely strong earnings — one predicted
that its 2Q10 revenue would reach an all-
time high for a single quarter — they
expressed caution about the rest of the
year due to macroeconomic uncertainty.
Fact: The “boom” portion of In fact, as this report was being prepared,
a semiconductor sector bellwether lowered
the semiconductors sector’s its revenue forecast for the rest of the year,
recurring boom-bust cycle citing deterioration in mobile PC demand.
Analysts subsequently argued publicly over
has thrust operating whether the deterioration was due to
margins up from 0.1% in macroeconomic factors or the sudden
popularity of tablet computers causing
2Q09 to 10.6% in 2Q10. PC buyers to hold off. If the latter issue is
the main factor, the slump may not affect
the entire semiconductor sector.26
Still, several companies announced major
capital investments during the first half,
investing in increased capacity and new
manufacturing processes.
Near-term product innovation appeared
focused on low-power chips across the
computing spectrum: in support of mobile
devices, for example, as well as green data
center initiatives. Both Intel and AMD
emphasized low-power, high-performance
microprocessors aimed for use in data
center servers.
innovate on the marketing front as well.
Intel borrowed the “app store” concept
from the smartphone market to launch its
“AppUp Center” for netbook PCs using its
Atom microprocessor. Access to the “app
store” will be pre-installed on devices from
its partner netbook PC manufacturers.27
Longer term, semiconductor sector innovation
may become more diversified and possibly
blur into other sectors. That’s suggested by
Intel’s acquisition of McAfee, through which
we expect that certain security functions
will be made available in silicon.28
One unusual report that caught our
attention involved a top 100 semiconductor
sector company whose sales of low-cost,
commodity mobile chipsets are touching
off a wave of handset innovation by “mom
and pop shops” in mainland China. It suggests
that such sophisticated technology may
become a source of innovation among the
world’s “tinkerers,” a factor that could
accelerate technology innovation even faster
if it becomes a widespread trend. That’s
something we intend to monitor closely.

• Established companies report robust earnings results in 1Q10,
ranging from strong companies’ large profit increases to narrower-
than-expected losses from weaker companies
• Smartphones, other mobile devices and improving PC sales are
reportedly driving semiconductor sector demand growth in 1Q10
• IBM researchers claim a technical advance that could enable
silicon-based optical computer chips29
• Multiple companies create potentially disruptive three-dimensional
chip designs
• “App stores” hit the semiconductor sector, e.g., Intel debuts
AppUp Center for Atom microprocessor
• Robust revenue and earnings growth continues — some companies
anticipate all-time high quarterly revenue in 2Q10
• Multiple companies report price increases for flash memory as
demand continues to outstrip supply
• Sector leaders reveal plans for significant capital spending increases;
one company alone will double spending to $15.6 billion30
• Performance of low-power microprocessors intended for mobile
devices is enhanced; ARM Holdings announces plan to add low-power
server chips to its influential family of mobile chip designs
• Solar-focused semiconductor products drive the strategy of at
least two leading companies: one reports that solar drives revenue
growth, another invests in solar-panel manufacturer

22 View from the top: global technology trends and performance

Figure 16: Key performance indicators for semiconductors (median value)

Sector median Constituent companies

$ millions 2Q 2009 Q2 Q3 Q4 Q1 Q2 2Q 2010 % Change Trend Notable High value Low value
Market value $9,017 $10,611 18% ▲ $108,220 $3,191
Sales $5,425 $7,291 34% ▲ ■ $128,125 $2,278
R&D $660 $673 2% ▲ $6,263 $94
Levered free cash flow $185 $658 255% ▲ ■ $8,639 $(163)
Cash, ST and LT investments $2,563 $2,846 11% ▲ $25,943 $985
Equity $4,440 $6,060 37% ▲ ■ $66,833 $752
Debt $980 $1,013 3% ▲ $34,927 $0
Capital expenditures $550 $361 -34% ▼ ● $9,357 $57
Inventory $825 $915 11% ▲ $15,134 $194
%
Operating margin 0.1 10.6 7,577% ▲ ■ 37.0 -0.4
Debt-to-equity 18.2 17.0 -6% ▼ 343.1 0.0
ROIC -0.8 11.3 N/A ▼ ■ 28.7 1.3
R&D as a % of sales 13.8 11.1 -19% ▼ ● 30.2 0.3
Days
Days sales outstanding (DSO) 52 51 -1% ▼ 85 20
Days payable outstanding (DPO) 55 57 4% ▲ 111 19

We’ve mentioned the semiconductor sector’s traditional boom-bust cycle before. The scorecard above shows what sector metrics look like while turning the corner from bust
to boom.
Having reduced spending and investment and cut production as demand collapsed in the bust of 2008-2009, companies saw sector operating margins shoot upward an
astonishing 7,577% YOY in 2Q10 (from a near-death median of 0.1 in 2Q09 to 10.6 in 2Q10) as demand flooded back. Median sales rose 34%, and free cash flow enjoyed
a trajectory of 255% growth. We won’t even calculate the improvement in ROIC because the starting point in 2Q09 is a negative number (-0.8). Given that ROIC grew to
+11.3, that’s an even bigger increase than the aforesaid “astonishing” one.
Unfortunately, the bust-time cuts — particularly the ratcheting down of capital expenditure (-34%) — means that the semiconductor sector was unable to deliver on all
available demand for certain components in the first half of 2010. Customers, particularly those in the communications equipment sector, say they could have sold more gear
if they only had enough components to build them.
We also observed that multiple scorecard metrics leveled off from 1Q10 to 2Q10. Many semiconductor sector companies already may detect the next bust approaching.
Note: the percent values noted above may differ due to rounding. Source: Ernst & Young analysis of Capital IQ data, last accessed on 31 August 2010.

