PROF IL E The Economic Impact of Microsoft's Windows 7, Worldwide
Sponsored by: Microsoft John F. Gantz Amie White July 2009 Al Gillen

www.idc.com

IN THIS PROFILE
This profile quantifies the forecasted economic impact that Microsoft's Windows 7 operating system will have worldwide from launch in October 2009 to the end of 2010. The impact is seen in IT employment, revenues to firms in the Microsoft ecosystem, and investment in products and services working with or supporting the new operating system. The employment, revenue, and investment in local IT ecosystems from Windows 7 will help the IT industry to assist economies around the world in climbing out of the current economic crisis and building toward long-term growth.

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EXECUTIVE SUMMARY

Windows 7, Microsoft's follow-on to Windows Vista (launched in 2006), will become commercially available in October 2009. IDC's forecast for Windows 7 shipments shows a brisk uptake: 177 million units to be shipped by the end of 2010. For Microsoft, the launch of Window 7 suggests strong growth in client operating systems again. But the impact of Windows 7 will reach far beyond Microsoft, driving revenues and growth for many of the IT companies worldwide that sell hardware, write software, provide IT services, or serve as IT distribution channels. This growth will do its bit to help economies around the world climb out of the current economic crisis. The IDC research indicates that: ! By the end of 2010, more than 7 million people worldwide in the IT industry and at IT using organizations will be working with Window 7, or 19% of the global IT 1 workforce. The 350,000-plus IT companies that produce, sell, or distribute products or services running on Windows 7 will employ 3 million; another 4 million will be employed at IT-using firms. ! For every dollar of Microsoft revenue from launch in October 2009 to the end of from Windows 7, the ecosystem beyond Microsoft will reap $18.52. During that period, this ecosystem will sell more than $320 billion in products and services revolving around Windows 7.
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See the Definitions and Methodology section for a description of the calculations. In this study, all financial data are stated in US dollars.
! To achieve those revenues, companies in the Microsoft global ecosystem working with Windows 7 are expected to invest nearly $115 billion by the end of 2010 developing, marketing, and supporting products and services built around Windows 7.

BACKGROUND TO THIS STUDY

Since 2002, IDC has conducted studies on the economic impact of IT, software, and the Microsoft ecosystem and partner community on local economies. This impact comes in the form of job creation, company formation, and increased IT spending. The economic impact and reach of the Microsoft ecosystem, which we call the Microsoft Footprint, have been studied in more than 80 countries since 2004. In the summer of 2009 IDC extended its Microsoft Footprint research to examine the economic impact of Windows 7.

ADOPTION OF WINDOWS 7

As of this writing, Windows 7 is expected to launch in October 2009. Figure 1 shows IDC's published forecast of Windows 7 unit shipments worldwide by year compared to Windows XP, NT, and Vista. IDC expects Windows 7 shipments to grow from just over 40 million in 2009 to 272 million in 2013.

FIGURE 1

Microsoft Client OS Forecast New License Shipments

300,000 250,000

(Unit Shipments - 000)
200,000 150,000 100,000 50,2009 Windows XP/NT/Vista Windows 7
Source: IDC, The Economic Impact of Windows 7, 2009

#W7WW709

2009 IDC
In the scheme of total IT spending worldwide, the spending on the 177 million copies of Microsoft Windows 7 to be shipped by the end of 2010 will be small barely 1% of total IT spending and less than 5% of total spending on software. But Windows 7 means more than revenue to just Microsoft. It will also drive revenue for hardware companies, other software companies, service firms, and channel firms in every corner of the globe. To understand this overall impact first requires understanding the role of software in the economics of IT.
THE IMPORTANCE OF SOFTWARE
On a worldwide basis, packaged software accounts for about 21% of total IT spending. That's spending on operating systems, applications, and development tools for everything from ultra portable computers to large mainframes. But this software generates related activity. ! People in service firms install, integrate, support, and train others on software. ! People in computer stores, system resellers, and distribution companies spend time selling and delivering software. ! Hardware and software firms design and sell products that run on software. Because software is more complex to sell, service, and support than hardware, dollar for dollar, software generates more downstream economic activity than hardware. IDC's analysis of the IT services market shows that for every dollar of packaged software sold, there is another $1.24 in revenue to IT service firms. That software revenue and additional services revenue also drive revenue in the distribution channel. These multiple revenue streams pool to help fund employment and investment in new products and innovations. IDC's interviews with user organizations also confirm that in IT organizations, the allocation of staff disproportionately favors software when compared to software's share of the external IT budget. This is why Windows 7 can have a much larger impact on an economy than Microsoft's revenues alone. Figure 2 demonstrates this conclusion by comparing software spending as a percentage of total IT spending to software-related employment as a percentage of total IT employment in 2009.

