Software Market Research Methodology and Definitions, Gartner Dataquest Guide

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1 Software Market Research Methodology and Definitions, Gartner Dataquest Guide Publication Date: 16 January 2004

2 GARTNER WORLDWIDE HEADQUARTERS NORTH AMERICA Corporate Headquarters 56 Top Gallant Road Stamford, CT U.S.A. Tel: Fax: West Coast Headquarters 251 River Oaks Parkway San Jose, CA U.S.A. Tel: Fax: Latin America Headquarters Gartner do Brasil Av. Nações Unidas, o andar - World Trade Center CEP Sao Paulo SP Brasil Tel: Fax: EUROPE European Headquarters Tamesis The Glanty Egham Surrey, TW20 9AW United Kingdom Tel: Fax: ASIA/PACIFIC Asia/Pacific Headquarters Level 7 40 Miller St. North Sydney, NSW 2060 Australia Tel: Fax: JAPAN Japan Headquarters Aobadai Hills 6F 7-7, Aobadai, 4-chome Meguro-ku Tokyo Japan Tel: Fax: Gartner, Inc. and/or its Affiliates. All Rights Reserved.

3 Software Market Research Methodology and Definitions, Gartner Dataquest Guide Publication Date: 16 January 2004

4 Authors Colleen Graham Nicole Latimer Fabrizio Biscotti Joanne Correia Chad Eschinger Chris Pang Thomas Topolinski This document has been published to the following Cluster codes: SOFT-WW-GU-0011 For More Information... In North America and Latin America: In Europe, the Middle East and Africa: In Asia/Pacific: In Japan: Worldwide via gartner.com: Entire contents 2004 Gartner, Inc. and/or its Affiliates. All Rights Reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice

5 Table of Contents Page 1. Market Share and Forecast: Overview and Methodology... 1 Market Share and Forecast Overview... 1 Market Share Methodology... 2 Research Process... 4 Forecasting Methodology Software Revenue Components and Licensing Models... 7 Software License Revenue Recognition... 7 Understanding Components of Recognized Revenue... 7 Abstract Components vs. Real World Complexity... 8 Types of Software Licenses Software Segmentation Product Market Definitions Composite and Stand-Alone Views Stand-Alone and Composite Views Infrastructure Software Definitions AD Software Requirements Management Business Process Analysis Database Design (Data Modeling) Object-Oriented Analysis and Design Language-Oriented Development Environments Integrated Services Environments Traditional (Client/Server) AD Tools Business Rules Engine Business Process Management Automated Testing (Distributed and Mainframe) Software Change and Configuration Management Other AD Software Application Integration and Middleware Adapter Suite Application Platform Suite Application Servers Business Process Management Integration Suites Message-Oriented Middleware Object-Request Brokers Enterprise Portal Server Transaction Processing Monitors Other Middleware BI Tools BI Platforms Enterprise Business Intelligence Suite Collaboration Software and Knowledge Management Tools and Calendaring Real-Time Collaboration Team Support Data Warehouse Tools Data Mining Tools Data Quality Tools Extraction, Transformation and Loading Tools Database Management Systems Pre-relational DBMS Gartner, Inc. and/or its Affiliates. All Rights Reserved. iii

6 iv Software Market Research Methodology and Definitions, Table of Contents (Continued) Page Relational DBMS Embedded DBMS Mobile Embedded DBMS Desktop DBMS Products Object-Oriented DBMS Embedded Software Tools Network and Systems Management Software DBMS Management Application Management Availability and Performance, Other NSM Network Management Configuration Management IT Service Desk Asset Management Job Scheduling Output Management Security Software Antivirus Content Filtering Network Security Intrusion Detection Encryption Security Event and Performance Management Security Administration Software Storage Management Enterprise Application Software Definitions Customer Relationship Management Sales Marketing Customer Service and Support Enterprise Resource Planning Manufacturing Human Capital Management Financial Management Systems Computer(ized) Maintenance Management System Enterprise Asset Management Supply Chain Management Supply Chain Planning Supply Chain Execution Warehouse Management Systems Transportation Management Systems International Trade Systems/Global Trade Management Sourcing and Procurement Project Portfolio Management Design and Engineering Emerging and Merging Markets Composite Markets Business Activity Monitoring Collaborative Commerce Corporate Performance Management Contract Management... 42

7 Software Market Research Methodology and Definitions, v Table of Contents (Continued) Page DBA Software Tools ERP II and Enterprise Application Suite Mobile and Wireless Packaged Applications Software Mobile and Wireless Infrastructure Software Platforms Order Management Product Life Cycle Management Smart Enterprise Suites Supplier Relationship Management Web Services Software Other Markets ASPs and Application Hosting Open Source Software Software Solutions Markets New Categories Operating System Definitions Operating Systems Unix Linux iseries (OS/400) zseries (OS/390) Windows Desktop Windows Server Other OS Platforms Java NET Worldwide Geographic Regional Definitions Asia/Pacific Region Countries of Specific Interest Rest of Asia/Pacific Western Europe Region Countries of Specific Interest Rest of Western Europe Central/Eastern Europe Region Countries of Specific Interest Rest of Eastern Europe Japan Region Countries of Specific Interest Latin America Region Countries of Specific Interest Rest of Latin America Middle East and Africa Region Countries of Specific Interest Rest of Middle East and Africa North America Region Countries of Specific Interest Research Metrics Exchange Rates Vertical Market and Company Size Segments Channel Definitions Appendix A Glossary of Terms... 61