Figure 17: Semiconductors at a glance, 1H10

• Mobility: demand for mobile computing and communication devices • Technology:

is driving capital investment in specific chip types • Optical, 3-D and DNA-based chip R&D
• Smart everything: strong demand for smartphones and other • Low-power, high-performance chips across the computing spectrum
smart platforms, devices and applications (green chips)
• Pent-up demand: resurgence of PC and server sales • Low-cost, commodity chips targeting the entrepreneurial
mentality and spawning faster innovation
• Emphasis on low-cost chips
• Manufacturing: processes reviewed and revised to
s

enhance efficiency and increase capacity

In
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no
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• Business models: leading companies diversify

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• Diversification: traditional “pure play” • Results:

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semiconductor companies begin to diversify

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• Semiconductors appear to be in the upswing

m
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• Uncertainty: macroeconomics and cyclical nature portion of its recurrent boom-bust cycle
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of the sector may curtail demand, too soon to tell; • Established companies report robust earnings
production/demand cycles appear to be getting shorter
• Significant capital investments planned by many
• Product lifecycle: rise in tablet computer sales may signal • Costs contained and margins soar
slump in PC demand
• Cost containment: managing spending, investment and production

Source: Ernst & Young analysis.

Issue 1: October 2010 23

 Sector view

Software
Software sector activity this year shows that the cloud computing
phenomenon that includes SaaS has become very nearly mainstream.
Perhaps nothing speaks more eloquently of the change in this sector in
general or the rise of SaaS in particular than the fact that the Microsoft
Office suite became available as a free cloud service during 2Q10.

Could free versions of such venerated
applications, monetized only by associated
advertising, be “good enough” for many
users? Not surprisingly, the sector-wide
move toward SaaS is happening
concurrently with an increase in the use of
advertising-supported business models.
The biggest M&A deal of the second quarter,
however, was motivated by the smart
mobility movement: SAP’s $5.6 billion
acquisition of Sybase. Sybase, first known
for its database software, now has a leading
position in mobile carrier infrastructure
software and mobile applications support.32

Fact: The software sector’s
median 23.8% operating
margin was the best of any
technology sector.
To adjust to the rapid rise of SaaS, leading
sector companies have made SaaS-related
acquisitions a hallmark of M&A activity in
2010. Most of the activity involves deals
that help companies to position themselves
within the cloud computing/SaaS market or
to enhance existing cloud/SaaS offerings.
The largest such deal by dollar value in the
first quarter was CA’s $350 million
purchase of Nimsoft, a provider of SaaS
monitoring tools. Top SaaS-related deals in
the second quarter were IBM’s acquisition
of Sterling Commerce for $1.4 billion
and Symantec’s $1.3 billion purchase
of the identity and authentication business
unit of VeriSign.31 Both Sterling and the
VeriSign unit offer software that helps to
address security concerns in SaaS-based
commerce applications.
Elsewhere in the sector, established
providers of middleware were seen focusing
on products and services that help large
enterprises adapt their business applications
for use by mobile devices. At the same time,
smartphone platforms are increasingly
attracting software developers, due to the
combination of large and growing user
communities, the increasing power of the
platform operating systems and easy
distribution via “app stores.”
Similarly — though not primarily a mobile
phenomenon — social networks are
attracting increasing developer resources.
They have become a platform for new
application development, especially for
online/virtual “social” or “casual” games,
which often generate revenue through the
sale of ancillary virtual goods. Videogames,
meanwhile, are experiencing a shift to
online distribution and are seeing sales
siphoned away by the rise of casual games.

• The “app store” model begins to spread beyond mobile devices to
other forms of software
• Social networks gain steam as platforms for software development
• Just as business software has begun to migrate into cloud services,
videogame makers are feeling the transition to online gaming
• Smartphone applications offered through “app stores” make
headlines for fun, usefulness and “wow factor”
• Strategic focus on information security, e-commerce and mobile
infrastructure seen increasing
• Published reports say software developers are migrating to the
Android platform
• Rapid rise of online/virtual “social” or “casual” game software
becomes apparent: one social game start-up is on track to generate
$500 million this year from “free” games by selling virtual goods
to gamers33
• Health-related applications proliferate; one drugmaker even
borrows technology’s “open source” development model for malaria
drug development

24 View from the top: global technology trends and performance

Figure 18: Key performance indicators for software (median value)