FIGURE 2

Softwares Outsized Influence

WW IT Spending, 2009

WW IT Employment, 2009
Software Vendors Channel & Services Firms Software Workers 50%
Hardware & Services 79%

Software 21%

Hardware Vendors Channel & Services Firms Non Software Workers 50%

$1,447 Billion

37 million

THE IT LANDSCAPE

If the economic forecasts hold, by 2010 the world's IT markets should begin recovering from the economic crisis. The overall IT market in 2010 should look like this: ! IT spending, $1,489 billion, up 3% from 2009 ! Packaged software spending, $311 billion, up 3% from 2009 ! Hardware spending, $570 billion, up 2% from 2009 ! Services spending, $608 billion, up 3% from 2009 ! PC shipments, nearly 300 million, up 7% from 2009 These increases from 2009 are modest Windows 7 will be shipping into a relatively harsh environment. But the launch of a new and better operating system will necessitate new applications, new hardware, new planning, deployment and training, and new services. These will drive much-needed investment that will, in turn, fuel stronger growth in subsequent years.

THE IMPACT OF WINDOWS 7

Applying the same methodology used to determine software-related employment, IDC has determined Windows 7-related employment by the end of 2010. As a subset of the software market, Windows 7 will drive a subset of employment. As an operating system, however, its share of employment will be disproportionately larger in comparison to employment related to applications or development tools. Figure 3 shows how Windows 7-related employment compares to total IT employment in 2010. By the end of 2010, Windows 7-related employment will account for more than 7 million jobs or 19% of all IT employment in the global IT industry and at user organizations. This is 1.2 million in hardware companies, nearly 280,000 in software companies, 1.5 million in services and channel firms, and 4.2 million in IT using organizations.

FIGURE 3

Windows 7 Related IT Employment, Worldwide

25,000,000

20,000,000

15,000,000

10,000,000

5,000,000

0 Hardware Total IT Employment Windows 7 Related Employment

Software

Services & Channels

IT Professionals

THE WINDOWS 7 EFFECT
It's one thing to calculate Windows 7-related employment, another to determine what employment would be were Windows 7 not to enter the market. What's the net gain, or economic "bounce," from the launch of Windows 7?
Figure 4 shows one way to look at it. Here we show the Windows 7 percentage of IT employment in 2010 (19%) compared to the Windows 7 share of the net gain in overall employment from 2009 to 2010 (55%). Coming up with the net gain meant developing an estimate of 2009 employment as if Windows 7 were not in the market. We did this using the same methodology we applied to determine Windows employment but with the predecessor operating systems in 2009. IDC expects that employment related to client operating systems will grow by more than 300,000 new jobs or more than 30% of total growth in global IT employment in 2010 solely because of the launch of Windows 7.

