For years, high-end business applications suppliers steered clear of the mid-market, saying it was impossible to make money selling sophisticated software to small and medium-sized businesses. They are not saying that anymore.
The once unfashionable mid-range market is looking increasingly congested. High-end giants such as SAP and Oracle are working hard to come down into the upper part of the mid-market (generally defined as companies with annual turnover of between $250 million and $1 billion). At the same time, resellers from Microsoft, Sage and others are already pushing up into the lower mid-range ($30 million – $250 million) with what analysts at AMR Research regard as credible systems, aggressive pricing and compelling messages about simplicity and cost of ownership.
Sage, Europe’s third biggest software supplier, which grew 7% to $421.5 million in its second half, still generates most of its revenue from sales of its low-end accounting applications. But about 5% of its business now comes from selling what it describes as “new and more sophisticated products to customers who have outgrown their existing software”. Some 36,000 clients either bought new licences or migrated to a more sophisticated product during Sage’s full-year, contributing about $43 million of new licence revenue.
Analysts believe that if Microsoft can accelerate growth at the bottom of the applications market, companies such as Sage are likely to be helped because they already have high-volume, reseller-based business models that target the small and mid-size market. They may also take advantage of the interest and activity generated by Microsoft’s marketing efforts.
But if things are looking rosier for Sage, Oracle is making little headway. In its second quarter, the database and business applications giant suffered a fall of 3% in consolidated revenue and, more alarmingly, a drop of 34% in application licence sales. In recent months it has launched a new personal-productivity applications package, called Collaboration Suite, which is aimed squarely at Microsoft’s powerful Exchange/Office combination. The success of the product may help Oracle’s midrange push in 2003.
Meanwhile, on the face of it, the mid-market incumbents, including International Business Systems (IBS) of Sweden, Scala Business Solutions of the Netherlands and JD Edwards of the US, are in the most uncomfortable position of all.
IBS is already being squeezed. The mid-market enterprise resource planning (ERP) software vendor contracted 11% in its third quarter, and is now pinning its hopes of a turnaround on Magnus Wastenson, who took over as CEO from founder Staffan Ahlberg in October 2002. He can draw a little comfort, perhaps, from the fact that software sales were virtually unchanged in the quarter – it was poor performance from the much bigger hardware and services units that dragged the company down as a whole.
On the other hand, Scala and JD Edwards appear to have responded to the threat with qualified success.
Scala, a lower midrange collaborative ERP software vendor, which is under attack from the likes of Sage, grew revenue 9% to reach $18.4 million in its third quarter. But new licence sales were virtually unchanged and most of the increase came in maintenance sales to existing clients.
JD Edwards, for its part, undertook a wide-ranging review of its strategy and business practices in 2002. It repackaged its applications suite into modular components based around business processes, and, more controversially, cut its reseller community by a third. In its fourth quarter, JD Edwards registered a modest 3% increase in revenue to $247.2 million but doubled net profit to $37.3 million. The new strategy may be working.