Sector median Constituent companies

$ millions 2Q 2009 Q2 Q3 Q4 Q1 Q2 2Q 2010 % Change Trend Notable High value Low value
Market value $14,857 $13,913 -6% ▼ $201,656 $4,747
Sales $4,368 $4,535 4% ▲ $97,379 $2,405
R&D $859 $844 -2% ▼ $8,714 $487
Levered free cash flow $991 $1,317 33% ▲ ■ $16,345 $49
Cash, ST and LT investments $2,853 $2,790 -2% ▼ $44,313 $1,713
Equity $4,801 $5,179 8% ▲ $46,175 $2,752
Debt $1,792 $1,560 -13% ▼ $26,650 $0
Capital expenditures $156 $230 47% ▲ ■ $3,729 $79
%
Operating margin 18.6 23.8 28% ▲ ■ 39.5 -5.5
Debt-to-equity 39.1 28.8 -26% ▼ ■ 126.5 0.0
ROIC 8.2 9.3 14% ▲ 29.0 -4.2
R&D as a % of sales 14.5 14.1 -3% ▼ 31.2 6.0
Days
Days sales outstanding (DSO) 46 45 -2% ▼ 98 15
Days payable outstanding (DPO) 56 49 -13% ▼ 97 29

A tepid YOY median sales increase (+4%) and a small decline in market value (-6%) for the software sector reflect both macroeconomic uncertainty and sector-specific
turmoil brought on by the disruptive force of SaaS. As exciting as the SaaS transition may be for the industry and its customers, the scorecard metrics above suggest that
the excitement will turn into greater sales and profit in the longer term — not now, while companies still are migrating from legacy licensing approaches to cloud-based
services and while customers are still uncertain how to use SaaS without increasing exposure to information management, privacy and security risks. When more services
are in place and the issues addressed, broader accessibility should lead to market expansion.
For now, the software sector can take pride in its top companies: median operating margins increased 28% YOY to 23.8, which was a better operating margin than any other
sector; and ROIC increased 14% to 9.3%. Free cash flow increased 33% YOY to a median of $1.3 billion. Companies held the line on R&D spending, with the median dropping 2%.
However, aggregate R&D spending of the 11 sector “pure play” and diversified companies that comprise this sector view actually increased a tiny bit — two-tenths of a
percent, or $50,000 — to $24.8 billion in 2Q10. Meanwhile, decreasing median debt enabled a 26% drop in the sector’s debt-to-equity ratio.
As in several other sectors, the software sector experienced slight declines from 1Q10 to 2Q10 in several key scorecard attributes, such as sales and free cash flow. This
correlates with what we’ve seen during the second quarter earnings season in that both companies and market research analysts have been reducing their growth forecasts
for the rest of 2010.
Note: the percent values noted above may differ due to rounding. Source: Ernst & Young analysis of Capital IQ data, last accessed on 31 August 2010.

Figure 19: Software at a glance, 1H10

• Mobility: providers of middleware focus on mobile • Business model:

software applications • Use of online advertising supported business models is on the rise
• Cloud: rise of SaaS drives application development; also drives • “Social” or “casual” games generate revenue through the sale of
SaaS acquisition activity virtual goods
• Smart everything: rise in use of smartphones attracts • Transition from licensed software to services; release of venerated
software developers software packages as free SaaS services

• Social networks: driving application development • Delivery channel:

s

• “App store” model begins to spread beyond

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• Transition: disruptive rise of SaaS forces • Results:

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companies to migrate from legacy licensing

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• YOY sales increase with small drop in market

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approaches to cloud-based services value overall

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• Risk: cloud presents increased exposure to • Leading companies’ operating margins are higher
information data management; service availability, than in any other sector
privacy and security risk; concerns intensify with SaaS • R&D spend held — with the median down but
e-commerce applications, including business continuity aggregated spending up slightly
management (“uptime” and availability)
• Customer: overall impact of “open software” phenomenon
remains unclear

Source: Ernst & Young analysis.

