Software Maintenance Fees May Not Be Invulnerable To Change After All

TECH DYNAMICS: Last Friday, June 25th, the US House and Senate reached agreement on a financial reform bill, which is likely to pass and be signed into law.* At first glance, this legislation has nothing to do with the IT industry directly. But buried in this bill is a provision regarding debit card fees, which could serve as a model for how end users of software could bring about a change in something that is very important to the economics of the software industry — software maintenance fees.

Now, software maintenance fees have been one of the givens in the software industry in perpetual license deals. Typically set at 18% to 22% of initial license fees, they are fixed in stone. An enterprise software buyer can try to negotiate a discount on a license fee; a really smart one can negotiate a deal where the maintenance fee rate is applied against the discounted license fee, not against the list license fee. But software vendors rarely discount maintenance fees. 

Why? Established software vendors depend heavily on maintenance fees for the bulk of their revenue. Almost half (49%) of SAP’s revenues and Oracle’s applications revenues in 2009 came from maintenance fees. Oracle’s middleware business earned 55% of its calendar 2009 revenues from maintenance fees.

And yet maintenance fees are one of the biggest sources of complaint from enterprise software buyers. Every so often this dissatisfaction breaks into the open. SAP faced massive client unrest when it raised maintenance fees for most customers during 2009. SAP tapped the biggest vein of resentment about maintenance fees: fees on old software. Old software is the crux of the problem with maintenance fees: It tends to be stable and therefore requires little support.

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Will SAP Fall Victim To The Innovator's Dilemma? – Thoughts From SAPPHIRE NOW 2010

TECH DEVELOPMENTS: I have been re-reading Clayton M. Christensen’s The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail in preparation for a session that Chris Mines and I are running on adapting to the Next Big Thing at Forrester’s IT Forum 2010.*  Last week, I attended SAP’s SAPPHIRE NOW conference in Orlando, listened to co-CEOs Bill McDermott and Jim Hagemann Snabe, and met with McDermott along with other Forrester colleagues.  The juxtaposition of the book and the event caused me to wonder: is SAP like one of the highly successful companies in Christensen’s book that failed to adapt to disruptive technologies?  As Christensen noted, “the managers of the companies studied here had a great track record in understanding customers’ future needs, identifying which technologies could best address those needs, and in investing to develop and implement them.” 

Everything that McDermott and Snabe said was consistent with these characteristics.  They talked about how companies were facing a world of mobile, empowered customers; their need to be connected with each other to optimize the value chain through to the end consumer; the desire for new process flows; and the importance to them of fast decision-making.  They identified a combination of on-premise, on-demand, and on-device solutions that SAP will be offering to meet these needs.  They discussed SAP’s investments and new offerings in these areas, including its acquisition of Sybase for its mobile solutions and real-time analytics capabilities. 

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Software License Revenues Roar Back In Q1 2010 -- And Why Licensed Software Will Co-Exist With SaaS Beyond 2010

TECH DEVELOPMENTS:  With SAP's release of its Q1 2010 earnings, it is clear that those who saw an irresistible shift from licensed software to software-as-a-service (SaaS) are a bit premature in their obituaries for the licensed software model.  SAP's license revenues increased by 11% in euros, and by 18% when its euro revenues are converted into dollars at the average exchange rates in Q1 2010 and Q1 2009.  Oracle's license revenues for its fiscal quarter ending February 2010 rose by 13% in US dollars (and 7% in euros).  Among other vendors, Lawson reported a 28% increase in its license revenues (in dollars), and Epicor reported 23%. 

These growth rates partly reflect how badly licensed software (which is treated as capital investment) got hit in the general cutbacks in business corporate investment in 2009, as panicked companies scrambled to conserve cash and avoid having to borrow from shut-down financial markets.  However, I think there's more to the recovery than rebound from depressed levels a year ago.

Forrester's surveys of companies about why they don't like software-as-a-service consistently turn up five reasons: 1) inability to customize; 2) difficulty in integration to other systems; 3) security of data and information; 4) worries about pricing models that put clients on a constantly rising escalator; and 5) lack of SaaS products.  SaaS vendors are addressing all of these, and there is no question that these barriers are eroding.  But they still persist, and mean that the license software model has a high degree of persistence in software categories like core ERP systems (integration and security of core data), industry-focused applications (need for customization), eProcurement products (integration to ERP systems), and contract life cycle management products (security of contract data).  