8 vi Software Market Research Methodology and Definitions, List of Figures Figure Page 1-1 Software Segmentation Structure Infrastructure Software Segmentation Structure Applications Software Segmentation Structure... 4 List of Tables Table Page 2-1 License Type Matrix Software Revenue Components Broken Down by Software Business Model Prevailing Annual Exchange Rates, Vertical Market Segmentation Company Size Segments A-1 Report Glossary... 61

9 vii Software Market Research Methodology and Definitions,

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11 Chapter 1 Market Share and Forecast: Overview and Methodology Market Share and Forecast Overview Gartner Dataquest's software industry research covers key areas of the enterprise infrastructure and application software markets worldwide. Our research programs include Infrastructure Software Worldwide (SWSI-WW), Applications Software Worldwide (SWSA-WW) and regional research programs, such as Software Europe (SWSF-EU) and Software Applications Asia/Pacific (SWSF-AP). While some research encompasses the entire software industry, the majority of research is done at the segment level. Gartner Dataquest breaks the software industry into logical segments, which allows for in-depth and segment-specific research. The segments for which software revenue is analyzed are comprehensively defined in Chapter 4 and Chapter 5 for the purpose of providing clarity and guidance to survey participants and those that use Gartner Dataquest's research. These definitions are revised, altered or expanded each year to reflect changes in software technologies and the software marketplace. Data is not collected or published for every product category defined in this document. Some subsegment details are included for clarification only. Within each of these segments, research documents produced will include some,orall,ofthefollowing: Vendor Market Share Market Forecasts Market Trends Research Briefs User Wants and Needs Of these reports, the two foundational documents are the Vendor Market Share and Market Forecasts. To produce market share reports, Gartner Dataquest collects, estimates and classifies vendors' software revenue in terms of license, updates, technical support and other services that is, the revenue received by the vendor, as opposed to the price paid by the end buyer of the software. Our research covers software vendors worldwide by selected software categories, as defined in this guide. Based on this research, Gartner Dataquest develops and maintains a database of information on software supply by vendor, revenue, region and software segments. In addition, Gartner Dataquest also analyzes segment and vendor revenue by platform, vertical industry, enterprise size and sales channels (direct, indirect and others) for most of the markets. Our surveys cover about 800 enterprise software vendors active in one or more of the following product segments: application development (AD) software, application integration and middleware (AIM), database management systems (DBMS), business intelligence (BI) and data warehousing tools, network and systems management (NSM) software, customer relationship management (CRM) software, project portfolio management (PPM) software, enterprise resource planning (ERP) software, supply chain management (SCM) software, and collaborative and knowledge management tools. Figure 1-1, Figure 1-2 and Figure 1-3 outline the relative structure of these segments and their subsegments Gartner, Inc. and/or its Affiliates. All Rights Reserved. 1

12 2 Software Market Research Methodology and Definitions, Figure 1-1 Software Segmentation Structure Software Segmentation Infrastructure Software Enterprise Application Software AD AIM BI Tools Collaboration Software and Knowledge Management Tools DBMS Data Warehouse Tools NSM Software Security Software CRM ERP SCM PPM Source: Gartner Dataquest (December 2003) Market Share Methodology Gartner Dataquest's vendor market share methodology combines primary and secondary sources to produce the Gartner Dataquest Market Statistics reports. Gartner Dataquest interviews all major vendors in covered product categories within the software industry in the following regions: Asia/Pacific, Europe, Japan, Latin America, Middle East and Africa, and North America. This primary research is supplemented with additional research to verify market size. Sources of data used by Gartner Dataquest include, but are not limited to: Interviews with the channel including manufacturers, distributors and resellers Information published by major industry participants Estimates made by reliable industry spokespersons Government or trade association data Published product literature and price lists Relevant economic data Articles in the general and trade press Published company financial reports Reports from financial analysts Information and data from online and CD-ROM data banks Demand-side (end-user) surveys Particularly significant sources of information are those published by vendors to the Securities and Exchange Commission (SEC) and other non-u.s. government agencies. The data is used by Gartner Dataquest to prevent "double counting" revenue in more than one segment. Information filed with the SEC and other government agencies is used to cross-reference analyst estimates and is the final check as separate segment and market estimates are rolled-up. For more information on this process, see the "Research Process" section below.

