Survival of software's fittest

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Consolidation: Why is consolidation occurring? The article wanders a great deal, but it's possible to pull together the different themes.
The following is a summary of the main points expressed in a more logical progression.
The take-away? It's a good time to be IBM or Microsoft, and a bad time to be anybody else.

There are no innovations propelling sales:

"New technology solutions have become narrower and narrower because there are fewer big problems that need to be solved," said Paul Maeder, managing general partner at venture capital firm Highland Capital.

and

In the past, major technology breakthroughs, such as the Web or the client/server model, opened up opportunities for upstart companies. But without any evident shift of that scale in the industry today, many say, several segments of the software industry appear ready for more mergers and acquisitions, including business intelligence, management software and business process management.

The emphasis for buyers has turned to getting better use of existing products:

Despite a general upturn in technology spending, analysts do not expect a return to rapid growth in software. Instead of launching large-scale projects, many customers are looking to make better use of the systems and data they already have in place, according to analysts.

These buyers turn to their current major suppliers:

Customers are likely to rely on their tried-and-tested suppliers for the technology in their data centers, which may ultimately mean that the big will get bigger.

The large companies are buying other companies so that they can meet the customer demand; in other words, so that they have products to sell that buyers want:

Businesses have spent the last few years reducing the number of providers they work with, and are counting on fewer suppliers for more capabilities. That's driven larger suppliers to buy technology to fill out their portfolios.

and

Experts say the business software industry will consolidate as companies try to increase their range of products to better compete for tight IT budgets.

and

Hewlett-Packard, IBM, Sun and Veritas have each purchased several smaller companies to fill out their utility computing product portfolios.

and

"When you can't grow organically, you look to grow or better position yourself through consolidation," said Paul Crisci, managing director of Broadview, a division of Jeffries, which advises companies on mergers and acquisitions. "The worst job in the world right now is a software salesman--there are too many software companies fighting for too few dollars in the marketplace."

Smaller companies are selling out because they can't expand their business, no matter how high the quality of their product. They also can't acquire enough other companies to have a wide range of product offerings.

"Once you're a midlevel company, that's the point where your technology being the best is not as important as the depth and breadth of your product offering and your distribution reach," said Yoav Schreiber, an analyst at the Precursor Group.

Back to the large companies again. Because the software market is so soft, many companies that would prefer to concentrate on new software have had to emphasize services. (This is obviously different for a company like IBM, which has a concentration on services.) Quoting:

Even if software spending improves, some market watchers say, established software companies are becoming increasingly dependent on maintenance and consulting revenue, rather than money from new license sales.

"As you move revenue to the least-attractive segment of the business, which is professional services--which is good but not as good as selling software licenses--a different set of economics apply," Wolf said.

The only thing worse than having to sell services is being a smaller company unable to sell services:

"In markets where services don't have a big a role to play, it's much easier for technology to commoditize, and it's easier for the dynamics to favor the really, really big player and make it difficult for a smaller company to be sustained," Gilpin [Forrester Research] said.

Me: I'm going to take "commoditize" here as meaning a single piece of software with widespread use. The alternative meaning is many pieces of software able to do the same job.; Posted by: Anton Philidor Posted on: 08/16/04 You are currently: a Guest | Members login | Terms of Use