Issue 1: October 2010 25


Kevin Price
Global Technology Sector
Advisory Services Leader
Ernst & Young
Kevin has been focused on the technology sector
for over 20 years, helping various enterprises
bring solutions and products to market. He
assists global technology clients to improve their
operational performance and delivery models.
Kevin provides leadership for the development
of new solutions and joint technology client
go-to-market service offerings.
Paul Chabot
Senior Manager and Global
Technology Sector Resident
Advisory Services
Ernst & Young
Paul has over 10 years of experience in product
development and management and the creation
of go-to-market strategies for Silicon Valley
technology clients. He also has extensive
knowledge of product management leading
practices, portfolio management strategies
and application development processes.
Jason Heinz
Senior Manager
Advisory Services
Ernst & Young
Jason has over 13 years of professional
services and industry experience in business
and market strategy, product management,
sales, channel management, distribution,
compliance and operations. He also serves
as our West Area Customer Practice Leader
and as our national service lead for Product
Innovation and Lifecycle Management.
26
Top of mind
Building business value from
smart mobility innovation
The massive move to smart mobility is one of the biggest technology
industry trends we’ve ever seen. Soon, just about any business or
personal activity you can imagine will be doable from wherever you
happen to be, via a mobile device.
As this becomes clear, businesses wishing to
capitalize on the opportunity to “mobilize”
their enterprise are beginning to re-imagine
their infrastructure and applications to suit
that purpose. They will require many
innovative new products and services to do
so. At the same time, consumers are adopting
mobile devices — think smartphones,
netbooks, e-readers and tablet computers — at
unprecedented rates. Consumers, too, expect
innovative new applications and services.
Examples of innovative consumer-oriented
mobile products and services being brought
to market by technology companies —
sometimes on their own and sometimes in
collaboration with companies in other
industries — include newspapers and
magazines redesigned specifically for tablet
computers, mobile advertising and location-
based marketing, social networking and
e-commerce services. In business-to-
business markets, companies are building
innovative enterprise applications that push
business processes out to the point of
customer contact.
As a result, technology companies face
a breathtaking landscape of opportunity
and complexity to develop and deliver the
mobile products and services that meet
the needs of enterprises and consumers.
The same companies, however, face a
daunting landscape of challenges in terms
of managing the development of these
innovative products as well as managing
the end-of-life of products that may be
cannibalized or eventually replaced.
“Few companies have the processes or the
discipline to manage this kind of rapid
product line innovation — it is doable, but
extraordinarily difficult,” says Kevin Price,
Global Technology Sector Advisory Services
Leader for Ernst & Young. Kevin explains
that the difficulties stem from the need to
assess strategic growth opportunities in the
View from the top: global technology trends and performance
fast-changing mobile market while
evaluating the revenue and profit potential
of the existing product portfolio.
Paul Chabot, Senior Manager and Global
Technology Sector Resident for Ernst & Young,
further explains that those analyses must
then be mapped against your individual
organization’s strengths and weaknesses to
make a series of decisions. These decisions
include which new-product opportunities
are best to pursue; whether your company
should build the new product, outsource its
development, or buy it via an alliance or
acquisition; and which existing products,
if any, should be eliminated in order to
reallocate resources and optimize profitability.
“This is a complicated issue,” Paul
emphasizes. “It involves many different
perspectives and areas of expertise in
order to master it and do it well.”
Yet, this type of opportunity analysis and
product lifecycle management is the heart
of any technology company. “It’s their core
competency, the most important thing they
do — it’s what keeps them growing and
competitive,” says Jason Heinz, Senior
Manager for Ernst & Young. Given the rapid
pace of mobile-related product and service
innovation in all corners of the technology
industry, companies’ mettle is being
severely tested in this area.
Leading technology industry companies,
therefore, are looking for new ways to
approach these challenges. “We advise
clients to take a holistic approach, which
we refer to as Product Innovation and
Lifecycle Management, or PILM,” says
Kevin. The PILM approach concurrently
addresses the multiple critical-path issues
facing technology innovators. PILM enables
companies to investigate market size
and window of opportunity, customer
requirements, competitive products and
services (both current and anticipated),
pricing issues and other market behavior,
while simultaneously addressing other
issues important to innovation delivery.
“Those other issues include assessing the
company’s manufacturing capability, supply
chain and IT operations to determine the
optimal approach for rapidly developing and
introducing a new solution that meets the
needs of the market — looking at what
will be needed to source and deliver an
innovative new solution, just in time,”
explains Paul.
Kevin adds, “The crucial factor is that you
need to do all this in the context of managing
your overall product portfolio. So you need
to think about all stages of the product
lifecycle, from original ideation right through
‘retirement.’” Figure 20 below details key
considerations for technology companies
at each of the different stages.
Further complicating the challenges of mobile
innovation is that mobile technology is
enabling innovation and operational change
in other industries — health care being a
notable example. “When trying to sell
your mobile product or service into a
new market, you will likely face unfamiliar
legal, compliance and regulatory issues,”
says Jason. “We are seeing a lot of cross-
industry collaboration and non-traditional
partnerships and alliances starting to
emerge, where companies are combining
hardware, software and services in
new ways to meet the needs of a
specific industry.”
To meet such new cross-industry
challenges, leading technology companies
are embracing innovation approaches that
holistically manage risk, policy and process.
A successful approach has to take into
account emerging legal, regulatory
and compliance issues, including tax
considerations — even local, national and
regional tax considerations — to help a
company develop the most tax-efficient
supply chain possible for a given product
innovation, for example. “Our PILM
approach is designed to take these issues
into account. It’s a flexible approach —
one that is tailored to each company’s
unique set of circumstances,” says Jason.
Finally, in the current fast-paced environment,
where customers are clamoring for
innovative and cost-effective solutions,
technology companies need repeatable
processes. “This is important to enabling
the company to leverage the power of
collaboration across organizational silos,
product lines, business units or even with
strategic partners. Repeatable processes
also provide a solid foundation for driving
continuous improvement,” notes Jason.
The pace of mobile-related product
and service innovation will likely continue
to accelerate for the foreseeable future,
while simultaneously spreading to more
diverse industries and applications.
Technology companies will need a new
approach and new tools to remain successful.
“PILM is all about giving companies tools
to get the most revenue and profit from
rapidly emerging, never-ending innovation
opportunities, while minimizing their risk,”
says Kevin.

Figure 20: Managing all stages of the mobile product lifecycle

Lifecycle stage Questions and considerations

Ideation • What market opportunities or threats does mobile technology create?

• What new products or services, or changes to existing products or services, are needed to seize those opportunities or mitigate the threats?
• How can various parts of your product or service ecosystem benefit (be streamlined or transformed) from mobile technology?
Examples include: mobile payment methods, mobile shopping and ordering, mobile bar code readers for comparison shopping or
supply chain processes.
• What new technology is needed (chips, devices, memory, PCs, tablets)?