13 Market Share and Forecast: Overview and Methodology 3 Figure 1-2 Infrastructure Software Segmentation Structure Infrastructure Software Application Development Requirements Management BPA Database Design (AKA Data Modeling) OOA&D Language-oriented Development Environments ISE Traditional (Client/server) AD Tools BRE BPM Automated Testing (Distributed and Mainframe) SCCM Other AD Sosftware Business Intelligence Tools BI Platforms EBIS Other BI Software Database Management Systems Pre-relational DBMS Relational DBMS OODBMS Embedded DBMS Mobile Embedded DBMS Desktop EBMS Products OODBMS Network and Systems Management Software Application Integration and Middleware Adapter Suites APS Application Servers Integration Suites MOM ORB Enterprise Portal Server TPM Other Middleware Collaboration Software and Knowledge Management Tools & Calenaring Real Time Collaboration Team Support Data Warehouse Tools Data Mining Tools Data Quality Tools ETL Tools Security Software DBMS Management Application Management Availability & Performance Network Management Configuration Management Job Scheduling Output Management ITSD Asset Management Other NSM Antivirus Content Filtering Network Security Intrusion Detection Encryption Security Event and Performance Management Security Administration Software Source: Gartner Dataquest (December 2003)

14 4 Software Market Research Methodology and Definitions, Figure 1-3 Applications Software Segmentation Structure Enterprise Application Software Segmentation Customer Relationship Management Enterprise Resource Planning Sales Marketing Customer Service and Support Manufacturing HCM FMS EAM CMMS Supply Chain Management Project Portfolio Management SCP SCE WMS Transportation Management Systems International Trade Systems/Global Trade Management Sourcing and Procurement Source: Gartner Dataquest (December 2003) Research Process Gartner Dataquest believes its market share data is the most accurate and meaningful available. Despite the care taken in gathering, analyzing and categorizing the data, careful attention must be paid to the definitions and assumptions, as various companies, government agencies and trade associations may use slightly different definitions of product categories and regional groupings, or they may include different companies in their summaries. These differences should be kept in mind when making comparisons between data and numbers provided by Gartner Dataquest and those provided by other research organizations. Atleastannually,theGartnerDataquestsoftwareanalystsreviewthelistsof vendorsandthesoftwaresegmentsthatwillberesearched.thisreviewallows for new vendors to be added, defunct vendors to be removed, and any adjustmentsthatneedtobemadeformergersandacquisitions.thesameistruefor the software product categories as emerging software segments can be added or outdated segments can removed from the research agendas. A company model is updated for all vendors, large or small, but it is most critical for large vendors that participate in multiple software sectors (such as Microsoft) or multiple industries (such as IBM). The company model divides the revenue that the vendor reports to the SEC (or non-u.s. government agencies) into manageable and logical segments, usually by division or business

15 Market Share and Forecast: Overview and Methodology 5 Forecasting Methodology unit. Then, the business unit revenue estimate is further broken down to the product level in collaboration with multiple analysts as necessary. By creating a single company model, the Gartner Dataquest software analysts ensure that no double-counting of revenue occurs. All analysts' detailed estimates of product, service, maintenance and other revenue must add up to the same revenue number that the vendor files with the SEC or other non-u.s. government agencies. While estimating vendors' product-level new license revenue, software analysts use the means outlined in the "Methodology" section above to cross-check and verify that their estimates are as accurate and reflective of market activities as possible. Once product-level new license revenue has been estimated, the data undergoes a series of reviews and revisions with other Gartner Dataquest analysts covering the market. Once consensus has been reached, the data is published. Gartner has a long history of providing end-user clients with independent research on products, vendors and technology trends. Vendor-share measures provide some partial, but interesting, insights into the health and viability of particular software vendors. However, end-users should realize that vendor shareisnotthecompletestory,asotherfactorsalsocontributetoavendor's viability. End users should base their vendor selections on a range of criteria, including the requirements of the applications they are running, and the size and growth of the vendor's installed base, as well as the vendor's innovation, research and development, scalability, third-party software support, and execution. If you are selecting a vendor and a product, you should also consult the relevant Gartner Magic Quadrant and Gartner Datapro product notes. In general, Gartner Dataquest forecasts are developed in accordance with a multi-step methodology. This methodology prescribes a highly structured approach to forecasting that involves three broad process steps. In the first step, the latest available market data is carefully reviewed and compared to the most recently completed forecast. The methodology then directs the formulation of assumptions about the future with consideration given to factors that could cause the forecast to stray in one direction or the other and to potential market discontinuities. On this score, the methodology commands forecasters to consider the complete range of influences that can affect a forecast, including relationships with the rest of the IT industry, general macroeconomic conditions and exchange rate fluctuations. Finally, the methodology dictates an iterative approach to a final forecast in which successive preliminary forecasts are reviewed, critiqued and revised by all those involved in the forecast process in Gartner's analyst community. An integral part of this final step involves comparing forecasts in one sector to those in related markets up or down the value chain and across the entire software industry. Gartner Dataquest's structured methodology leaves specific issues of technique open to forecaster discretion. In general, Gartner Dataquest uses a variety of forecasting techniques in its forecast efforts, depending on the product or technology being forecast. Experience has shown that sole reliance on statistical techniques tends to produce inferior forecasts. Consequently, we use a mix of quantitative statistical and qualitative judgmental methods to generate forecasts. All-in-all, statistical techniques are heavily used in the early parts of our process to anchor our preliminary forecasts in historical fact. Judgmental techniques are then used to shape the final forecast according to the consensual feel of analysts, and are based on information gathered during research with end users, such as User Wants and Needs surveys, CIO surveys and other mechanisms that provide qualitative information on the state of the market.

