The continued economic slump in business capital spending is changing the shape of the software industry as top-tier software vendors are gaining revenue share at the expense of the pure-play vendors, according to Dataquest Inc., a unit of Gartner, Inc.

Gartner Dataquest analysts refer to these

top-tier vendors as titan vendors (vendors that have achieved dominant market share in more than one software market segment by offering a diversified and often integrated line of software products). Pure-play vendors derive most of their software revenue from the sale of products within one market. The realities of the weak economy continue to shift the competitive advantage from pure-plays to titans.

“”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,”” said Joanne Correia, vice president for Gartner Dataquest’s Software Industry Research group. “”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.””

Worldwide end-user spending on software is forecast to grow 3.6 per cent in 2002, with revenue of totaling $76.9 billion, and increase to $81.8 billion in 2003. In 2001, worldwide software revenue declined 5.7 per cent, with revenue of $74.2 billion.

The first-half 2002 license revenue performance of enterprise software companies was lackluster because of the continued bad news around the U.S. and global economy which is inhibiting corporate purchases and stalling investment decisions.

“”Tight IT budgets have meant that buyers can’t satisfy their pent-up demand for software projects to improve corporate business performance and IT infrastructure efficiencies,”” said Roger Fulton, group vice president and worldwide director for Gartner Dataquest’s Software Industry group. “”When budgets loosen in the second half of 2003 or the first half of 2004, the backlog of demand could cause a temporary growth surge that then settles down to normal growth rates.””

The maturity of customer/supplier relationships in the industry has led to extremely distorted buying patterns across the year. The fourth quarter – the year-end for the majority of vendors and buyers – has become the time of peak activity as customers anticipate that this is the time the best deals can be struck. The second quarter had a similar but much smaller peak. These peaks limit the opportunities in adjacent quarters, leaving the market behavior very lumpy.

“”As buyer behavior has changed dramatically over the last several quarters, there has been a large decline in sales of new software licenses,”” said Correia. “”Enterprise software license sales are competing for a more scrutinized IT and business budget, which is focused on a broader client requirement. Greater success will come to those vendors that create value propositions that business and IT managers can buy into.””

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