Design • Mobile opportunities often require new capabilities, expertise or knowledge of new markets. Who can you partner with to seize the opportunity?
How should you structure the relationship (acquire, partner, JV)? What does the business model look like?
• Social networking helps you get closer to customers; you can involve customers in the early design of new products and services, getting
instant feedback that can accelerate innovation.

Development • Flexible, streamlined processes are necessary to support extremely rapid — and on-target — product or service development.
First-mover advantage is huge in such a fast-moving, competitive arena, where new ideas can completely change the game.
• New mobile products and services require collaboration from a network of partners. Development processes should accommodate close
collaboration and co-development — while protecting your IP and ensuring regulatory compliance.

Launch • Technology companies should leverage the combination of mobile and social media to sell and promote new products and services.
Use social media to build awareness and buzz and create demand.
• New marketing approaches, such as mobile advertising and promotion, are required to take advantage of the new customer contact points
and experiences that mobility offers.

Support • Consider new ways of interacting with customers that mobility enables.
• How do you manage customer experience across new mobile touch points — e.g., mobile video, text, voice and interactive applications?
• Leverage mobility together with social media to gather customer feedback on current products. Get the pulse of different user
groups: early adopter, mainstream, business users, etc.

Retirement • Mobile markets move fast: think about how to make your own products obsolete before competitors or new entrants do.
• Monitor the costs and profitability of new mobile products and services. Be judicious about investments made to capture new markets,
and know when to stop investing.

Source: Ernst & Young analysis.

Issue 1: October 2010 27

 Outlook
Given the uncertain state of the macro economy, the big-picture
outlook for the global technology industry can only be described as
“cautious optimism.” In most other ways, however, this is an industry
that is eager to put the global downturn behind it and get on with the
business of continuous innovation and the reshaping of society.

Ubiquitous broadband connectivity and the Looking beyond macroeconomic uncertainty

many new business, personal and social
agendas it enables have moved much of
what the technology industry produces
from the “nice to have” to the “must have”
list. Leading technology companies are flush
with cash to support innovation, deal
making or both. Technological advances
“Smart mobility has that have emerged as megatrends are
the potential to cause enabling any activity to become mobile,
enabling intelligence to be embedded into
many different industries (or gathered from) everyday products
to re-imagine business and social networks and causing formerly
disparate industries and sectors to blur into
processes for an each other. Businesses and consumers alike
increasingly mobilized and have voted with their wallets, indicating
they want more of the productivity
interconnected economy.” improvements and experiences that
Yuichiro Munakata technology creates. Their purchases are the
Ernst & Young reason the global technology industry has
Japan fared better than most during the downturn.
and the technology megatrends, there are
many related and secondary trends to
watch for that are shaping or reshaping
different aspects of the global technology
industry. For example, the recession has
been credited with accelerating initial
corporate adoption of cloud computing
services — despite their newness, the
potential loss of control their use implies
for IT managers and increased information
security concerns. Going forward, it will
be critically important for technology
companies to monitor corporate cloud
computing adoption rates in order to
determine when cloud-based versions of
their products and services will become
viable market entries.

Figure 21: Global technology industry venture capital investment, 1H09 and 1H10

$ billions Amount invested # of deals Number of deals, YOY

-15% -9.7%
$8 1,200
$7.1b
$7 959 deals
1,000
$6b 866 deals
$6
Software
$2.8
Semiconductors 800
$5 439
$2.2 IT services and internet
396
$4 $0.8 Computers, peripherals and electronics 600
Communications equipment
$0.9 67
$3 69
$1.7 400
$1.3 255
$2 238
$0.9 200
$1 $0.8 108
99
$0.9 $0.8 90 64
0 0
1H09 1H10 1H09 1H10

Distribution of total technology industry venture capital (1H10) Distribution of deals (1H10)
• US: 73% ($4.35b, -21.2%) • Israel: 3% ($0.21B, -16.5%) • US: 67% (576, -11.1%) • Israel: 3% (29, -37%)
• Europe: 14% ($0.84b, 2.7%) • India: 1% ($0.04B, -62%) • Europe: 24% (211, -2.8%) • India: 1% (7, -22.2%)
• China: 9% ($0.52b, 62.7%) • China: 5% (43, 10.3%)

Given the macro economy and the direction of regulatory policy affecting the venture capital (VC) industry, it is no surprise that VC activity declined YOY in the
first half of 2010 both in terms of US dollar volume invested (-15%) and number of deals (-9.7%). Only the semiconductors sector bucked the trend in both areas —
an unusual twist given that the sector’s high capital requirements generally make it an unpopular choice for VCs. Globally, all regions declined in dollars invested
except for China, which saw a 62.7% increase (but which accounted for only 9% of funds invested during the period) and Europe, where funding increased 2.7%.
Europe had 14% of funds invested; the lion’s share, 73%, was invested in US start-ups.
Source: Ernst & Young analysis of Venture One/Venture Source data, 1 September 2010

