2005 - The Shrinking Sofware Industry

Bill Burnham writes that in 2005, the aggregate market capitalization of the software sector shank by almost 10% despite the broader NASDAQ market being up 1.4%. Anyway you look at it, 2005 was a bad year for Software stocks. There were 236 public software companies at the start of 2005, but only 213 at the end of the year, a decline of 10% - for every new software company that went public in 2005, almost 7 were acquired or went out of business. Bill notes that large cap enterprise software stocks almost uniformly declined last year, most by double digits.The spreadsheet has the details. While I want to write more on a related topic in the near future - some brief observations:

I see distinct trends for success:

- Not good to chase companies for becoming just big - As we earlier covered oracle's depressed pricing. The stock has never been this cheap since 1990 on a pure P/E [price-to-earnings ratio] basis. This at a time when Oracle spent more than $1 billion per point of market share.
- The companies that showed growth include that showed good vision about future, invested in future technologies and went after innovation as can be seen here, here.
- Companies that show leadership in specific segments shall continue to prosper – size may not matter here
- Software companies need to focus on innovation lot more - bring in the next growth platform.
- Improving customer care and relationships and fight the poor image the industry has now.