16 6 Software Market Research Methodology and Definitions, Gartner Dataquest aims to provide clients with forecasts that are useful, credible and as accurate as possible. Because it is impossible to be 100 percent accurate, it is important to provide clients with details of the assumptions that drive the forecast. For several years, the process of developing IT market forecasts has been undergoing continued refinement at Gartner Dataquest. Today, the process draws on Gartner Dataquest industry experts and client feedback to devise a forecast that is consistent internally and meets client expectations. The process assimilates vast amounts of disparate and aggregated data that are molded into a forecast that is scrutinized and scrubbed by many seasoned analysts. Forecasts are reviewed quarterly to ensure they reflect current analyst opinion. The quarterly analysis of a sample of key vendors is used to fine-tune the forecast, if necessary.

17 Chapter 2 Software Revenue Components and Licensing Models Software License Revenue Recognition Compared with 10 years ago, today's software vendors offer a much wider variety of contract terms and conditions, pricing models, billing and payment models.andthepaceofcontractinnovationonlyseemstobeescalating. Sometimes, it is the customers that are demanding variations from a "standard" contract. Other times, it is the vendor that is adjusting the terms and conditions to make the customer "sticky" or to smooth the vendor's revenue recognition on itsincomestatement. Gartner Dataquest anchors our published vendor revenue estimates for publicly traded companies to the revenue numbers reported in the vendor's SEC filings, or the international equivalent. We assume that the vendors are following generally accepted accounting principles (GAAP) and Financial Accounting Standards Board (FASB) guidelines for how and when to recognize software contract revenue. In general, if a software vendor contract contains contingencies, all or part of the revenue must be deferred until the contingencies are removed and "delivery" is thereby completed. The effect of contracts that require or permit revenue deferral is that, in any particular quarter, the software vendor's revenue will typically be made up of revenue from current quarter sales closing activity, but also from previous quarters' activity. For example, the value of a newly closed maintenance contract is always posted as an asset to the balance sheet and later recognized as revenue on the income statement over many quarters. Depending on the terms and conditions of a particular contract, software license revenue might be recognized over many quarters as well, rather than in the quarter the sales activity was closed. Software license contracts, popularly called any of the following term, lease, rental, subscription may result in gradual recognition of software license revenue by the vendor, rather than a big lump in a single quarter. Understanding Components of Recognized Revenue Gartner Dataquest identifies four main components of software company recognized revenue: Product new license revenue Product update license revenue Technical support revenue Services/training/consulting revenue And optionally, a fifth: Hardware revenue Product new license revenue is the only metric tracked by Gartner Dataquest software analysts and the one on which estimates of software vendor market share and market size are based. Gartner Dataquest considers the best method to quickly identify shifts in technology trends in the software market is through observing changes in measures of new license revenue. Changes in vendor new license revenue shows trends faster than changes in total company revenue because new license revenue clearly reveals which product categories are accelerating and which are declining Gartner, Inc. and/or its Affiliates. All Rights Reserved. 7

18 8 Software Market Research Methodology and Definitions, Looking only at total revenue can mask a steep descent in demand in a category because total revenue includes revenue from updates and upgrades, which is revenue from sales activity that occurred long ago. Updates do not track to what customers are buying new in current quarters. Therefore, new license revenue is much better for revealing important inflection points. It's better to use a leading indicator rather than a lagging one. New license revenue New license revenue is the initial fee charged by a vendor to use a given version of a software product. New licenses can includefirst-timeuseofthesoftwarebyacustomer,aswellastheadoption of new modules by a customer or the addition of new seats, new processors or more million instructions per second (MIPS). This is the software company revenue component tracked by Gartner Dataquest software industry analysts and the basis of software market vendor share and market size reports. Upgrade revenue Upgrade revenue is revenue from customers that purchase a special product license that expands the established license to cover more users, CPUs, storage or other product license metrics. License upgrades are sometimes offered to allow a user to license a package that includes multiple components, one of which the customer already owns. Gartner Dataquest recognizes upgrade licenses as product license revenue. Update revenue Software is licensed for a specific product version at time of purchase. Update revenue is a fee paid to allow the user to update their license to allow the use of a new version. Customers can purchase update licenses as new versions become available (a common approach for PC software) but enterprises usually contract for an annual service that includeds the right to install all new version of the product released during the contract period. The fee is usually a percentage of the initial purchase price of the software (see "new license revenue" above). New versions of the product may or may not become available during any given contract period. In general, an update contract includes the right to receive both the minor "dot" versions, for example, from version 7.2 to 7.3, as well as the right to receive major upgrades, for example, from 7.5 to 8.0. Gartner Dataquest recognizes all update license revenue, whether received as part of a service contract or as a separate update license as service revenue. Technical support revenue Technical support revenue is typically an annual fee, usually based on the percentage of the initial purchase price of the software (see "new license revenue" above) charged by a vendor for technical support of the software product purchased. Technical support can include phone support as well as Web-based support, but does not usually include physical, on-site support. Training, consulting and other services revenue Training, consulting and other services revenue may be a one-time charge or a contract, which will be recognized over time. Abstract Components vs. Real World Complexity If only the real world were as neat and tidy as the conceptual world. Unfortunately, updates are not always sold in contracts as described above. Many vendors selling PC software have historically sold updates on a one-off basis, especially in the consumer and small office/home office (SOHO) segments. Only recently has Microsoft begun to offer "right to update" contracts, such as Software Assurance to enterprise-class customers. Siebel has always offered right-to-update contracts, but the updates covered are only the minor dot versions. When a current Siebel customer wants to move to a major update, that must be negotiated as if it were a new product, and Siebel accounts for it as a new license sale.