28 View from the top: global technology trends and performance

If cloud services are adopted rapidly, it will
be interesting to watch how they reshape
technology industry sectors, particularly the
computers, peripherals and electronics sector
and the IT services sector. Will growth in
data centers to support cloud computing
continue to drive server and storage system
sales, as seen in the first half of 2010?
Or will sales ease as customers switch from
buying hardware to buying cloud-based
“instances” (virtual servers that are
purchased, accessed and managed over
the internet)? And how will server makers
themselves participate in the hardware as a
service market? IT services providers must
consider how the migration to cloud-based
services affects their own services, and
whether they should transform into cloud
computing service providers.
There is little doubt that technology is
enabling innovation in other industries,
such as health care, smart grid and
automotive. We’ve begun to see the rise of
non-traditional alliances and partnerships.
Watch for the acceleration of this trend —
and of related M&A.
The evolution of the information sharing
versus privacy debate precipitated by
Facebook and joined by Google and many
others — including governments, regulators
and litigants — will shape emerging
Figure 22: Top 25 global technology company stock repurchases, 2Q10 and 2Q09
$ billions
$49b
$50
+29%
$6b
$40
$38b -33%
$9b
$30
$43b
$20 +48%
$29b
$10
$0
2Q09* 2Q10*
*Based on Capital IQ data, last accessed on 31 August 2010.
advertising, marketing and e-commerce
business models. Will the debate affect
privacy regulation in different regions of
the world? Will it change user attitudes?
Market research analysts anticipate that,
in the latter part of the year, established
market share leaders that have lost ground
to new entrants will flood the market with
new smartphones in an attempt to regain
share. That could put pressure on prices and
even touch off a price war. A big question,
however, is whether companies can buy
enough LCD screens, flash memory and
other chips to enable them to flood the
market. Manufacturers of those components
are still scrambling to build enough capacity
to meet demand. Will supply chain
constraints ease or worsen?
A closely related question is: What will happen
if all that semiconductor capacity gets built
but remains unused due to macroeconomic
weakness, despite current expectations?
Semiconductor industry analysts expect
today’s major build-outs to result in an
overcapacity bust circa 2012-2013, but some
companies have already expressed concern
about growth for the rest of this year.
3-D has become a rallying cry among
videogame makers and television
manufacturers. Some expect 3-D
Top 25 companies pulled the trigger on 29% more
stock repurchases in 2Q10 than 2Q09, likely
taking advantage of the “opportunity” as
macroeconomic uncertainty drove down both sales
forecasts and stock prices. Most of the activity
and all of the increase actually occurred among
the top 10 companies. For a full list of the top 100
companies (including the top 25 viewed here)
see the Methodology, page 31.
Source: Ernst & Young analysis of Capital IQ data.
Next 15
Top 10
Issue 1: October 2010
smartphone screens soon. The evolution
and adoption of 3-D technology is worth
monitoring. Will 3-D do for the technology
industry what it has done for Hollywood’s
box office?
All of these innovations make for a very
dynamic industry. But what makes
technology especially exciting is the
continuous nature of its disruptive
innovations. That nature may be put “on
hold,” at least temporarily, as extended
macroeconomic uncertainty dampens new
investment by venture capital companies.
As Figure 21 (page 28) shows, global
venture investments in technology companies
dropped 15% in terms of US dollars invested
and nearly 10% in the number of deals
during 1H10. History shows, however, that
the companies that do get funded during
economic hard times often include the
technology industry’s future leaders.
Interestingly, the one technology sector
that experienced a YOY increase in venture
funding was semiconductors, where
capital requirements often inhibit start-ups.
However, breakthrough innovations at the
semiconductor level can have powerful
effects on the rest of the industry.
Here’s one thing about which there is no
doubt: the global technology industry
certainly is helping to shape the near future.
29
 Source notes
1 18
“Pay TV Lost Subscribers in Quarter,” The Wall
Street Journal, 24 August 2010, via Dow Jones
Factiva, © 2010 Dow Jones & Company, Inc.
2 19
“Forrester US IT Spending to Ramp in Second
Half of Year,” eWeek, 22 July 2010, via Dow
Jones Factiva, © 2010 Ziff Davis Enterprise
Holdings Inc.
3 20
“Investment Adviser: JPMorgan urges funds to
target emerging markets,” Investment Advisor,
16 August 2010, via Dow Jones Factiva,
© 2010 Investment Adviser.
4
“Dow’s Quarter Ends With Slip,” The Wall Street
Journal, 31 March 2010, via Dow Jones
Factiva, © 2010 Dow Jones & Company, Inc.
5
“IPO Outlook: Tech offerings leading the way —
Qlik, MaxLinear among year’s winners,”
The Wall Street Journal Asia, 31 August 2010,
via Dow Jones Factiva, © 2010 Dow Jones
& Company, Inc.
6
“Credit Markets Put on the Brakes,” The Wall
Street Journal, 29 May 2010, via Dow Jones
Factiva, © 2010 Dow Jones & Company, Inc.
7
“The Siren Song of Low Bond Yields,”
The Wall Street Journal, 31 August 2010,
via Dow Jones Factiva, © 2010 Dow Jones
& Company, Inc.
8
“comScore: iPad and E-Readers Poised to Be
‘Incredibly Disruptive’ Tech,” min Online,
23 March 2010, © 2010 Access Intelligence, LLC.
9
“iPad Off to Fast Start,” The Wall Street
Journal, 23 June 2010, via Dow Jones Factiva,
© 2010 Dow Jones & Company, Inc.
10
“As iPad Gains, Others Will Lose,” The New
