The world of business software continued its inexorable march toward Total Consolidation in 2007. If IBM was off the mark in 1943 when it (supposedly) predicted a world with only five computers, it might have better luck today with a similar prediction about the software industry.
The trend has been under way for years, but the past 12 months saw many of the remaining big names in business software absorbed into other companies, including Hyperion, Business Objects, Cognos, Opsware and webMethods. They join PeopleSoft, Siebel, JD Edwards and JBoss from the recent past. Outside of security companies, it is now difficult to name even a half dozen well-known, best-of-breed vendors that are holding their own.
Market Changes, Consolidation
The trend has been driven by two factors: First is the commoditization of key software sectors, including Java middleware and business intelligence, where products that once were distinct and innovative started to look remarkably the same. Second is the need by big platform vendors like IBM, SAP and Oracle, to take over new markets as growth in their own businesses -- databases and applications -- dries up. Buying companies with mature products and a lot of customers gives them a fast and safe way to do that.
The trend was most apparent this year in data analysis software, where the fallen include Pilot Software (to SAP), Hyperion (Oracle), Inxight (Business Objects), OutlookSoft (SAP), Applix (Cognos), Cognos (IBM) and Business Objects (SAP). Other prominent names swallowed up were Telelogic (IBM), Xensource (Citrix), Agile Software (Oracle), Altiris (Symantec) and WebEx (Cisco).
But you can't say they didn't warn us. Larry Ellison, Oracle's rapacious CEO, has made it his favorite pastime this decade (after sailing) predicting the demise of the independent software vendor. "There won't be, and nor does there need to be, tens of thousands of software companies," he said at OracleWorld in 2002, before launching a torrent of scorn on startups like Ariba, Commerce One and i2 Technologies. Ariba's e-commerce software was so simple, he said, "two cats could have written it."
Ariba, ironically, is among the survivors, as is i2 (although it is considering a possible sale), and Commerce One was acquired last year. But then, predicting the future is easy when you fulfill the prediction yourself. Oracle has done more than any other vendor to consolidate the industry, buying close to 40 companies in three years.
Not that all of those companies tried to resist Oracle's tractor beam. PeopleSoft put up quite a fight and BEA, which Oracle tried to buy in October, has resisted (for now). But in many cases, Oracle was "an exit strategy for startups looking at a weak IPO market or a weak stock market," said Forrester Research analyst R. "Ray" Wang.
So is it the end of the business ISV as we know it? In fact, probably not. For starters, some large independent vendors remain, like SAS, Sage, Lawson Software, Dassault Systemes and BEA. There are several reasons for their survival: SAS is privately owned, so less vulnerable to the type of shareholder pressure that shoved BEA onto the market. Some others lie only on the fringes of commoditized segments.
"It is indicative that the BI vendors acquired in 2007 were those that focused on performance management and traditional BI functionality," said Vuk Trifkovic, an analyst with Datamonitor. "Vendors trading primarily on less commoditized predictive analytics, such as SPSS and SAS, remain independent."
More importantly, as sure as yesterday's technologies mature and get acquired, so a new wave of startups -- in virtualization, software-as-a-service or enterprise Web 2.0 -- will grow to become large ISVs and begin the cycle anew. "Pure-plays will always be there, as long as innovation takes place in a given market," said Bo Lykkegaard, a research manager with IDC.
In the meantime, what's a large business to do? Customers should have pointed discussions with their primary vendors about their future plans, said Wang. The type of discussion will vary depending on the vendor.
"On the SAP side, it's really about understanding what they're trying to do on the technology front," he said. "SAP acquisitions will be things that bolster NetWeaver. ... If you're an IBM customer, the question for them is, 'Are you going to acquire some of these applications I own, and how should I prepare for that?'''
Customers who haven't bought into a software stack from a big platform vendor have a different quandary. "The question to ask yourself is, what's your packaged application strategy, and should you bet on one of these platforms?"
The merger wave is almost certainly not over, and bigger surprises may be ahead in 2008. Hewlett-Packard has set about rebuilding its software business after it sold off or squandered its middleware assets at the end of the last decade. Just last month, HP CEO Mark Hurd predicted another wave of industry buyouts. "In the end, math wins," he said.
And don't assume that the big fish left in the tank won't eat each other. A merger between Microsoft and SAP seemed unthinkable a few years ago -- until Microsoft admitted it had been considering exactly that. In the end it dropped the idea only because it seemed too complicated.
"It's not inconceivable to expect mergers of equals and blockbuster deals on an order of magnitude larger than the ones we witnessed in 2007," Trifkovic said.