19 Software Revenue Components and Licensing Models 9 Types of Software Licenses The SEC and FASB have a lot to say about when elements of contracts for software products and services revenue can or must be recognized on the income statement as revenue. However, these regulatory bodies do not require that public companies decompose revenue into line items, such as license, maintenance, consulting and others. Software vendors that do choose to decompose their revenue for public reporting purposes do not use consistent terminology among themselves. Terms such as product, license, new license, update license, maintenance, technical support and services are used differently by different vendors in publicly filed reports. Regulatory authorities do not dictate what words, such as license, maintenance, updates, support and others, mean in a public report. In fact, these words are used at the vendor's discretion. The vendor decides how to describe its business to its investor community and how much it wants to disclose without giving competitors an edge. Practice varies widely, as stockholders seem ineffective in demanding greater visibility into financial reporting. Gartner Dataquest identifies and defines the following software licensing models: Perpetual license Term license Subscription license Appliance license The two key differences between these models are whether updates or technical support is included with the software license and the length of time before the vendor is contractually able to charge the customer for another license. Perpetual license A perpetual license is when, once the customer pays the initial fee for the new license, they have the right to use that software in perpetuity. However, this does not give the customer the right to updates without an additional fee. For that, they must sign an update contract (or buy the update one-off, if available that way). This is the type of license most preferred by users and apparently by many vendors, as it makes up over 90 percent of the software licenses sold. Term license A term license is when, once the customer pays the initial fee for the new license, they have the right to use that software for a contractually established term. Often, the fee is paid in a lump sum upfront. Once that term is over, the customer must again pay an initial fee for a new term license. Prices probably will have changed. The customer also generally has a maintenance contract of the same duration as the term license contract. Gartner Dataquest always clarifies in the vendor interview process whether updates are included directly in the term license. (If they are, this vendor is actually using a subscription license model as defined by Gartner Dataquest.) True term license revenue (not including updates) is counted by Gartner Dataquest as new license revenue. (Some vendors call their term licenses "lease licenses" or "rental license.") Subscription license A subscription license is when, once the customer paystheinitialfeeandsignsthecontractforthenewlicense,ithastheright to use the software developed by the vendor for a contractually specified time, as in a term license. Unlike in a term license, as defined by Gartner Dataquest, the customer also has the right to subsequent updated versions of the software as well as a certain amount of technical support. If a vendor claims to be using a subscription license model, the analyst must research

20 10 Software Market Research Methodology and Definitions, that vendor's contract practices to discover if it's definition of "subscription license" matches Gartner Dataquest's software subscription definition. Gartner Dataquest identifies and defines two types of subscription license: The customer buys and runs the subscription in-house Thecustomerbuysthesubscriptionthatishostedbythesamesoftware vendor. Some examples are sales force.com in CRM, SupportSoft in help desk and Opsware (formerly Loudcloud) in systems management. Appliance license An appliance license is where a software program is soldonahardwaredevicebrandedbythesamevendor.thesoftwareissold as a package of hardware and software. Sometimes, the software is available as only software, but most commonly the software is available only on the vendor's appliance, board or blade, not for installation on a general-purpose computer, or the software works fully only in conjunction with the purchase of the hardware. In some cases, the appliance or board may contain custom hardware components, but in other cases, may be quite generic. Examples include the firewall market, where end-buyers consider software-only solutions, such as Checkpoint, alongside appliance solutions, such as NetScreen. In the network management market, NetScout Systems embeds its agents in probes (boards), whereas Hewlett-Packard agents are software-only. When Gartner Dataquest reports on such a software market, the imputed value of appliance and board hardware is excluded. Table 2-1 details the different types of software licenses. Table 2-1 License Type Matrix Gartner Dataquest Concept Length of Term Includes Updates Perpetual License Forever No Term License Term No Subscription License Term Yes Appliance License Forever Varies Source: Gartner Dataquest (December 2003) If vendors do not provide revenue line-item information that breaks software revenue into its various components, Gartner Dataquest uses the following matrix of the ratios used for each licensing business model to attribute revenue to Gartner Dataquest's concepts of software revenue components (see Table 2-2). If the vendor's licensing model, managerial accounting and investor reporting practices do not match up to Gartner Dataquest's definitions, then additional adjustments may need to be made to estimate the Gartner Dataquest new license revenue, update revenue, technical support revenue and others. To better serve clients, Gartner Dataquest is constantly seeking to provide the best and most current software industry analysis possible. As vendors modify and evolve licensing and pricing models to achieve a competitive edge, Gartner Dataquest reviews and revises it's models and rules to keep up with industry practices.