York Times, 2 August 2010, via Dow Jones
Factiva, © The New York Times Company.
11
“Worldwide Converged Mobile Device Market
Projections Raised 10% for the Year, Says IDC,”
Business Wire, 7 September 2010, via Dow
Jones Factiva, © 2010 Business Wire.
12
“Oracle Fights to Go Mobile,” The Wall Street
Journal, 17 August 2010, via Dow Jones
Factiva, © 2010 Dow Jones & Company, Inc.
13
“Ericsson’s Sales Hit by Lack of Key Parts,”
The Wall Street Journal, 24 July 2010,
via Dow Jones Factiva, © 2010 Dow Jones
& Company, Inc.
14
“Tech Sector Defies Gravity as Web Drives
Upgrades,” The Wall Street Journal,
12 July 2010, via Dow Jones Factiva,
© 2010 Dow Jones & Company, Inc.
15
“Business Spending is Soaring on Internet’s
Plumbing,” The Wall Street Journal,
20 July 2010, via Dow Jones Factiva,
© 2010 Dow Jones & Company, Inc.
16
“Dell Predicts Revenue Growth as Firms
Replace Aging PCs,” The Wall Street Journal,
24 June 2010, via Dow Jones Factiva,
© 2010 Dow Jones & Company, Inc.
17
“HP Outguns Dell in Takeover Duel,”
The Wall Street Journal, 3 September 2010,
via Dow Jones Factiva, © 2010 Dow Jones
& Company, Inc.
30 View from the top: global technology trends and performance
“iPad Off to Fast Start,” The Wall Street
Journal, 23 June 2010, via Dow Jones Factiva,
© 2010 Dow Jones & Company, Inc.
“PC Rebound Continues With Growth Over 22%
Despite Mixed Economic Outlook, According to
IDC,” Business Wire, 14 July 2010, via Dow
Jones Factiva, © 2010 Business Wire.
“iPad Off to Fast Start,” The Wall Street Journal,
23 June 2010, via Dow Jones Factiva, © 2010
Dow Jones & Company, Inc.
21
“Disk Storage Systems Market Sustains Strong
Double-Digit Growth Across All Sectors in
Second Quarter, According to IDC,” Business
Wire, 3 September 2010, via Dow Jones Factiva,
© 2010 Business Wire.
22
“Outsourcers Wrestle With a Rebound: Tata,
Infosys and Indian Rivals Face Rising Labor
Costs, Lower Billing Rates as Demand for Tech
Services Picks Up,” The Wall Street Journal,
18 May 2010, via Dow Jones Factiva,
© 2010 Dow Jones & Company, Inc.
23
“Firms Jockey for Space in Services: Big
Competitors Join Increasingly Crowded Market
as New-Deal Spending Slows,” The Wall Street
Journal, 7 April 2010, via Dow Jones Factiva,
© 2010 Dow Jones & Company, Inc.
24
Ibid.
25
Ibid.
26
“Intel Is Less Chipper About Demand,”
The Wall Street Journal, 30 August 2010,
via Dow Jones Factiva, © 2010 Dow Jones
& Company, Inc.
27
“Intel Seeks Apps for Atom Gadgets,”
The Wall Street Journal, 30 August 2010,
via Dow Jones Factiva, © 2010 Dow Jones
& Company, Inc.
28
“Tech companies on a buying binge; Firms
desperate to branch out; Seeking a bit of the
cloud spurs flurry of deals,” The Seattle Times,
13 September 2010, via Dow Jones Factiva,
© 2010 The Seattle Times Company.
29
“IBM Researchers Claim Chip Design Advance,”
The Wall Street Journal, 4 March 2010,
via Dow Jones Factiva, © 2010 Dow Jones
& Company, Inc.
30
“MARKET TALK: Samsung Capex May Lift Japan
Chip-Related Cos,” Dow Jones International
News, 17 May 2010, via Dow Jones Factiva,
© 2010 Dow Jones & Company, Inc.
31
“Global technology M&A update: April-June
2010,” © 2010 EYGM Limited.
32
“SAP Buys Sybase For $5.8 Billion,” CMP
TechWeb, 12 May 2010, via Dow Jones
Factiva, © 2010 United Business Media LLC.
33
“Will Zynga Become the Google of Games?”
The New York Times, 25 July 2010,
via Dow Jones Factiva, © 2010 The New York
Times Company.
Methodology
► View from the top: global technology
trends and performance is based on
extensive secondary research and trend
analysis combined with Ernst & Young’s
analysis of Capital IQ data for the top 100
technology companies.
► Financial data is drawn from results reported
during the first and second quarter earnings
seasons between January and August
2010. Our performance analysis is based
on standardized data pulled from the
Capital IQ database on 31 August 2010.
The performance data provides a directional
look at how these companies are doing
at a given point in time.
► We selected the top 100 technology
companies by ranking all public technology
companies around the world by sales and
by market capitalization, and then averaging
the two ranks together into a single ranked
list. Data drawn for ranking the top 100
companies is as of 31 December 2009.
► Our report includes a separate look at the
top 25 companies because these companies
are either highly diversified or moving toward
diversification; they are participating in
and influencing many industry sectors
beyond the sector in which they originated.
► Our report also includes a look at the
following sectors within the technology
industry: communications equipment,
computers, peripherals and electronics,
internet, IT services, semiconductors and
software. The performance data analysis
for these sectors is based on the medians
from companies within the top 100 that
are either “pure plays” within the sector
or diversified companies participating in
the sector. For this report, diversified
companies were determined to be
participating in a sector if they reported
20% or more of total revenue as coming
from that sector, as identified by financial
reporting or secondary research.
► Unless otherwise indicated, key
performance indicator definitions are
based on Capital IQ database definitions.
► The median was selected as the metric
most reflective of the directional
performance of the group of top 100
technology companies. Medians for each
key performance indicator were calculated
independently, based on Capital IQ data for
that metric only, and separately, for each
different set of companies (top 100,
top 25 diversified and individual sector
views). As a result, key performance
indicators are in directional alignment,
where appropriate, but do not demonstrate
precise matches.
► All currency references are to US dollars,
unless otherwise noted.