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IBM's Q1 2010 Results In Align With Our Expectations -- A Bellwether for Other Vendor Results To Come

TECH DEVELOPMENTS: Like half a dozen Forrester colleagues, I have been stuck in London since last week due to the Icelandic volcano's disruption of air travel.  So, this allows me a UK perspective on IBM's results for Q1 2010.   These turned out to be very much what I expected (see "US And Global IT Market Outlook: Q1 2010 -- The Tech Market Recovery Has Begun").  I thought IBM's revenues would grow by mid-single digits; in fact, they grew by 5%.  I expected its software revenue growth to be in low double-digits; its hardware revenues to be around 3%-5%; its outsourcing revenues up about the same; and its consulting and SI revenues down by 5% to 10%.  Again, actual results came in pretty close: software revenues were up 10.6%; systems and technology revenues up 4.9%; outsourcing (GTS outsourcing) up 6%; and IT consulting and systems integration services (Integrated Technology Services and Global Businesses Services) flat with the year before. 

Based on the results we have seen so far from IBM, Oracle (quarter ending February 28), Accenture (quarter ending February 28), and Atos Origin, here's what I think we will see for vendors for the rest of the quarter:

  • Software will be strong, up 10% or more growth in US dollar revenues for most vendors.  Microsoft will do better than this, thanks to strong sales from Windows 7.
  • Hardware will also be strong, with PC vendors posting 15% growth and server/storage vendors coming in around 5% to 8%. 
  • IT consulting and systems integrations servies will still be down, lagging the upturn in software investment.
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The Tech Recovery of 2010 Is Underway

As I predicted in January 2010 (see January 11, 2010, "US and Global IT Market Outlook: Q4 2009"), a tech recovery has started in the US and around the world.  In my updated IT market forecast (see April 8, 2010, "US and Global IT Market Outlook: Q1 2010"), I point out that IT market indicators from Q4 2009 showed an end to declines, setting the stage for stronger growth in 2010.  Since IT market trends are playing out as I expected, I have made only modest changes to my 2010 IT market forecasts.  I now expect the US IT market to grow by 8.4%, a bit higher than my earlier forecast, because of better-than-expected performance in communications equipment.  My forecast for the global IT market in US dollars is a bit lower at 7.7%, with the unexpected strength in the US dollar (due to the weaker Euro after the Greek debt crisis) dampening dollar-denominated growth.  I continue to see computer equipment and software as the strongest product categories in 2010, with PCs, peripherals, and storage equipment leading the computer category and operating system software and applications setting the pace for software. Communications equipment purchases are looking up, especially for enterprise and SMB buying.  IT services will lag a bit, with systems integration project work waiting for licensed software purchases to rise. 

In this report, I provide our first look at 2010 IT purchases on an industry basis in the US.  Confirming past research, the largest US industry market for tech products and services is the professional services industry ($103 billion), followed by financial services ($81 billion), and government ($71 billion).  In terms of 2010 growth prospects, US manufacturers, financial services firms, utilities, and health care will see the strongest growth in 2010. 

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Launching A New Blog On Tech Economics

With Forrester’s new blogging platform in place, I have the opportunity to launch a series of blogs about tech economics.  What do I mean by tech economics?  To me, tech economics first means how the larger economy and the tech sector interact.  I am interested both in how economic conditions impact the demand for technology goods and services and how business and government purchases of these tech goods and services affect the economy as a whole and the industries and firms in the economy.  Second, tech economics is about the revenue of tech vendors, both what they are reporting in the present and past and what we expect those revenues will be based on future purchases by their business and government customers.

 

My published research on the US and global IT market outlook, industry, regional, and country IT purchase trends, big trends like Smart Computing, and the ePurchasing software market (which I also cover) will continue to be my platform for addressing tech economics.  However, I want to use this blog to talk about four focused aspects of the tech market: 1) tech data sources; 2) tech industry definitions; 3) tech market developments; and 4) tech market dynamics.   Let’s call these the 4Ds of tech economics, and each will have its own strand of comments and observations.

 

D1: Tech data sources will be of most use to the data geeks like me in tech vendors.  These are folks who use my numbers in their own forecasts of the market for their firm and its products.  These blogs will talk about the data sources that I use in building my tech market sizing and forecasts, issues and questions about these data sources, and how the data geeks can leverage them.  I will share some (but not all!) of our secret sauce for our forecasts, and I hope you will share some of yours so we can all get better.

