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Tuesday, July 12, 2005

Enterprise Software - Clear Signs Of Slowing Down

Optimists were thinking that the enterprise software sector’s weakness was supposed to be short term. Yet again, enterprise software players are issuing second-quarter warnings. Borland, Siebel,Altiris all are falling down. While Borland blamed its woes on weaker information technology (IT) spending & that several of its deals failed to close by the quarter's end,(Borland's problems may be deeper. On Friday, the company announced the resignation of its CEO after six years at the helm. Borland's core business - developing sophisticated programming tools for enterprises - faces intense competition, especially from IBM )Siebel , leader in CRM - which sacked its CEO about three months ago (because of, well, a bad quarterly performance)also blamed its results on customers delaying orders. The outlook for enterprise players is becoming bleak. Customers are more resistant and competition is fierce. Unless a company has the scale needed to buy growth with cash and stock, the sector should be a laggard for some time to come.
We covered earlier, that the new economy software startups measured on different parameters are beginning to realize that earnings have replaced revenue growth as the new measure of success on Wall Street. This shift in outlook and measurements are creating pressures – these shall trigger a powerful wave of consolidation throughout the industry over the next few years. We also covered Ray Lane's recent view that the top 15 software companies earn 84% of the revenues in the industry & that the top three generate 75% of the profit, and the top one generates 57% of the profit.Enterprises have consumed a lot of technology and want to consolidate a lot of the technology they've bought. They want a few platform players - and innovation. The challenge is how do large enterprises hear about innovation? They used to have entire staffs who would spend thousands of hours listening to thousands of startups and trying to figure out which ones are the most innovative. We also covered M.R.Rangaswamy capturing it the best when he wrote that in five years we’ll look back and not recognize the old enterprise vendor. In an extremely well researched and thought out piece he wrote, "Many software vendors will not be able to hang on during the coming tumultuous five years. The survivors will operate in an entirely new landscape – with new models for business, hiring, development, services, marketing and so on. The enterprise software business of the future will be more dynamic, innovative, efficient and business-driving than ever before".
We also identified in the last few weeks, that the software market may get grouped along the patterns of:
- Platform Players Forcing Consolidation:
- Basket of Best Of Breed Players:
The general trend toward consolidation is already felt. The only issue is outside of the top 5/6 players several other players addressing specific niche areas currenlty have ore than 50% of the marketcap - we have to see how the economics,integration, customer reaction all mix up - with software, more than the employees, customers get alarmed about any possible merger moves. Big time acquisitions are already happening.Consolidation fever ahead - not sure whether customers would benefit a lot because of this - till the haze cleares, it is clearly alarming!!!

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