CEO’S ANALYSIS
The interviews
In addition to the quantitative findings, 13 executives were interviewed for this report.
We thank all of them for their contributions.
Although fairly recent, the software industry shows strong signs of maturity. These signs include pressures on operating margins, increasing concentration amongst a few vendors, search for new business models and growth delivered increasingly through acquisitions rather than organically. Nonetheless, there are strong trends emerging that could dramatically reshape the industry, whose key characteristic revolves around never ending opportunities provided by technological shifts, innovation and constant agility.
How will European software companies adapt to thrive in their industry? To carry out the analysis, PricewaterhouseCoopers identifi ed twelve key trends and asked the CEOs and senior executives of a number of key representative software players in Europe their views and opinions on how these will impact their business over the next five years. We are happy to present hereafter the results of this joint analysis, which confirms that the industry is actively monitoring and adapting its strategy to these evolutions.
| “American
vendors could strengthen their presence in Europe over the
next five years, mainly because they dominate the
infrastructure,
virtualisation and online services segment.” Bernard Charlès,
CEO, Dassault
Systèmes |
| “Software is
vital to the European economy, especially in the current economic situation. By providing strategic agility to businesses of all sizes, software can help companies worldwide weather the storm by realizing effi ciency gains and enhancing their competitiveness in global markets.” Léo Apotheker, co-CEO, SAP AG |
American vendors will benefit from a leading positioning in certain key technologies and markets
Over the last few years, American software vendors have considerably strengthened their position in the European market, mainly through acquisitions. Indeed, more than 50% of the revenue generated in the European market is attributable to American vendors and one third of EuroSoftware100 companies are headquartered in the US.
Although it is commonly acknowledged that American vendors are not likely to see their share in the European market decline in the coming years, opinions vary as to whether or not they will further strengthen their footprint. One of the factors contributing to a relative status quo is the signifi cant decrease in the number of companies of substantial size in Europe, which means that major acquisitions may simply no longer be possible on a large scale.
However, American vendors are strongly represented in booming sectors such as virtualisation and in the online delivery, including infrastructure and applications. Leading internet players are also expected to gain ground. Changes in these segments should logically provide American companies with an opportunity to boost their already dominant presence.
Consolidation will not slow down
The major players have already taken advantage of most market consolidation opportunities, leaving fewer potential acquisitions in the short- to medium-term. This relative saturation could well curb the ambitions of American vendors. However, acquisitions of smaller software companies are likely to gather pace, with European vendors themselves setting the trend and leading the way. Once they have attained critical mass, these newly formed groups will represent attractive targets for their American counterparts.
The focus on the acquisition of smaller software companies is both an advantage and a drawback for the European sector: an advantage because it will boost initiative by providing favourable exit prospects for entrepreneurs and investors and a drawback because it will further impede the emergence of larger European players, if once a critical size is reached, insufficient long terme capital makes european vendors an easy target.
In the near term, the most vulnerable companies will be hardest hit by the combined impact of the economic crisis, financial pressures and the maturity of certain markets, which will threaten their survival and pave the way for more consolidation.
| “As the economy
slows down across the world and fi nancial pressures increase, survival
will be increasingly diffi cult for borderline companies, leading to
more consolidation.” Cory Eaves, CIO & CTO, Misys “European companies should be prepared to be “hunters” rather than “hunted”, against a background of more traditionally being “hunted”.” Stephen Kelly, CEO, Micro Focus “Consolidation will not slow down, but it will be driven by European software vendors.” Chris Ouwinga,
CEO,
Unit4Agresso
“European companies will take a greater market share within the next fi ve years.” Chris Ouwinga, CEO, Unit 4 Agresso “Indian companies will use their fi nancial strength to buy themselves into the market via acquisitions.” Cory Eaves, CIO & CTO, Misys “There could be a real risk that Europe “gets caught” in US dominance. The introduction of lower cost, more agile Asian companies could mean that the European industry is squeezed in the middle.” Stephen Kelly, CEO, Micro Focus |
New players from Asia and emerging markets may not be ready yet, but could well be emerging through acquisitions
Opinions differ on the issue of emergence of new players from Asia and emerging markets. Some believe that the market will continue to be dominated by the US for a long time to come, with European vendors winning back some lost ground in the years ahead, but without any real breakthrough by new players from emerging markets. Others believe that Chinese and, in particular, Indian companies, which already have a strong foothold in IT services and are seeking to diversify into software applications, could prove to be potential acquirers of European companies.