21 Software Revenue Components and Licensing Models 11 Table 2-2 Software Revenue Components Broken Down by Software Business Model (Percent) GartnerDataquest Concept Perpetual License Term License Software with an Appliance/Board Subscription License Without Hosting Subscription License With Hosting New License Update License Technical Support Hosting Hardware Total Notes: Term license is applied when the vendor does not include updates in the license. Gartner Dataquest does not include "hosters" that are merely reselling a third-party vendor's software intellectual property. Such a hoster is a distributor, not a software vendor earning license revenue from its own software intellectual property. Source: Gartner Dataquest (December 2003)

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23 Chapter 3 Software Segmentation Product Market Definitions The software market segments covered contain a wide variety of products and technologies. To better understand the range of vendors and products included in this program, this document provides a taxonomy for the market and definitions of the specific segments. Note that the inclusion of a segment in this list does not indicate the level of coverage (if any) committed to it. The segmentation of software infrastructure products and application packages poses significant challenges, including: Products are very often used in ways that differ from their intended purpose. The positioning of a product by a vendor may not match the actual functionality of the product. Product sets and suites are evolving and devolving. Products are, therefore, moving across segment boundaries, and new segments must be created and oldsegmentsmustberevised. In many markets, the lines between segments are blurring. Important attributes, which may be of interest in their own right, do not necessarily constitute a unique market. Gartner Dataquest segments products into mutually exclusive groups to minimize the double-counting of vendor revenue. Chapter 6 provides details of emerging software market opportunities which don't fit the standard categories listed in Chapter 4 and Chapter 5. Gartner Dataquest's classification of a product takes into account a variety of factors, including the product's technical features, target audience, competitive positioning and perceived usage of the product by customers. Wherever possible, Gartner Dataquest intends to position a product within one specific segment. However, in cases where the vendor and Gartner Dataquest see the product being used in multiple segments, percentages of the total new license revenue will be allocated to the appropriate segments, to avoid doublecounting. Composite and Stand-Alone Views In general, to produce the market share and forecast for a specific software market, the Gartner Dataquest software group counts new license revenue of appropriate stand-alone products and does not attempt any estimate or adjustment to count revenue from functionality embedded within software products that are not part of the specific software market being studied. However, in severalsoftwaremarkets,ashiftisoccurringasincreasingnumbersofvendors are producing software that fits into one segment but selling it as additional functionality embedded in products sold in another segment. An example of this would be SAP's Business Warehouse (SAP BW), which is sold as a separate product and as a bundle in the mysap application suite. SAP BW, sold as a separate product, is the only SAP revenue counted in the stand-alone view of the BI market. However, when sizing the composite view of the BI market, we formulateanestimateoftherevenuethatsapgeneratesfortheentiresapbw solution, including when it is sold as part of the mysap application suite. This, then,issap'srevenueinthecompositeviewofthebimarket Gartner, Inc. and/or its Affiliates. All Rights Reserved. 13

24 14 Software Market Research Methodology and Definitions, Looking only at stand-alone products would end up showing the trends of only one side of the software market, completely missing the relevance of vendors that are exploring this strategy of embedding functionality to make their core products more attractive and competitive. These software vendors are beginning to capture increased numbers of customers that are choosing to use this embedded functionality rather than purchasing a stand-alone product from a traditional vendor. As a result, Gartner Dataquest has developed a methodology to allow us to view the market from a stand-alone perspective to identify trends occurring among traditional vendors, as well as from a composite perspective, which incorporates the activities of non-traditional vendors that are impacting the software market by embedding software functionality targeted at one market into software products sold into another segment. Stand-Alone and Composite Views Gartner Dataquest looks at certain software markets affected by this new trend from two perspectives: stand-alone and composite. We refer to these perspectivesas"views"andnotasmarketssincetheyaresimplydifferentwaysof looking at the same market. Stand-aloneproductsarethosethataresoldontheirownasdistinctive solutions. Looking at the market from a stand-alone perspective means considering only those products that are sold into a specific software market and not including any revenue from products from other segments that may include similar embedded functionality. When Gartner Dataquest creates composite views of various markets, we estimate revenue that can be attributed to functionality embedded in products not being marketed and sold primarily for their capabilities in that market. To this estimate, we add the amount of licenses generated by products sold as stand-alone; hence the term "composite." The view can be summarized with the equation: Stand-alone + embedded component = composite view In terms of forecasts, Gartner Dataquest looks at the outlook of the stand-alone and composite views. Of the two, the composite view is projected to grow more rapidly because, as vendors and technologies consolidate, and as functionality is embedded in other software, more enterprises will find this embedded functionality to be adequate in meeting their needs, and thus will not need to purchase a stand-alone product.