FIGURE 4

The Windows 7 Effect, Worldwide
Share of It Employment, 2010
Share of IT Employment Gain, 2009 to 2010
THE REACH OF THE MICROSOFT ECOSYSTEM
Microsoft is more than the world's largest software company. It is an economic force that, through its ecosystem, directly impacts the economies in which it operates. Microsoft partners and OEMs sell PCs running Windows; software vendors write applications that run on Windows using Microsoft application development tools; retail outlets and resellers employ people to sell and distribute these products; and service firms install and manage Microsoft-based solutions, train consumers and businesses on Microsoft products, and service customers for their own applications. If you total all of the spending on hardware and software that run on Microsoft operating systems as well as all of the spending on the services related to installing
and maintaining Microsoft applications and solutions, you quickly come up with a number much bigger than Microsoft's revenues. With Windows 7, ecosystem companies will drive their own revenues by: ! Reselling the new operating system ! Reselling other Microsoft software that runs on the new operating system ! Selling their own software ! Selling services on the Microsoft software ! Selling services on their own software and that of others that run on the new operating system ! Reselling partner-developed software that runs on the new operating system ! Selling or reselling hardware that runs the new operating system These permutations and combinations of revenue-generating activity will lead the Microsoft ecosystem as many as 700,000 companies worldwide, at least half working with Windows 7 to bring in more than $320 billion in product and services revenues related to Windows 7 from launch in October 2009 to year end 2010. The vast majority of the companies in the Microsoft ecosystem are locally owned and operated small and medium sized businesses. That means the preponderance of the $320 billion in revenues will remain in local geographies and drive local economic growth. Figure 5 shows the dollar relationship between estimated Microsoft revenues from Windows 7 and revenues to partners from Windows 7-enabled hardware, software, and services sales. For every dollar of Microsoft revenues from the new operating system, other companies will make $18.52 on a global average. To obtain these revenues, ecosystem firms are expected to invest nearly $115 billion during that period to develop, market, and support their products and services that work with or run on Windows 7. These investments, mostly out of company revenues, will also primarily remain in their local economies.

FIGURE 5

Windows 7 Ecosystem Revenues, Worldwide

$10.21

$4.43 $3.88

Microsoft Windows 7

Hardware

Services

THE MICROSOFT PARTNER COMMUNITY
Within the Microsoft ecosystem is a subset of vendors that are recruited and supported by Microsoft as OEMs and registered partners. They are a diverse group of companies, running the gamut from large international vendors, such as major PC manufacturers, to very small national resellers and software entrepreneurs. These partners often don't go to market as pure hardware, software, or services companies. Many resell software while creating their own, sometimes they resell hardware as well, and often they service both their own software and the hardware and software they resell. Hence, IDC also classifies ecosystem companies by business model, categorizing them into five groups: ! Product-oriented partners derive 60% or more of their revenue from the sale of internally created products. These may be independent software vendors (ISVs), communications solution vendors, hardware vendors (ranging from major system vendors to non branded local assemblers), or other types of technology solution vendors.
! Services-oriented partners derive 60% or more of their revenue from the delivery of internally created services and less than 20% from the resale of third-party products. These include systems integrators and consultants. ! Value-added resellers (VARs) derive 20% or more of their revenue from product resale and 20% or more from internally created services. They provide turnkey solutions that bundle hardware, software, and services. ! Logistics-oriented resellers derive 60% or more of their revenue from the resale of third-party products and less than 20% from the delivery of internally created services. They focus on improving the process and reducing the cost of buying third-party products. ! Retail logistics resellers derive 80% or more of their revenue from the resale of third-party products to consumers. This category is a unique subset of the logistics-oriented category. Figure 6 recasts the revenue ratios shown in Figure 5 by partner type. Since most ecosystem partners fall into one of these categories based on their business model as opposed to the strict hardware, software, services IT spending categories these figures are more applicable to their understanding the impact that Windows 7 can have on their own markets.

FIGURE 6

Wi ndo ws 7 Ec o syst em R evenues by Par t ner Type, Wo r l dwi de

$6.42 $5.76 $4.14 $4.23

Product Oriented

Services Oriented

Value Added

Logistics Oriented

Retail Logistics
(Note: the partner type revenue ratios will not add to $18.52 because of double counting, as many partners buy and sell from one another. The categories of the earlier Figure 5 are mutually exclusive.)

