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In mid-July, stock market analysts and computer industry pundits came to Oracle headquarters in Redwood City, Calif., seeking guidance on how the enterprise software market was going to grow during the rest of 2004.
While Oracle Corp. was among the software companies that reported healthy sales and profit growth in the second half of 2004, other companies including archrival PeopleSoft Inc. as well as Siebel Systems Inc. reported lower sales and earnings. PeopleSoft in particular has blamed Oracles yearlong buyout effort as the main reason why PeopleSoft this week reported a 70 percent drop in earnings.
The latest quarterly reports had analysts asking Oracle officials when the software market would fully recover from the collapse of the IT industry bubble of the late 90s.
“This is the recovery. Enjoy it,” Oracle CEO Larry Ellison told them. The industry, he advised, would never again see the kind of growth experienced in the late 90s. “We are not going back to the lunacy of the bubble,” Ellison said.
Ellison maintains that the software industry has seen its best days and has entered a consolidation phase–a period that Oracle intends to take advantage of by acquiring smaller companies for their technology and management talent.
“This will not be an industry that will be forever young,” Ellison said. In fact, he suggested that the industry is getting well on into middle age.
But analysts say that this may be too gloomy a view. Plenty of companies have done relatively well in the past few quarters. The software industry is making a slow and somewhat inconsistent recovery from the slump that gripped it from 2001 through much of 2003.
Some of the larger software companies did particularly well in the 2004 second quarter. Microsoft reported a 15 percent revenue increase. Computer Associates International Inc., SAP AG and EMC Corp. also reported strong sales growth.
Next Page: Contending with a muted buying sentiment.
Muted Buying
“I think there is some weakness in the market. But I wouldnt overstate it,” said Donovan Gow, vice president of equity research at American Technology Research Inc., in Greenwich, Conn.
“Siebel and PeopleSoft are two of the biggest misses, and that is mostly explained by SAPs strong results,” Gow said. Its an indication there has been some shift of market share from PeopleSoft and Siebel to SAP, he said. PeopleSofts situation could improve if Oracle loses the U.S. District Court antitrust suit that seeks to bar Oracle from acquiring PeopleSoft, he noted.
But these were two of the more prominent cases, Dow said. Other companies that missed their second-quarter projections included E.piphany Inc., Informatica, Inc., Kana Inc., Secure Computing Corp., Sybase Inc., Veritas Software Corp. and WebMethods Inc., according to Gow.
This raises a question about why there appears to be some persistent softness in the enterprise applications software market.
Gow said it is clear that enterprise applications software buyers are being conservative in their purchasing and budgeting, especially for applications such as CRM (customer relationship management), supply chain management, and human relationship management software.
“They are just buying what they need for the short term,” Gow said, rather than making large bulk license purchases for anticipated needs that in past years ended up as shelfware.
“They just arent feeling a lot of urgency to buy these days,” Gow said. They are taking their time about making buying decisions and they are prolonging the sales cycle.
“They know they are in the drivers seat as far as price concessions are concerned,” he said. “There are a lot of hungry vendors out there who are ready to discount heavily.”
But so far, there has been some modest improvement in overall demand, and Gow expects this trend to continue for the rest of this year. “There are not many areas that will see explosive growth,” he said. Data center automation, Linux and security are among the few sectors that are experiencing strong growth, he noted.
Next Page: Prospects for slow, steady growth.
Slow, Steady Growth
The current trend of slow but steady growth is likely to continue for the next couple of years in the enterprise software market, said Chad Eschinger, an analyst with Gartner Inc. in Stamford, Conn.
“We would anticipate over the next year or two that we are going to continue to see low, single-digit growth” in the enterprise resource planning software market.
But Eschinger expects that sometime between 2006 and 2007, sales growth will start to gain momentum due to product innovation and a faster pace in the technology replacement cycle, Eschinger said. This should allow the market to start “hitting double-digit growth, but it is going to be a slow struggle as far as growth is concerned, he said.
“Demand is still fluctuating at best,” and buyers are still extremely cautious about how much they spend on enterprise applications software, he said. But sales have bounced up after bottoming out in 2003, he said.
“Think of the market as an hourglass. We are in the middle of that hourglass,” Eschinger said. The sales growth is slowly expanding back up the slope of the hourglass and will continue to do so for the next couple of years, he said.
During this time, there will be some of the consolidation that Ellison has predicted as ERP point solution vendors start to merge with companies that can offer a wider range of applications.
Many companies are hoping that small and midsize businesses would provide a strong new market for enterprise software. But there is no way SMBs (small and midsize businesses) can compete with the buying power of large enterprises.
For the ERP vendors, there was the perception that the SMB space “is all the virgin territory that is left. They had to turn their attention there,” said Michael Doane, senior vice president of professional services strategy with The META Group Inc. market research firm in Stamford, Conn.
This was particularly a target for SAP in North America, which has been competing tenaciously with Oracle and PeopleSoft for ERP customers. “There has been a long-term perception that SAP was a big boy toy,” Doane said.
Next Page: Hopes riding on SMB market.
Chasing SMBs
All of the ERP vendors are trying to package and price their products to be more useful and affordable for SMBs. “Were not seeing a big wave of midmarket adoption, but they are making inroads,” he said.
The general turmoil caused by Oracles pursuit of PeopleSoft is creating uncertainty through the entire ERP software market, Doane said. Its not just the PeopleSoft buyout, Doane said. Its also PeopleSofts buyout of competitor J.D. Edwards and the revelation that Microsoft had engaged SAP in preliminary talks about a possible merger before they decided to drop the idea.
Customers are wondering whether they should go ahead with their purchase plans for ERP software and consulting services “or whether they should simply wait for the dust to settle over this lingering round of corporate acquisitions,” he said.
But SMBs are limited in the amount of growth they can add to the market, Gow contended. SMBs “are not a complete green field opportunity. Its been around for a long time,” Gow said. All of the ERP software companies have had some midmarket presence for nearly as long as theyve been around, he noted.
ERP vendors are pursuing this market because there are a lot of customers in the space, Gow said. But this market also doesnt usually provide the multimillion-dollar sales to supply software for thousands of individual users, he said.
SMBs will add some momentum going forward, but they cant serve as a sustainable replacement for the enterprise sales that are the industrys bread and butter, Gow said.
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