25 Chapter 4 Infrastructure Software Definitions The focus of infrastructure software is to increase the performance of IT resources. In this category, we gather software primarily for use by IT professionals. These definitions are how Gartner Dataquest views the market as of August AD Software TheADsoftwaremarketiscomprisedoftoolsthatrepresenteachphaseofthe software development life cycle (planning, design, construction, automated software quality and operation life cycle). Requirements Management Requirements management tools streamline development teams' analysis of requirements, captures requirements in a database-based tool to enable collaborative review for completeness, ease use-case or test-case creation, provides traceability and facilitates documentation and versioning/change control. The database approach uses special-purpose repositories that are part of the requirements management solution or ship with a general-purpose commercial database integrated with the tool. Business Process Analysis The fundamental analysis of business processes and management systems is to improve them for cost reductions, faster time-to-market, lowered risk or higher business value. Business process analysis (BPA) can point out opportunities for optimization, automating manual processes, reducing error cycles and identifying revenue leakage points. It uses objective, quantitative methods and tools to analyze, redesign and transform business processes, including supporting organization structures, information systems, job responsibilities and performance standards. In some cases, BPA could point out the need for wholesale change implied in a full business process re-engineering (BPR) effort. Database Design (Data Modeling) Database design software includes logical (entity relationship) and physical (table, column and key) design tools for data. Physical data modeling is becoming almost mandatory for applications using relational database management systems (RDBMS). Strong support for physical modeling is paired with facilities to manage multiple models, to sub-model or extract from larger models and to reverse-engineer a database design from established tables. Developers are a secondary market, often targeted with a subset of the complete functionality. Object-Oriented Analysis and Design Object-oriented analysis and design (OOA&D) tools support object analysis and design technologies, and they commonly use Unified Modeling Language (UML) notation with a variety of methodologies to assist in the creation of highly modular and reusable software. Applications, data, networks and computing systems are treated as objects that can be mixed and matched flexibly rather than as components of a system with built-in relationships. As a result, an application need not be tied to a specific system or data to a specific application. (The UML standard from the Object Management Group has become the defacto standard for OOA&D tools) Gartner, Inc. and/or its Affiliates. All Rights Reserved. 15

26 16 Software Market Research Methodology and Definitions, Language-Oriented Development Environments Language-oriented development environments typically are built around a compiler and a language, such as COBOL, C/C++, Fortran, ADA and PASCAL, among others. These tools generally include graphical user interface (GUI) builders, debuggers, editors and other utilities that are integrated into the environment. Integrated Services Environments An integrated services environment (ISE) is a suite of integrated development tools, frameworks and technologies used for building service-oriented and composite applications. Most often, these applications will implement a service-oriented architecture (SOA) and will use the techniques of servicesoriented development of applications (SODA) [see "Producer Platforms and SODA Will Shift the AD Approach," T ]. ISEs are producer platforms (for creating services), much as application servers are provider platforms (for hosting services). Seven basic characteristics of an ISE define the completeness of its support for SODA: Design Specification of application requirements Modeling Definition of application structure Fabrication Writing code, creating components and wrapping legacy resources. Nominally, this is the function of an integrated development environment (IDE). Assembly Aggregation of components, alignment of inputs to outputs, translation of input or output data Orchestration Flow control and process management Automation Hiding complexity and removing the need to write code Variability Rapid change management. The variability of a system may be inversely proportional to its automation. Traditional (Client/Server) AD Tools Traditional AD tools include all traditional client/server development environments, and may be client/server fourth-generation languages (4GLs) targeting older technologies (that is, VisualBasic targeting the Microsoft COM/DCOM environment) and third-generation language (3GL) generators for Cobol, C or C++ targeting the Multiple Virtual System (MVS) or Unix. Business Rules Engine Business rule engine (BRE) business change has been a constant companion of systems development since the inception of IT, but a growing number of factors has led to the increase of change necessary to remain competitive in business. This increase in the frequency of change is leading to new approaches to alter the business rules embedded in business process flows, applications and even in the enterprise architecture. Enterprises are more pressed to become adaptable and apply the knowledge captured in rule sets to outflank competitors and respond to changing business environments. They can no longer wait for professional programmers to change applications written in traditional programming languages. Business users want to change rules without going through a long-running change process that is, at best, measured in days and, at worst, measured in weeks and months. Therefore, rules engines allow even end users to make dynamic "real time" changes to their applications in an abstracted level of language.