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Q4 2009 IT Market Data As We Expected Shows End of Tech Downturn

The first reports on the IT market in Q4 2009 are now in, and they are in line with our prediction that the tech market recession ended in that quarter (see US And Global IT Market Outlook: Q4 2009). Overall, the tech market in Q4 2009 was more or less flat with the same quarter the year before – an improvement from prior quarter when growth was negative, and evidence that the 2010 tech market will post positive growth. 

  • The US economy was stronger than expected, by 5.7% real GDP is an aberration.  The US Department of Commerce released preliminary data on Q4 2009 economic growth, and the results was a surprisingly strong 5.7% in real GDP, 6.4% in nominal GDP from the previous quarter (on a seasonally adjusted annualized basis).  However, about two percentage points of that growth was due to inventory re-stocking, which will not be repeated in future quarters.  And based on prior GDP reports, this growth rate will probably be revised down as new data comes in.  (In Q3 2009, the growth rate in real GDP started at 3.5%, but ended up revised down to 2.2%.)  Still, this report confirms that the US recession is over, and slower by steady growth is likely for the rest of 2010.
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Global Tech Recovery Will Drive US IT Market Growth Of 6.6% And 8.2% Globally (In Dollars) In 2010

2009 was a miserable year for tech vendors, especially for sellers of capital equipment like PCs, servers, routers, and licensed software, and for systems integrators who helped implement that software.   2010 will be a much better year, especially for these very same vendors.   We’re not talking boom yet, so we are not predicting double-digit growth rates across the tech market (though some categories will see those kinds of growth).  But, as our latest tech market report shows (http://www.forrester.com/rb/Research/us_and_global_it_market_outlook_q4/q/id/53384/t/2), we do think there will be a solid tech recovery in 2010, with growth rates in the high single digits.

 

Given that other IT advisory firms are predicting that tech markets will see growth of 3% to 4% in 2010, why are we so (relatively) bullish with our predictions of 6.6% growth in the US tech market, and 8.2% growth in the global tech market (when measured in US dollars)?  Three reasons:

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Smart Computing Will Create Growth Opportunities -- and Challenges -- for IT Vendors

Since 2004, I have been arguing in my research that the tech market would enter a new cycle of innovation and growth starting in 2008. This thesis was based on my review of the US tech market since the 1950s, which showed a pattern of eight-to-ten year cycles of strong growth in tech purchases, followed by eight years of modest growth. This pattern had repeated three times, first with the introduction of mainframe computers in the late 1950s and 1960s, then with the arrival of personal computers in the 1970s and 1980s, and then with ERP software, client-server systems, and the Internet in the period from 1992 to 2000. Based on this pattern, I predicted that the tech market (at least in the US) would grow at about the same rate as the overall economy from 2004 to 2007 as business "digested" that third wave of technology, then decline in 2007 or 2008 due to a recession in that period ("IT Spending Outlook: 2004 To 2008 And Beyond -- Waiting For The Next Big Thing": http://www.forrester.com/Research/Document/0,7211,35063,00.html; "Expect A Tech Slowdown Before The Next Boom -- Forrester's Long-Term IT Spending Forecast For The US, 2005-2010": http://www.forrester.com/Research/Document/0,7211,37816,00.html). While not all aspects of these predictions have come true, overall I believe they were a generally accurate forecast of what happened in the tech market from 2004 to 2008.

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As Expected, Data on Q3 2009 US IT Market Showing Continued Decline, But With Signs of Nearing Bottom

This morning, the US Department of Commerce’s Bureau of Economic Analysis released preliminary data on the US Gross Domestic Product in Q 3 2009, which included data on business investment in computer equipment, software, and other IT equipment (principally communications equipment).  The headline news is the 3.5% increase in real GDP in the US from Q2 2009 to Q3 2009 (at a seasonally adjusted annual rate).  That is the first positive growth in US real GDP since Q2 2008, and the strongest since 2007.  Some special factors, such as the cash-for-clunkers program in autos and the tax incentives for first time home buyers, contributed to this strong growth, so growth in coming quarters will be closer to 2% since these incentives have expired or are likely to do so.  Still, the economic data does suggest that the recession is over. 

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