Expectations about economic growth prospects and the resulting implications for tech markets have been gyrating wildly in 2010. First, there were fears that the Greek debt crisis would spread to Portugal, Spain, Italy, maybe even the UK, leading to a breakup of the euro zone and a renewed recession in Europe. Then, as worries about Europe started to ebb after Greece and other countries successfully held debt tenders, the slow pace of job growth and weak retail sales in the US sparked concerns that the US was facing a double-dip recession.
What should a tech market watcher make of this uncertainty? As I read the economic and tech market indicators, I see more news that is in line with our expectations than not; where there have been surprises, they have been more often positive than negative. Economic recoveries seldom move in a straight line, so I did not expect to see an unbroken string of good news. Moreover, because of the imbalances that caused this downturn (too much consumer spending in the US, housing bubbles in the US and several other countries, too much debt), I expected the US economic recovery in particular to be relatively weak, with real growth rates of 2% to 3%. True, European economic growth — in large part due to the effects of the Greek debt crisis — has been weaker than expected, and the euro dropped much more against the US dollar then I had assumed. On the other hand, economic growth in Asia Pacific and Latin America has been stronger than I expected, and many of the currencies in these regions have risen in value against the dollar. Lastly, the indicators of the tech market itself — both US and other government data on business investment in technology (where available), as well as the vendor data from earnings releases for calendar Q1 2010 — has generally been stronger than our forecasts.
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.
5:30am, the family sleeps and it’s time to prepare – today is Analyst Day in Frankfurt. I’m on the road 2h45min before the event starts (1h20min should be sufficient) but sometimes the traffic is terrible. Last week I missed a flight because the highway was completely closed after an accident and I had to give up after 3h driving for nothing. When the concern of missing an appointment slowly turns into certainty, these are the moments that cost me some of my (remaining) hair.
(Of course) I arrive much too early, but other analysts are already there (probably they don’t sleep at all). Plenty of time to look through my presentation again for some final adjustments and for some small talk with customers that arrived early.
1min before the kick-off, I make the last slide changes and load it to the presentation laptop. Another analyst colleague goes first. I have seen some of the slides a hundred times and look around at the faces of the attendees. For most, it’s the first time they see e.g. our market sizing and forecasting data, and they make hectic notes into their notebooks. They don’t know yet that we will distribute all slides after the event. I’m getting a bit nervous, but I’m used to it. When I'm not nervous any more before a presentation, it’ll get boring for me and the audience, and I should probably do something else.
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).
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.
Cloud computing, on-demand solutions, subscription fees… software licensing is undergoing significant changes. Enforced by the current economic crises with tight IT budgets, companies don’t have the money to pay upfront licenses and are reluctant to take financial risks over many years when purchasing software. A key factor of the current growth of cloud computing is its financial benefits: no capital expenditures, no upfront financial risk, no depreciation and nothing on the balance sheet! But pay-by-use licensing models are not necessarily limited to cloud deployment models and can be applied to more traditional implementations as well.
Traditional software licensing with upfront payments has served vendors well over the last 40 years. However, over time vendors had to face significant disadvantages as well. The pressure to successfully close quarter by quarter and the fiscal year has led to a common practice by customers to push decisions until year end for a special deal. Discounts up to 80% became not uncommon in the software business. Another problem is the revenue volatility in difficult economic times. In 2009 many software companies had to face a decline in new license revenues of 10 to 25%. Without the constant stream of maintenance revenues many software companies would be facing severe financial problems today.
IBM threw a big event in New York City on Thursday, October 1, and Friday, October 2, to publicize its Smarter Cities initiative, part of its Smarter Planet marketing message. The event featured an impressive list of politicians (Mayor Bloomberg, NY Governor Patterson, governors from Vermont and North Carolina) and CEOs (CEOs from ABB, Verizon, American Electric Power, etc.). I was part of the crowd of hundreds of attendees and IBMers on Friday, and my colleague Doug Washburn attended on Thursday.
It would be easy to dismiss this as part of hype machinery that IBM is running to build awareness of and create customers for its Smarter Planet initiative and the emerging offerings that it is creating under that rubric. But I think there is more going on here. What IBM is really doing is creating a vision - or more precisely, half a dozen visions - of how a new generation of technology can help address some critical challenges facing the planet. Visions of course can easily become hype. But as several speakers noted, visions are also a necessary first step in any transformation process, building awareness of what can be different at the end that will inspire people to start the journey. And IBM to its credit put concrete examples behind the proposals.
Here is what IBM is doing right:
Focusing on key social and economic problems facing many countries around the world. Cities and national governments face challenges of providing healthcare more efficiently, improving the quality and delivery of education, managing greater and greater volumes of people travel and goods transportation, providing public safety and security in the face of increased threats of terrorism and persistence of crime, and encouraging energy conservation and alternative energies to counter global warming. These are the problems that IBM's Smarter Cities initiative focused on.
CSC celebrates its 50th anniversary at Innoventure Europe 2009
At Innoventure Europe 2009 on June 22 & 23 in Paris CSC outlined their new strategic concept – increased industry focus and innovation.
After 2 years of transformation CSC has finally settled on their new vertical organization and strategy around the 6 industry clusters Public Sector, Financial Services, Manufacturing / Aerospace & Defense, Technology / Consumer, Health Services and Chemical, Energy & Natural Resources. With solid figures for FY09 including a net income of $1,115 million and strong sector growth in e.g. Healthcare (+30%) and Public (+4%) based on the new vertical strategy, CSC seems to be well positioned to navigate the stormy waters of the current economic crises. However, with the new vertical company orientation CSC will face some new fundamental challenges and questions that need to be addressed.