27 Infrastructure Software Definitions 17 Business Process Management Business process management (BPM) is a general term describing a set of services and tools that provide for explicit process management (that is, process analysis, definition, execution, monitoring and administration), including support for human and application-level interaction. BPM has emerged from many sources workflow, applications, collaborative tools, integration brokers, Web integration servers, application servers, development tools, rules engines and commerce offerings. BPM leverages tools to analyze and model processes, using a graphical process designer targeted for business analysts that extract process flow and architect new business process flows. A runtime execution engine (underlying state machine) executes the defined process flow, stepping through the defined process flow. As the process flow is executed, applications (that is, legacy, packaged, external business-to-business [B2B] and Web services) may be invoked, as will tasks that humans have to complete. The runtime environment maintains the status (state) of each process instance. As the many instances of multiple process types execute, they can be monitored (that is, process performance, degree of completion and out-of-bounds conditions) and administered (that is, for process termination and load balancing or rerouting). Post-completion analysis is also possible, as the state data is archived for BI potential. Automated Testing (Distributed and Mainframe) Automated testing applies commercially or internally developed software or services to assist in the testing process. Automated tests provide consistent results and data points. The benefits are repeatability, ease of maintenance, the ability to efficiently use resources in off-peak hours and the capability to create reports based on the executed tests. Software Change and Configuration Management Software change and configuration management (SCCM) is a set of disciplines to stabilize, track and control an agreed to set of software items. It includes version management, change management, defect tracking, change automation and other related processes. Other AD Software Other categories of AD software, not directly covered in the market research, include: Methodware Process management tools Component-based development tools Legacy understanding, legacy extension and legacy transformation tools IT metadata repositories Application Integration and Middleware AIM is defined as the system software or runtime infrastructure used to provide intra- and inter-application communications. Intra-application middleware is used for the construction of individual multitiered applications. Inter-application middleware is used for communication between individually designed applications. Gartner Dataquest includes all runtime platforms, such as application servers, transaction processing monitors (TPMs), object request brokers (ORBs) and object transaction monitors (OTMs), as middleware, making our definition broader than other popular definitions. Elsewhere, middleware is sometimes

28 18 Software Market Research Methodology and Definitions, limited to program-to-program communications services, such as messageorientedmiddleware(mom)andremoteprocedurecalls(rpcs)(communication middleware). A definition that only includes communications middleware is too narrow. Many other types of software "sit in the middle" (between the application, the operating system and the network), acting as glue. It is good to have one general term (middleware) rather than multiple terms for each form of such software. Note also that application servers, TPMs, ORBs and OTMs (what we call platform middleware) do the same thing that MOM and RPCs do. That is, they send messages between programs, although they also do other things, such as managing system resources, the operating system and network transport service. In the IT marketplace, AIM is often referred to as enterprise application integration (EAI). Adapter Suite Adapters are some combination of design tools and runtime software that act as glue to link applications, considered as sources or targets (or both), to the enterprise nervous system (ENS), that is, the integration middleware infrastructure that transports, transforms and routes data between systems. An adapter deals with a group of touchpoints (one or more entry/exit points, collectively an "interface") for a source or target. On the other hand, an adapter links to the ENS. Adapters recognize events, collect and transform data, and exchange data with the ENS. They also handle exception conditions, and can often dynamically (or with minor reconfiguration changes) accommodate new revisions of back-end applications. A comprehensive adapter suite should include adapters for common technologies (Component Object Model [COM], Enterprise JavaBeans [EJB] and Web services), industry protocols (electronic data interchange [EDI], SWIFT and RosettaNet) and applications (SAP or PeopleSoft). Adapter development kits (ADKs) are also needed when no prepackaged adapter is available for a particular (often proprietary) application. Adapter suites are available as part of an integration broker solution (for example, SeeBeyond, Tibco, Vitria and web- Methods) and as unbundled solutions (for example, Actional, iway, Peregrine, Sybase and Tavis) for use with integration brokers, or "lightweight" integration, often in composite application scenarios in conjunction with application servers. Application Platform Suite An application platform suite (APS) is an assembly of essential software infrastructure products sufficient to enable, at run time, the fundamentals of modern e-business applications. Gartner Dataquest defines minimal APS infrastructure as consisting of: An application server An enterprise portal server An integration suite A good APS will include other product categories, such as an integrating development framework and integrated systems management. In fact, these added product types will probably become the key features to attract future users to the vendors' APS offerings. Colloquially, an APS is also referred to as an "e-business platform." A user can assemble an APS from different vendors' component parts, but increasingly, leading software vendors offer an all-inone, "one stop shopping" APS assembled from their own products. The configuration of an APS reflects the central importance of component architecture, service-oriented architecture, Web services, portal-style user interaction and application integration to most modern business applications. Users