Is enterprise software finished?

In the OnStartups blog is a very perceptive piece on the state of the enterprise software market.  The post Y2k dotcom bust has had some deep effects on the industry.  In a backlash against the vendor bull market of the late 1990s large companies reined in IT budgets and revised their procurement processes.  Deals that previously would have needed one signature now need five, or eight.  Buyers have become ultra-conservative, falling back on the giant vendors to the exclusion of purchasing from smaller companies. This can be seen in the margins of Microsoft (25%) and Oracle (24% net margin) compared to everyone else.  Most other enterprise software companies, even the successful ones, have operating margins in the teens.  The five year average net margin of public application software software companies is 13.6%.  Even a company like Business Objects has a five year net margin of just 7%.

Venture capital firms, seeing this, have moved on to funding “Web 2.0” ventures, which typically require a lot less capital (Flickr reputedly needed around USD 200k in capital to get going).  Why bother funding companies which need millions in R&D and expensive enterprise sales forces when you might find the next Myspace for a bargain?

This is unhealthy, and not just for small enterprise software companies.  As I have written before, innovation rarely comes from industry behemoths, so by creating an environment where companies are buying only from “safe” companies they are in fact damaging the ecosystem which will bring them their next new and exciting software application.  By sticking to the giant software vendors CIOs are creating an environment where smaller companies struggle, which causes VCs to invest less, which means that fewer and fewer enterprise software companies get started at all.  This in turn allows the giant vendors to charge whatever they want in upgrades (witness those margins) as they now lack serious competition.  Cartels are never a healthy thing for customers, and yet in this case the customers are bringing it on themselves by creating the conditions for a cartel to effectively exist.

 

2 thoughts on “Is enterprise software finished?”

  1. Interesting article. I agree with you partly, in that, the giant corporation have a keen interest in maintanence and upgrades. But I am yet to be convinced that there is no motivation for them to not innovate.
    After all, in this age, we have hundreds of Davids slinging at Goliaths, and the giants are beginning to see how frequently the Davids are bleeding the Goliaths

  2. Andy,

    My view from the trenches is that the business model for enterprise software (and hardware…)is broken. They (you?) reportedly spend as much as 90% of their income on sales and marketing.

    The number of sales people that I deal with at these companies is mind numbing. The number of reseller layers that get a cut of my license fees is shocking.

    These companies could learn a huge lesson from the “web2.0” upstarts by shortening their development cycles and moving their engineers out towards their customers. How do they know what needs to be improved, what needs to be simplified or what needs to be added? It certainly isn’t because I’ve told them.

    What I really want are a set of building blocks that stack together nicely, use industry standards, can be interchanged if I’ not happy, can be managed by fewer (possibly better) people and can be consumedly easily across networks.

    Is that too much to ask for?

    BTW, my favourite example of getting this right is Netezza. I load my data into their box and my queries instantly run 1000x faster. It uses no proprietary SQL, has no indexes or tuning and I only need 1 DBA. Awesome.

    Joe

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