Cuts and consolidation still dominate markets

Dissecting the mid-year financial results of the major IT suppliers

The global software market is taking some serious hits.

Aggressive consolidation by vendors is making jittery users even more worried, sales are expected to decline again this year, and 2004 isn't shaping up well either.

A new report by analyst Ovum says the software market declined 5 per cent in 2002, will drop another 2.5 per cent this year, and is unlikely to grow until 2005.

'We interviewed the fifteen top spending users in European marketplace and every one of them is talking about cutting costs on IT, and not only this year, but year after year,' said Ovum Holway director Richard Holway.

IT services and software vendors have to deal with users spending less, demanding application consolidation, single vendor software suites, and cheaper licensing costs, partly through investigating Linux as an alternative to Microsoft, says Holway.

'The demand from users to suite offerings is driving the vendor consolidation we're currently seeing in the market. The raft of particularly smaller acquisitions taking place is part of the vendor's urge to get everything under one roof,' he said.

But this bleak picture is in contrast to the strong quarterly financial results announced last week by three of the industry's heavyweight software vendors: Microsoft, IBM, and SAP (see Financial World, page 4).

Holway says the good figures are the result of a strong drive on internal changes. 'These profits are on the back of enormous cost-cutting efforts, making 2003 the first year when the software industry will make a collective profit on the back of static revenues since 2000,' he said.

But Holway is slightly bullish for next year. 'Our forecasts say that 2004 will be the year that things will stop getting worse. We're basically talking about a standstill, with things not getting worse, and with cost-cutting probably improving vendor profits,' he said.

'This is really positive stuff, this is not gloom.'

But Holway warns that sustained profit growth over a long period is extremely difficult if revenues don't increase.

The Ovum report says that growth areas in the software market remain. Demand for business intelligence is still strong, the security, portal and content management markets are all growth areas, and software for supporting mobile workers is starting to attract serious interest.

'Security in particular is a very major growth area, for all kinds of reasons,' said Holway.

And an increase in corporate governance legislation, such as Basel II, Sarbanes-Oxley and anti-money laundering initiatives, is also driving up demand (Computing, June 26).