There have been many blog postings over the past two weeks making technology predictions for 2006 and beyond. Bill Burnham has taken a look back at 2005 and sees that the software industry itself has been shrinking. Last year, the aggregate market capitalization of the software sector shank by almost 10%.

From this he makes some very interesting predictions which are very close to what we have been hearing anecdotally and which are supported by many of the moves in the enterprise space in recent times.

The main factors causing the shrinkage that he identifies are:

1. Software is moving from growth to value. In particular he mentions the current focus on maintenance pricing and services revenues.

We are seeing this everywhere. More and more high-end enterprise software products are seeing their growth slow. In many cases, the mid-end has turned out to be “good enough” and is cannibalising high-end sales. One often hears comment about “dying” products despite continued massive revenue because they are not growing the way they used to. In fact, we know of several enterprise software systems which struggled to get any market foothold, were de-featured and re-launched at a lower price point and are now market leaders. It is not quite the RyanAir model but it is not far off.

Our niche is the services area, we currently do not have a product offering. More and more, we are asked to take mid-range industry standard products licensed by our clients, customise them and integrate sets of them together for their unique needs. Thus they can avoid having to pay for the big uplift to move to either the next Tier in their vendors product suites or they can avoid moving to the next generation of product which simply does not meet their needs.

2. Open Source and SaaS. Here the issue is that many companies are unwilling to pay out huge up-front fees for proprietary software in the first place. The trend is now to reduce upfront license fees and increase maintenance charges. Software as a Service allows companies to purchase software “on demand” over the web.

Again, this is a big area for us. We have worked on one customer-built system which in itself was not very complex but which required a $40K Oracle licence to run. We were able to re-target it to MySQL and re-build the entire system using Open Source tools. This enabled them to roll the system out across multiple sites at minimal incremental cost to themselves.

We have previously mentioned the move in BI world to the Open Source reporting solutions and we expect that trend to accelerate as clients become more comfortable with paying annual fees.

To be honest, SaaS has not really been an issue for us to date.

3. No big platform transition.

The drip drip drip move to platforms such as Linux provides great opportunities for small nimble companies such as ourselves. It is of no help to the big guys. The letters WS- are almost the kiss of death at this stage. We have no idea when/if there is going to be “the next big thing” - there is always plenty of money to be made on “the current thing”.

4. Networking companies are encroaching on software company turf.

Not really an issue either way for us.

5. Being public ain’t so great. Software companies are seeing their margins hurt by higher compliance costs and steep charges for options.

Compliance is a pain for everyone and a big opportunity for any company in the business of helping clients get a handle on their data. We continue to see this as an opportunity.

A few recent news stories back up many of the points Bill makes. The most apt being the announcement that Business Objects want to grow their services business. There are also some good comments on TDWI on the commoditization of the BI market by Microsoft and Oracle (again the idea of “good enough”).

37 Signals has an excellent short post on this topic too. Unfortunately for many of the big guys they are right on the mark when they say that in the near future “enterprise means bulky, expensive, dated, and golf.”.

And finally, Vinnie Mirchandani is right on the money as far as what is important when he says “Much as I love Google, it cannot process BOMs for the average manufacturing company. Much as my daughter loves her iPod, it will not process insurance claims. Whoever does whatever with AOL will not improve supply chain logistics at UPS.”

We particularly love his comment about a type of company that we, in our infancy, are striving to become: “A generation of appligators will emerge - small systems integrators which specialize in innovation areas like web services or telemetry and willing to work with clients in small, intense teams”.

[tags]enterprise software, predictions 2006, Open Source, SaaS[/tags]