Enterprise Software Consolidation : Strong Opposing Perspectives

Bryan Stolle, CEO, Agile in a hard hitting viewpoint outlines that Considering the innovation going on in the software business, it is surprising that many analysts and investors can describe the entire, $600 billion, many-thousand-company industry with words like "mature" and "consolidating". He sees new business models and technologies are taking hold across the software vendor landscape and points out that software is not a homogenous market. Since it is heterogeneous there is no If strong case for a market future with consolidation leading to a handful of players. As different enterprise software segments have very different maturation cycles in each market segment - the market lifecycle model espoused by Geoffrey Moore and others applies. There is still much innovation to be done, especially as the market gets more and more vertically focused. Software is a very broad category and reminds that we are a long, long way from a Global 5000 enterprise going to one company, and saying, "automate all my business processes." Talking about consolidation without digging deeper ignores tremendous opportunity. He cautions that the way analysts are running down the industry, many innovative vendors will have to shut their doors before they get the chance to be the next Salesforce.com. Enterprise software is a long-term investment and serious business - analyst firms should put serious effort into better guiding IT buyers with thoughtful analysis around predicting market evolution, not just "feeds & speeds". Scale matters, and everyone is trying to find ways to achieve it, whether it be through investments in new products or market segment expansion to drive organic growth, or more through inorganic M&A efforts to create more immediate results.

Vinne Mirchandani, a very incisive analyst criticises the prevalent view - The chorus of "market is consolidated". He points out that 15 years ago Charlie Wang at CA was seen as the consolidator as he acquired large number of companies. Ditto with Baan’s acquisition spree several years ago and points out that there are still over 700 packaged software companies listed with the SEC, and at least twice as many either private or listed on non-US exchanges.
If the Big 4 continue to define the market in classical waysthey may feel good for a while about their market strength, but they will be blindsided by coming BPO competition. They will continue to be outflanked in vertical markets by the likes of SunGard and Cerner. And deep infrastructure capabilities at vendors like CA, Mercury and HP. Continued custom development by the likes of Accenture and Infosys. And new generation SaaS and open source models.
My views on consolidation remains the same - 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 and I expect the software market may get grouped along the patterns of:

- Platform Players Forcing Consolidation:

- Basket of Best Of Breed Players ( as part of a larger ecosystem)

- Bunch of Innovative startups

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 currently 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. What I do not see in the arguments centered on developments in the past and the potential in the future is : how would these companies survive the next 6-8 quarters and how on earth would any customer feel comfortable with the many walking dead companies - sad as it is -but reality is more important.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!!!