You can download the Infoconomist Software 100 (download size 176K), click here. It is in Acrobat Reader (PDF) format.

Alfred Chuang, like so many other software

industry veterans, has been through the best of times and the worst of times. And as founder, president and CEO of application server vendor BEA Systems, there is no question which of those descriptions fits today. “These are tough times,” he sighs. “IT budgets have come under a lot of scrutiny in the last 12 months, and instead of the wild spending spree we saw in 1998, 1999 and 2000, people are much more careful now.”

Jim Goodnight, chairman and CEO of SAS Institute, the business intelligence software company, agrees with his peer’s frank assessment. “It [2002] is going to be a very slow year for the industry.” Lindsey Armstrong, European senior VP of Veritas Software, adds, ruefully: “Two or three years ago this was a very buoyant market. Now it has become a very tough industry to be in.”

What these comments underline is that even some of the most senior figures in the software industry are prepared to admit just how difficult things are — people who normally carry the mantle of cheerleader rather than doomsayer. They have looked at their order books, talked to their customers and reached a gloomy conclusion. It may still be an era of largely positive marketing spin – but an epidemic of realism, even of resignation, is spreading. Executives who once assumed they had struck it rich now accept that harsh economic realities have left them holding fool’s gold.

The bare statistics do not lie: The software industry is in a recession, as demonstrated by the fact that the global Infoconomy Index has been in ‘negative growth’ since August 2001. Indeed, the worldwide industry is 14% smaller than a year ago, representing a $30 billion (€31bn) loss in revenue terms for the biggest 200 companies in the sector. More disturbingly, even the European version of the Infoconomy Index, which has remained surprisingly robust in the last 12 months, finally and inexorably slipped into minus figures in June 2002 — representing the first month in more than a decade that Europe’s software

sector has shrunk in size.

The InfoconomistGlobal Software 100 table underscores this view. For example, the table shows that one in three of the 100 most successful vendors in the world sold less than last year — confirming that the recession is affecting the giants of the industry as well as the minnows.

Consolidation underway

Undoubtedly, however, it is the community of young software companies that is suffering the most. “If you are a start-up, this is a really tough market to play in,” says Richard Mathews, senior vice president of international operations for JD Edwards, the enterprise resource planning software vendor. “Every one of the big players is trying to broaden its applications, while all the economy has done is make customers more nervous about dealing with smaller players.”

SAS Institute’s Goodnight says that the only start-ups that will survive the shakeout will be those with a “rock-solid product that inspires people”. He has found compelling evidence of the long-awaited consolidation in the software market. “We are seeing a lot of acquisition requests from a lot of smaller companies. We get a request almost every day.” He says his company bought analytic management software vendor ABC Technologies in March 2002, and “we have another one in mind at the moment”.

Chuang of BEA Systems believes the consolidation will be good for the industry — but only up to point. “We have gone way too far in terms of funding mere ideas,” he explains. “Many start-ups are basically just an idea or a single product. They are not real companies. Those smaller companies just aren’t going to make it as a business.” But it is a state of affairs that he partly regrets. “We need innovation. We need entrepreneurs to keep creating new companies,” he says.

Cost conscious

In order to survive the downturn, cost cutting has become a priority for nearly all vendors, big and small. The most traumatic consequence of this has been the loss of hundreds of thousands of jobs in Europe and the US.

But leading industry figures are quick to play down suggestions that the software sector will be permanently damaged by the unprecedented cull of the last 12 months. Many people who have left the industry, says Chuang, were not particularly specialised in software engineering and marketing and have now returned to their previous sectors. “I have not seen a ‘brain drain’. Better talent is now being recycled back into the great companies.”

JD Edwards’ Mathews takes up this view that the software industry has become a true meritocracy – with the talented few having returning to the large, wealthy companies that they left behind in the late-1990s for Internet-boom start-ups. “The top 20 vendors are picking off the best talent,” he says.

But not all vendors have cut their staff. “We spent last year hiring people,” says Goodnight. “Our workforce has grown by 6%. Because SAS is a private company I have got the luxury of not having to lay people off to meet the target some guy on Wall Street has come up with.”

It is not all doom and gloom, even for publicly listed vendors. Governments in Europe and the US, for example, have never been keener to invest billions of euros and dollars in new technology. Initiatives such as electronic government and beefed-up national security – particularly in the wake of 11 September – are spurring demand for software, hardware and IT services and triggering a wave of unlikely partnerships between erstwhile rivals.

And many parts of the world, such as southern and eastern Europe, China, the Gulf States and South Africa remain relatively buoyant — albeit because technology penetration levels are invariably lower there than in the West.

“People everywhere have become addicted to information,” says Chuang, who sees this fuelling demand for broadband technologies and a myriad of Internet-compatible devices. “I think it is a very positive sign for us.” That cautious optimism may not quite be music to the ears of struggling vendors, but at least it is a start.

You can download the Infoconomist Software 100 (download size 176K), click here. It is in Acrobat Reader (PDF) format.