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12/14/2012

Analyzing the Global Software industry

The IT sector showed a good performance during the crisis, compared to other industries, and the IT software was the segment within the IT industry which was less affected by the economic downturn.
Despite a recognized maturity due to product standardization and market concentration, new actors and new technologies contribute to the high dynamic and flexibility of the software industry, bringing continue innovation. With the introduction of cloud computing, the value proposition of software has improved dramatically and also the way to deliver and to sell the “product” has evolved consequently. Software vendors have managed to take advantage of the recent evolution in the software model, reshaping the traditional business model focused on product sale and turning it into a service offer, which ensures a more recurrent and resilient cash flow.  The future of software is increasingly more focused on services rather than on products. The browser is becoming the common platform for software applications and the cloud system is replacing the PC. Rather than having to pay for a perpetual and static software program, users will pay for services and on a subscription basis, which will be pre-packaged and easily accessible online.

The software industry: product categories and revenue models

To understand this significant change, let us first take a look at how the software market can be segmented and categorized. There are two main ways to approach this market, focusing either on software product categorization or revenue models.
Software products within the Global IT industry are mainly categorized into four types:

  1. Application software, whose role is mainly to improve business processes and the level of automation within the organization. This type of software is used directly by the end-users and workers.

  2. System software is the infrastructure software foundation which manages and links the hardware, the network and the software together.

  3. Middleware and tools are intermediary software that stand between the system infrastructure and application software and allow different software to interact with each other.

  4. Electronic games that form part and parcel of the software industry as they provide interactions with a user interface offering visual feedback on a video display. Both paid and ad-funded games can be found in this category.

In terms of product formats, Software products can be sold either as ready-to-use packaged software or as custom software that need to be tailored based on organizational structure and processes, not to mention end-user’s requirements. Though video games and leisure software account for a significant part of the IT industry nowadays (6% of the European market in 2009), the focus in this article lies especially on the first three categories of B2B software products.

The second way to look at the software industry is to focus on revenue models, which describe the ways in which software suppliers sell and deliver software products to their clients. Three main revenue models can be found in the software industry1:

  1. Software products and licenses model, whose revenues are derived mostly from the sale of software products, such as licenses, usually accompanied by annual basic support and maintenance fees;

  2. IT associated services model, where the majority of the revenue comes from human activities. This consists of IT consulting, integration services, specialized technical support, outsourcing or hosting services, etc.;

  3. Paid web-based model, also known as cloud computing. This emerging revenue model is mainly based on a monthly “pay- as-you-use” basis and uses the Internet to deliver the services and software to end-users.

Additionally, some companies have also focused on hybrid software solutions and have developed their offerings around a
mixed portfolio of products and services, obtaining most of their revenues from maintenance and support fees. According to Gartner2, global IT software spending was estimated at US 267bn in 2011.
This mainly includes sales of software products, support and maintenance. With a size of US 845bn in 2011, the IT services industry represents a much larger portion in the ICT market. Together, IT Software and IT services represent approximately 30% of the whole IT industry, with Computer Hardware (11%) and the Telecom industry (59%).
The IT Software sector was, in general, less affected by the economic crisis compared to the other segments in the IT industry. While the overall IT market shrunk by 4.9%, the software segment only contracted by 2.6% in 2009. Consequently, the growth of the software industry in 2010 - 3.1% on a yearly basis - was lower than the growth of the IT sector at 3.9%, mainly because it experienced less recovery as predicted by analysts at Gartner, worldwide IT spending reached 2008 pre-crisis levels in 2011.

Market Players

IT Software is quite a concentrated market, with the top 20 players representing approximately 75% of the market. Combined revenue of the top 3 players, Microsoft, IBM and Oracle - all US incorporated companies - is US 97.7 billion, representing more than 40% of the total market3. It is important to highlight that software revenues do not represent the totality of sales for most of the companies in the IT software markets. Rather, there are different kinds of players, namely:

  • Independent Software Vendors (ISV)
  • Hardware Manufacturers
  • IT Services Providers
  • Telecom Operators
  • Internet Players
  • Video-games Vendors

Taking this perspective, some companies among the top 10 players, such as Microsoft or Symantec are mainly focused and specialized on software revenues which represent at least 70% of their total sales, whereas other companies like IBM, Ericsson, HP, EMC have less than a quarter of their total revenues coming directly from software sales.

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