The top 100 technology companies in this report are:

Acer Inc. Fiserv, Inc. Nitto Denko Corporation
Activision Blizzard, Inc. Flextronics International Ltd. Nokia Corporation* ▲

Adobe Systems Incorporated Fujitsu Limited*▲

NVIDIA Corporation
Advanced Micro Devices, Inc. Garmin Ltd. Oracle Corporation* ▲

Agilent Technologies, Inc. Google Inc.* QUALCOMM Incorporated* ▲

Alcatel-Lucent Harris Corporation Quanta Computer Inc.

Amazon.com, Inc.* Hewlett-Packard Company* ▲
Research In Motion Limited*
Amphenol Corporation Hitachi, Ltd.*
▲
ROHM Co., Ltd.
Apple Inc.* ▲
Hon Hai Precision Industry Co., Ltd.* SAIC, Inc.
Applied Materials, Inc. Hoya Corporation Samsung Electronics Co., Ltd.* ▲

ASML Holding N.V. HTC Corporation SanDisk Corporation

ASUSTeK Computer Inc. Hynix Semiconductor Inc. SAP AG*
Atos Origin S.A. Infineon Technologies AG Seagate Technology PLC
AU Optronics Corporation Infosys Technologies Limited Seiko Epson Corporation
Automatic Data Processing, Inc. Intel Corporation* Sony Corporation*
▲

Broadcom Corporation International Business Machines Corporation*▲

STMicroelectronics N.V.
CA, Inc. Intuit Inc. Symantec Corporation
Cal-Comp Electronics (Thailand) Public Company Jabil Circuit, Inc. Taiwan Semiconductor Manufacturing Company
Limited Juniper Networks, Inc. Limited
Canon Inc.* Koninklijke Philips Electronics N.V.* ▲
Tata Consultancy Services Limited
Cisco Systems, Inc.* ▲
Kyocera Corporation ▲
TDK Corporation
Cognizant Technology Solutions Corporation L-3 Communications Holdings, Inc. Telefon LM Ericsson* ▲

Compal Electronics, Inc. Lenovo Group Limited Tencent Holdings Limited

Computer Sciences Corporation LG Electronics Inc.* ▲
Texas Instruments Incorporated
Dell Inc.*
▲
Logica Plc Tokyo Electron Limited
Delta Electronics, Inc. Marvell Technology Group Ltd. Toshiba Corporation* ▲

eBay Inc. MediaTek Inc. Tyco Electronics Ltd.

Electronic Arts Inc. Micron Technology, Inc. VMware, Inc.
Elpida Memory, Inc. Microsoft Corporation* ▲
Western Digital Corporation
EMC Corporation* ▲
Motorola, Inc. Wipro Limited
Expedia, Inc. Murata Manufacturing Co., Ltd. Wistron Corporation
Experian plc NEC Corporation ▲
Xerox Corporation
▲

Fidelity National Information Services, Inc. NetApp, Inc. Yahoo! Inc.

First Solar, Inc. Nikon Corporation ▲
ZTE Corporation

Legend: * Top 25 rank ▲

Diversified

Issue 1: October 2010 31

Ernst & Young’s Global Technology Center contacts Ernst & Young

Assurance | Tax | Transactions | Advisory

Pat Hyek Joe Steger
Global Technology Industry Leader Global and Americas Transaction Advisory
About Ernst & Young
United States Services Leader, Technology
Ernst & Young is a global leader in
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About Ernst & Young’s Global

Technology Center
Driven by relentless innovation, compressed
market timing and dynamic consumer
demand, the technology industry is
constantly changing. Ernst & Young’s Global
Technology Center brings together a
worldwide team of professionals to help you
achieve your potential — a team with deep
technical experience in providing assurance,
tax, transaction and advisory services. The
Center works to anticipate market trends,
identify their implications and develop
points of view on relevant industry issues.
Ultimately, it enables us to help you meet
your goals and compete more effectively.
It’s how Ernst & Young makes a difference.

© 2010 EYGM Limited.

All Rights Reserved.

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of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.