Software squeeze to send prices tumbling
Software squeeze to send prices tumbling
Dec 24, 2004: For the first time in over a decade, overall packaged software pricing is set to decrease, with the downward trend likely to continue for the next three to five years.
Analysts Meta Group cites a major shift in the technology industry as the agent of change in the software market, driving software costs down and spurring sizable market consolidation by 2008.
Competition from new application providers building on top of infrastructure services from IBM, Microsoft, SAP, Oracle, et al.; the increasing availability of open source solutions; the growth of third- party application service providers and the increased exploitation of offshore labour, are all contributory factors in the downward price pressure.
As a result, Meta expects the traditional software market to experience major consolidation as the industry condenses 35 percent by 2008, and another 15 percent by 2010. Traditional software providers will be squeezed by emerging software and application infrastructure alternatives entering the marketplace. Solutions from open source providers, infrastructure services vendors, offshore developers, web services, business process outsourcers, etc, will supply customers with bargaining chips that will pressure vendors to deliver flexible solutions at prices below traditional pricing thresholds.
"This shift has so many implications that it would be hard to overstate. We are not only seeing consolidation trends, but more importantly, we are beginning to see a burgeoning new software industry being germinated by IBM, SAP, and Microsoft that is cutting a swathe through every layer of traditional IT. These events are redefining the economics of the technology market in some fundamental ways," said Meta Group research director, Dale Kutnick. "We are already seeing the major technology vendors positioning themselves and investing more aggressively in infrastructure and web services, where they believe their products can support this more stable model, versus battling it out in the old (over) packaged application software market. Many vendors are terrified and questioning what to do and where to go next."
The analyst group warned that none of this bodes well for the traditional packaged software industry at large, which has been grappling for several years over the right corporate, product and investment strategies that can pencil out profits in the short and long term.
"Traditionally, customers were beholden to their software vendors for the long term simply because alternatives were costly; ongoing maintenance and service support nearly guaranteed ongoing commitment to legacy vendor partners. This vendor 'gravy train' is now in jeopardy due to emerging alternatives. As software becomes more interoperable and structured in a more flexible nature, customers can realistically threaten to bring their business elsewhere or explore to low-cost offshore alternatives if they are unhappy with their current vendor," continued Kutnick.
These trends have opened the door for business-minded CIOs to raise the bar for software vendors by increasing pressure on performance, reliability, and pricing, favoring buyers no longer hostage to traditional rules of software purchasing.
Meta believes that large commercial users should exploit the capabilities and interfaces that are enabled by the application infrastructure services from major players (IBM, MSFT, SAP, ORCL, and BEA) to build/assemble their next generation applications. They should try to isolate and maintain their "basic" ERP software (HR, financials, etc) where they're previously invested and build "software bridges" to the new business applications that are more innovative and transformational.
Meanwhile, small packaged application providers should select one of the leading infrastructure services vendors as a "partner," and build their business applications to this environment, with some basic information exchange to a few of the others. Avoiding a major infrastructure software investment will enable application developers to focus their efforts on capturing more specific business processes. There is also an opportunity for innovative software suppliers to add infrastructure functional capabilities to the "stacks" of the leaders, since they cannot address every niche quickly enough.
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