Software's Dramatic Revolution
New technologies, models and a thriving ecosystem will be critical to future industry success.
By M.R. Rangaswami, Sand Hill Group
Apr. 03, 2006
Let's stop talking about the maturation of the software industry.
Every time I hear the press compare software to a mature industry like autos, I cringe. Sure, there are similarities. Both have experienced consolidation and slower revenue growth rates. But the similarities end there.
Software is driven by innovation. New technologies, new models, new companies - all enable the software industry to reinvent itself with stunning regularity.
Before angry auto industry experts email me, I recognize that innovation exists in the auto industry. But the fact remains that it is far harder for a truly "mature" industry to reinvent itself. When was the last time you saw an automaker experiment with a new sales model? Where are those alternative energy-powered vehicles we've been hearing about for 30 years?
The software industry is undergoing a quiet but dramatic revolution. The implications of this revolution will may be even more profound than in previous transitions. As Software 2006 opens today, software executives, investors, professionals and customers will gather to discuss and debate the current state of the industry and its future.
One thing is certain: It is time to start thinking differently about the software business.
Three Common Misconceptions
As the software market begins to undergo this revolution, experts continue to debate the state of the industry. Here are three areas which are commonly misunderstood and the reality of the situation.
Misconception #1: The software industry has matured.
Reality: A dramatic revolution is underway.
It is true that the traditional business model of enterprise software companies has matured. There will be very little further growth in perpetual license sales of proprietary software products.
But new software business models have sprouted to take growth to another level. There are thousands of startups blossoming with new business and technology models, such as those based on software-as-a-service or on-demand methods, open source, Web services and offshoring. Combined, these innovations form the platform for the next wave of growth.
At the same time, a new study conducted by McKinsey & Co. and Sand Hill Group finds CIOs forecast an increase in software spending. Software's share of IT budgets will rise from 30 percent today to 35 percent in 2008. Clearly, the industry has emerged from the economic downturn and is on a new path to success.
Misconception #2: Web 2.0 is consumer-driven.
Reality: The real Web 2.0 opportunity is in the enterprise.
The media is awash these days with excitement about Web 2.0 and its potential to revolutionize consumers' online experiences. Indeed, Web technology has matured to the point that the cost of market entry, sales and marketing has declined substantially.
Although it will certainly impact consumer experiences, Web 2.0's big impact will stem from its ability to transform the way enterprises connect with their constituents. Communicating with customers via podcasts, with partners about new product development via a RSS feed, with legal advisors via a blog on regulatory issues are all increasingly common - and lucrative features.
Another joint project, the "Software 2006 Industry Report," also prepared in conjunction with McKinsey & Co., quantifies the opportunity. Tacit, person-to-person interactions account for 41 percent of worker activity but only 24 percent of software spending. As vendors work to correct this imbalance, enterprises will be the key to driving Web 2.0 revenues.
Every time I hear the press compare software to a mature industry like autos, I cringe. Sure, there are similarities. Both have experienced consolidation and slower revenue growth rates. But the similarities end there.
Software is driven by innovation. New technologies, new models, new companies - all enable the software industry to reinvent itself with stunning regularity.
Before angry auto industry experts email me, I recognize that innovation exists in the auto industry. But the fact remains that it is far harder for a truly "mature" industry to reinvent itself. When was the last time you saw an automaker experiment with a new sales model? Where are those alternative energy-powered vehicles we've been hearing about for 30 years?
The software industry is undergoing a quiet but dramatic revolution. The implications of this revolution will may be even more profound than in previous transitions. As Software 2006 opens today, software executives, investors, professionals and customers will gather to discuss and debate the current state of the industry and its future.
One thing is certain: It is time to start thinking differently about the software business.
Three Common Misconceptions
As the software market begins to undergo this revolution, experts continue to debate the state of the industry. Here are three areas which are commonly misunderstood and the reality of the situation.
Misconception #1: The software industry has matured.
Reality: A dramatic revolution is underway.
It is true that the traditional business model of enterprise software companies has matured. There will be very little further growth in perpetual license sales of proprietary software products.
But new software business models have sprouted to take growth to another level. There are thousands of startups blossoming with new business and technology models, such as those based on software-as-a-service or on-demand methods, open source, Web services and offshoring. Combined, these innovations form the platform for the next wave of growth.
At the same time, a new study conducted by McKinsey & Co. and Sand Hill Group finds CIOs forecast an increase in software spending. Software's share of IT budgets will rise from 30 percent today to 35 percent in 2008. Clearly, the industry has emerged from the economic downturn and is on a new path to success.
Misconception #2: Web 2.0 is consumer-driven.
Reality: The real Web 2.0 opportunity is in the enterprise.
The media is awash these days with excitement about Web 2.0 and its potential to revolutionize consumers' online experiences. Indeed, Web technology has matured to the point that the cost of market entry, sales and marketing has declined substantially.
Although it will certainly impact consumer experiences, Web 2.0's big impact will stem from its ability to transform the way enterprises connect with their constituents. Communicating with customers via podcasts, with partners about new product development via a RSS feed, with legal advisors via a blog on regulatory issues are all increasingly common - and lucrative features.
Another joint project, the "Software 2006 Industry Report," also prepared in conjunction with McKinsey & Co., quantifies the opportunity. Tacit, person-to-person interactions account for 41 percent of worker activity but only 24 percent of software spending. As vendors work to correct this imbalance, enterprises will be the key to driving Web 2.0 revenues.
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