SUMMARY AND OUTLOOK

The advent of Windows 7 will bring related and cascading economic benefits, from new employment to increased revenues and investments made in local country economies. In this case, less than 1% of global IT spending will drive nearly 20% of global IT employment and account for a significant portion of the new jobs created in the IT industry in late 2009 and 2010. In the midst of an economic crisis, with most governments seeking economic stimulus to grow their economies, the launch of a major new operating system should be considered good news a stimulus package in its own right.
DEFINITIONS AND METHODOLOGY

Economic Impact

IT Spending Spending by consumers, businesses, governments, or educational institutions on information technology, including hardware, software, services, and data networking, as measured in the IDC's Worldwide IT Spending Trends reports (The Worldwide Black Book). This spending excludes all telecommunications revenues and some smaller emerging technology areas, such as videogames (although PC gaming software is included). IT Employment The number of people employed (full-time equivalent) in hardware, software, services, or channel firms and those managing IT resources in an IT-using organization (e.g., programmers, help desk, IT managers). Channel revenues Within calculations of employment, IDC used a figure for channel revenues to drive estimates of employment. In this case, channel revenues were equated to 100% of IT spending. Most of that goes back to the hardware, software and IT services suppliers, but it is that revenue that funds employment. Within its tracking of IT spending, IDC looks only at channel mark-up, which is the difference between IT spending and vendor revenues. Figure 7 illustrates the methodological flow of the study.

FIGURE 7

Economic Impact Methodology

Local IT Production

Domestic Spending Export Distribution
Hardware Software Services Channels
Software SW-rel IT Services SW-rel Channels

Economic Impact Model

Non SoftwareRelated

IT Spending

By BB Category
Software-Related Windows 7 Related

Domestic Spending Jobs

IDC 2009 EIM
IDC CIS and Tracker Research
Pro Forma or Local Estimates
Source: IDC Economic Impact of Windows 7 Study, 2009

Windows 7 Footprint

Software-Related Revenues and Employment
This is the percentage of spending or employment that can be associated with creating, installing, servicing, or distributing software. It was developed by first analyzing 13 service categories and using IDC research to determine the percentage of that activity devoted to software (e.g., what percentage of IT outsourcing is managing software applications and infrastructure, and what percentage is managing hardware.) This led to a ratio of software spending to services spending. For the purposes of allocating employment, internal IT departments were assumed to resemble external service organizations and headcount is allocated accordingly. The allocation of channels activity to software is the midpoint between the percentage of software spending to the total of software and hardware spending and the percentage of IT services that is software related.

Windows 7 Related Economic Impact
Windows 7 related employment was derived using country-level estimates of the percentage of IT spending in 2009 and 2010 by IT category for products running on the new operating system or for services supporting them. ! For hardware we counted newly shipped PCs that we expect to run on Windows 7 based on IDC forecasts.
! For software we counted all software that we expected to be shipped that would run on Windows 7, including Microsoft software. For this we used the IDC Software Market Forecaster on revenues by software category (e.g., development tools, CRM software, collaboration tools) by operating system. ! For services we counted all services related to the design, deployment, management, support, and training for Windows 7 and solutions running on it. We excluded maintenance and support on hardware running Windows 7 under the assumption that maintenance was more likely to be related to equipment failures. ! For Windows 7 related IT professionals we used the general ratio of services to come up with estimates of headcount percentages in user organizations. To determine the amount of Windows 7 related IT spending per dollar of Windows 7, we took the Windows 7 related spending percentages developed above and compared them to estimates of Windows 7 revenue. In the final calculation, we subtracted Windows 7 revenues and Microsoft revenues from its own software that would run on Windows 7 from the total to come up with the total Windows 7 related spending that wasn't revenue to Microsoft.
Ecosystem Revenues and Investment Levels
The exercise above yields a ratio of Microsoft revenues to those in the ecosystem, which leads to a revenue calculation for 2009 and 2010. IDC then used these revenues and applied estimates of investment in R&D, product development, sales and marketing, and customer support to determine Windows 7 investment levels. These were patterned after standard industry ratios.

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