Corporates cut software spending

The combined effects of economic uncertainty and lower business confidence in software investments are combining to severely constraining corporate spending, according to Gartner Dataquest.

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By  Neil Denslow Published  March 19, 2003

The combined effects of economic uncertainty and lower business confidence in software investments are combining to severely constraining corporate spending, according to Gartner Dataquest. However, the worldwide software industry is set for a modest revival this year.

Gartner predicts that’s the industry will return to positive, stabilised growth in 2003, with worldwide end user spending on software forecasted to reach US$76.1 billion, a 3.5% increase from 2002’s figure. This compares to a 0.7% decrease in revenues in 2002, when total worldwide spending was US$73.5 billion.

"[However,] renewed IT software spending will only occur in many organisations after a prudent review of the supplier options and the business priorities," notes Joanne Correia, vice president for Gartner Dataquest's software industry research group

"Despite the backlog of pent up demand, vendors will continue to deal with a new extended sales cycle, resulting in more pressure on margins," she adds.

"Uncertainty is riding high with a very restrained economic outlook, so it can only be sensible to advise continued caution for the near future," agrees Thomas Topolinski, vice president, Gartner Dataquest's software industry research group.

"While some sectors are seeing increased demand, other sectors are losing their share. The most prudent planning assumption is that, at least for the next 12 months, overall global demand for software licenses will remain as static as it is today," he continues.

However, while the continued tightening of budget will hit short term licensing revenue, the analyst house predicts that in the long run, the top tier software vendors will benefit as they continue to take market share from pure play vendors.

These top tier vendors, or titans, are vendors that have achieved a dominant market share in more than one software segment by offering a diversified and often integrated line of software products. By contrast, pure play vendors derive the majority of their software revenue from the sale of products within one market. In the current weak economy, the competitive advantage is shifting from the pure play vendors to titans, as they are able to offer greater economies of scale.

"Software titans have deeper pockets and can withstand the economic challenges much easier than many pure play vendors, which have smaller revenue streams and cash reserves," observes Correia.

"This has caused struggling pure play vendor solutions to be less desirable from a financial perspective even though they can be a better solution to risk-averse decision makers. Loss of revenue, partly because of such reluctance in the marketplace may indeed make bankruptcy or acquisition by a titan a self-fulfilling prophecy," she adds.

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