| “Customers will
be able to partition their portfolio of applications across onpremise
deployment and service-based deployment, and optimise for user
experience, management requirements, economics and other parameters of
deployment choice.” Jean-Philippe Courtois, President, Microsoft International “The low upfront costs, low risks and fast return of cloud computing will make it much more appealing to companies constrained for cash but pressured to get quick return on technology.” Marc Benioff, CEO, Salesforce.com “We are going to witness a new era in software creation which will be pushed by convergence between software and content. Software will no longer just be a data processing tool but will convey information. The software industry is evolving from a paradigm involving only the vendor and the technology provider to one that will also include a content provider.” Patrick Bertrand, CEO, Cegid |
New business models such as software as a service will become increasingly important
Software as a Service (“SaaS”) or “Cloud Computing” business models should become increasingly widespread over the coming years. Although many do not expect SaaS to dominate the market in the short- to medium-term, this model will have a profound impact on the industry. While more and more new software products will be licensed and delivered as on line services, the rate of adoption for current software will be slower, due to lengthy installed base renewal cycles.
Software offerings will no longer be confined primarily to applications and will extend more and more to all areas, including infrastructure. Most vendors will continue their efforts to offer all or some of their software in a SaaS mode which, alongside the widespread adoption of Service Oriented Architecture (SOA) platforms, will radically impact their business models. In many instances, rather than the replacement of locally installed software, there will be an increasing complement of existing on-premise software with on-line services. Whatever the rate of adoption may be, traditional client server vendors will be challenged in their approach to these new technologies and its business model, while customers will open up more widely to the value propositions of Cloud Computing / SaaS.
New players will give software vendors competition
The sector already faces competition, particularly from Internet players such as Google or Yahoo!, with a proliferation of online service offerings. In addition, many industrial products companies, particularly in the telecommunications, engineering and aerospace / defence sectors, are acquiring software vendors and providing more and more software functionality at each level of their product offering.
Finally, convergence is taking place at a third level with content providers developing their own software products (for example in the media / publishing). While it therefore seems likely that players that were not previously involved in software development will become active players in this sector, this trend will not lead to the decline of existing software vendors. On the contrary, they will benefit and draw new strength from these changes that will make software more and more pervasive, although in the long run, it will become critical for them to provide services or content as well as software products.
| “Research and
development, innovation and software creation in France and in Europe
are the key concerns, no matter what economic and/or technological
model you choose!” Patrick Bertrand, CEO, Cegid “Open source is specifically a threat in Europe in the public sector.” Chris Ouwinga, CEO, Unit 4 Agresso “Although technological changes encourage the emergence of new players, they do not necessarily imply the disappearance of existing ones. We generally accompany major trends rather than facing a complete revolution or “big bang”.” Patrick Bertrand, CEO, Cegid “The real growth is going to be in cloud computing. American companies have an early lead here, but the new economics of development in the cloud means that there will be plenty of opportunities.” Marc Benioff, CEO, Salesforce.com |
Open Source Software will be complementary rather than a direct competitor
Not all European software vendors foresee open source software as one of their main competitors. Although they all acknowledge that it is here to stay and is set to grow, many predict that open source software will be complementary.
Open source software is not, therefore, perceived as a major threat. On the contrary, many software vendors are exploring using it more and more frequently and combining it with an offering increasingly based on services.
Nevertheless, for certain vendors, particularly those developing widely used applications, offerings based on open source software is perceived as a clear competitor now and going forward. Also there is a specific challenge for vendors dealing with customers in the public sector, who are perceived as favouring more open source based solutions.
Technological challenges will focus on on-line services and v