Tastes Consolidated! More Competition!

I choked on my Miller Lite when I read this research alert (registration required) from Saugatuck which says the Big 4 software firms - Microsoft, IBM, Oracle and SAP are driving "65 percent of software industry revenues, and more than 88 percent of earnings." Saugatuck is an advisory firm founded by my former Gartner colleague Bill McNee, one of the most likable and smartest Gartner analysts I have known. 

Just recently, I had done an analysis of the software market for this blog -  Larry Ellison's version of  "Survivor" - and that showed the 4 vendors with about 35% of the market cap around business software and services  - given that they have higher market valuation to revenues than the rest of the market Saugatuck's number of 65% of revenues was particularly striking.

So I reached out to Bill. Here's part of his response:

"Saugatuck is taking a narrower definition than you, focusing on "packaged" software (whether it be at the OS/platform level, middleware - broadly defined to include database, network/systems mgmt et al, or at the packaged enterprise apps level, both best-of-breed and suite) in contrast to all of the custom development work that is done (in the variety of venues available).”

"So at the end of the day, what we are talking about is essentially license and maintenance revenue for a classical "software" company. The denominator of our equation is taken from Dataquest's most recent Market Databook which has the classic software industry at around $ 94 billion at YE2004"

Bill, thanks for the explanation - but I still think the numbers are way off.  For SEC filings Oracle, SAP and Microsoft use the SIC code 7372 - Prepackaged Software - which is close to your "classic" definition.  If you look up Edgar for this code there are over 700 software companies listed (the total list is over 1000, but some have been acquired or have not filed recently). Then if you throw in countless private software companies and non-US companies like  iSoft, the UK healthcare software company (revenues over $ 450m); i-flex, the Indian financial services  software vendor (over $ 200m), Temenos the Swiss banking software vendor (over $ 150m) and many others  even the "classic software" market is far more fragmented than appears on surface.

Then look at IBM. For its SEC flings, it still uses its legacy SIC code of  3570 - Computer and Office Equipment. Therein lies the problem with using "classic" definitions.  IBM gets only 30% of its revenues from hardware. Oracle gets 70% of its revenues from services and support. The world has moved on.

Talking of "classics", allow me to invoke the 1960 Harvard Business Review article  "Marketing Myopia" by Theodore Levitt.  If the Big 4 continue to define the market as your "classic" definition they 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. Ask any CIO and he/she defines all that and a lot more as software.

Clearly, the Big 4 are not myopic.  They have been voracious acquirers the last couple of years. Microsoft is verticalizing its business applications and making large investments in search, colloboration and other software.  But while they scamper to diversify, it suits them to use your and other "consolidation" messages to advantage with 2 audiences:

a) Buyers – The message there is “Do not bother with the other riff raff, just look at us 4. Oh and by the way, since it the market has consolidated down to us, we will not be discounting much”.  The problem is the Big 4 have to offer today is  mostly "utility" products.  See my blog “The Giant Crunching Sound” about how CIOs will continue to squeeze Utility Spend to free up money for Innovation spend.

B) Other vendors - "Let me acquire you before you get consolidated out”  or if they do not get the vendor use the "the market is already consolidated, so we did not need that" explanation.  (Chris Selland who has been saying the CRM market is consolidated, suggests this in his recent post Have I been Had?). The problem with the logic is the “riff raff” is over 65% of the market cap (and a lot more if you include all the still private plays).

Bill, it's not about the numbers. Too many people are writing the software market off as "consolidated". Such talk just discourages software entrepreneurs and is disrespectful to the BEAs, Lawsons and countless others. Yes, the Big 4 grew big because they once had some innovative products - but look at their lack of innovation the last few years. From CRM to Web services to Blogging software they have mostly been followers. When you encourage buyers to consolidate because that "brings operating efficiency", the reality I have seen in my clients is the administrative and integration savings are often much lower than the "vendor lock-in" costs of such consolidation.  This also when SAP itself is telling users to get ready for an explosion of new vendors which will develop functionality around its planned thousands of web services.

The Big 4 have clear roles as Tier 1 vendors, but so do so many other software and services vendors as we move to more of an auto and aerospace industry model.

Now, Bill when can we get together and share a few Millers? I promise to keep the "C" words out - no classic, consolidation or Coors...cheers!