Is the enterprise software licensing business dying?By Andy Singleton
2005.05.18
SourceIs the enterprise software business dying? Is anybody out there buying new licenses? Based on news from the past few weeks, it seems that there are very few buyers. The collapse of new licensing revenue isn't news -- it started five years ago -- but the latest news makes it look like a permanent and accelerating fact of life for software vendors.
This article, titled "IT Execs to Vendors: Your Software Stinks," sets the tone for the industry's most recent quarter. Ouch! It contains the astonishing claim by the CIO of British Petroleum that out of a $2B IT budget, only $30M is allocated for new software licenses.
Why licensing revenue is decreasing
Siebel Systems Inc. shows the trend starkly. Siebel is a poster child for the bad old days; software that is very complicated and expensive to acquire and implement. Buyers have had enough. License revenue declined 40 percent in the most recent quarter compared to a year ago. Analyst Jim Yin of EKN Research was quoted as saying: "First-quarter preliminary results were so disastrous, (CEO Michael J. Lawrie's) current strategy of building business is not working out." The board fired Lawrie and installed George Shaheen as CEO. Shaheen was formerly the president of Accenture, and he has never run a business that depended on selling licenses.
Over the last few weeks I have spoken with a lot of companies in PowerSteering Software's category -- corporate program management. None of them looked happy. But several of them pointed out that Niku has been doing well in the category. I wasn't surprised to see this AP headline recently: "Niku Slashes 1Q Outlook, Shares Tumble." Services revenue is holding up well, but licensing revenue has declined due to "stronger than expected seasonality." Yeah, right.
I talked about this trend with Mike Kinkead, serial software entrepreneur and one of the founders of the Massachusetts Software Council. He recently moderated a strategy session for the council to figure out the way forward, and his conclusion was that the traditional enterprise software business is dying. That doesn't mean that the software business as a whole is dying, but it has shifted permanently to new revenue models. He asked me: "What big software company came out of the Internet boom? Netscape is dead." He pointed out that the big winners, like Google and eBay, are users of software, not vendors. We still buy a lot of software, embedded in devices and services, but we don't buy it as licenses.
Enterprises still need software, and lots of it, to run their operations, but they are buying few new licenses. Part of the story is that the market is mature and buyers have enough software already. Part of the story is that offshore outsourcing makes it cheaper to build your own. A big part of the story is the appearance of more efficient alternatives, such as open source.
New companies erode markets of established ones, and so on ...
Siebel is getting eroded by Salesforce.com, a highly configurable, rapidly deployable, application service. That's the Wall Street story, and it is true. You would be crazy to buy Siebel if you can get away with a much faster and easier Salesforce.com deployment. What you don't hear is that Salesforce.com itself is about to get eroded -- and severely -- by the open source CRM systems like SugarCRM (a Salesforce.com knockoff) and CentricCRM.
I believe that traditional enterprise software companies still can deliver a lot of value. However, we need to figure out new packaging and revenue models for them. The new-license business is hardly paying its cost of sales, so a lot of people are spinning their wheels on long sales cycles, rather than innovating and delivering.
Andy Singleton is president of Needham, Mass.-based Assembla, which brings "inspired by open source" applications and development processes to enterprise software.
Links
1. ""IT Execs to Vendors: Your Software Stinks,"" - [
www.developerpipeline.com]
2. "Analyst Jim Yin of EKN Research" - [
biz.yahoo.com]
3. "Accenture" - [
www.accenture.com]
4. "PowerSteering Software's" - [
www.psteering.com]
5. "Niku" - [
www.niku.com]
6. "Massachusetts Software Council." - [
www.masoftware.org]
7. "Salesforce.com" - [
www.salesforce.com]
8. "SugarCRM" - [
www.sugarcrm.com]
9. "CentricCRM." - [
www.centriccrm.com]
10. "Assembla," - [
www.assembla.com]