Software Forecast Update, 1H03: Markets Start Their Slow Growth

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1 Forecast Analysis Software Forecast Update, 1H03: Markets Start Their Slow Growth Abstract: Signs of recovery in software purchases are starting to show while indications of further discretionary budget constraints remain. Slow growth patterns should hold for future enterprise software spending. By Joanne Correia and Thomas Topolinski Strategic Forecast Statements The most likely scenario growth rates for enterprise applications and infrastructure software license spending are starting from a base of negative 3.4 percent in 2002, up 2.2 percent in 2003, up 7 percent in 2004 and up 8 percent in Spending on IT infrastructure software will recover from below flat spending of negative 1.8 percent in 2002 to regain 4.1 percent growth in 2003, 5.8 percent in 2004 and 6.9 percent in 2005 as buyers continue to give preference to streamlining, optimizing and integrating established applications. Spending on enterprise applications software will recover more slowly from negative 5.7 percent in 2002 to negative 0.4 percent in 2003, and returning to positive growth in 2004 (8.7 percent) as customers start to use more automation to improve business performance and replace of proprietary applications with standards-based applications (Web services and Java 2 Platform, Enterprise Edition [J2EE]). Strategic Planning Assumptions Through 2005, buyer behavior will continue to stay cautious and more focused on the bottom line (0.8 probability). During the second half of 2003, software spending will increase 2.2 percent for the year (0.7 probability). Publication Date:30 September 2003

2 2 Software Forecast Update, 1H03: Markets Start Their Slow Growth Forecast Overview The software markets will generally lag behind an economic upturn by six to 12 months as buyers review their choices and the value they are seeking from IT. Prospects for a global recovery in the next six months are still slipping, but a rebound in 2004 is still possible, given improved confidence, reduced uncertainty and bolder economic policies. In the face of continuing economic uncertainty, Gartner Dataquest has developed three forecast scenarios for the software market. Based on Global Insight forecasts, general economic news and quarterly vendor results, Gartner Dataquest has formulated a range of possible forecast scenarios for 2003 through 2004 and beyond. These are best case, most likely case and worst case. Most Likely Case The U.S. gross domestic product (GDP) growth rises in the third quarter of 2003, but fundamentals remain mixed. The U.S. economy improves in the fourth quarter of 2003, but the pace of recovery is noticeably slower than previous post-world War II upturns is characterized by continuing improvement rather than a sharp upturn, and unemployment noticeably lags recovery. Fueled by a reviving U.S. economy, global economic recovery begins in the first quarter of The IT market noticeably recovers one quarter after the economic upturn. Best Case The United States experiences stronger-than-expected economic recovery in the second half of 2003, more in line with previous post-world War II upturns. The European domestic economy experiences independent revival before the end of the year. A global economic recovery is strongly evident in the first quarter of Strong IT market recovery follows within one quarter of the economic upturn if not coincident with it. The best-case forecast rises above the most likely forecast by 4 percent year over year for 2003, 2004 and Worst Case The U.S. economy remains weak through the second half of 2003 and into early Consumer spending slows, becoming more cautious in the face of persistent unemployment. Businesses remain guarded and tight-fisted with IT budgets. A weak U.S. economy implies global economic recovery will be delayed well into IT market recovery still follows one quarter after the economic upturn but could be delayed somewhat longer. Selective but minimal IT investments take place in the interim to maintain existing assets and infrastructure (that is, no new net IT investment occurs). The worst-case forecast lowers the most likely forecast by 6 percent year over year for 2003, 2004 and Figure 1 shows the most likely forecast scenarios for the worldwide enterprise software license market. Some of the more dynamic sectors include: 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 30 September 2003

3 Application integration and middleware (AIM) and application development (AD) Security and network and systems management (NSM) Information management and business intelligence (BI) analytic tools Front-office customer relationship management (CRM), including e- commerce sell-side Back-office enterprise resource planning (ERP), human resources (HR), financial accounting and supply chain management (SCM), including e- commerce buy-side The most likely trend lines correspond to the current Market Databook update, showing the actual for 2002 and forecast through Figure 1 Most Likely Forecast Scenario for End-User Software Spending in Selected Enterprise Software Markets, Millions of Dollars 25,000 20,000 15,000 Application Middleware and Application Development Information Management, BI System Network Management Front-Office CRM 10,000 5,000 Back-Office ERP, SCM, PPM Collaborative and PC Software Design and Engineering Source: Gartner Dataquest (September 2003) Changes to Our June 2003 Update Some of the most significant negative changes to our most likely forecast are in the CRM, design and engineering and information management/bi software markets. These software market forecasts were reassessed based on the first half of 2003 numbers, which showed much lower growth than originally projected Gartner, Inc. and/or its Affiliates. All Rights Reserved. 30 September 2003

4 4 Software Forecast Update, 1H03: Markets Start Their Slow Growth The market forecasts that changed in a positive manner were back-office ERP, SCM and project portfolio management (PPM), which showed a slight improvement in growth. The collaborative and PC software market is higher in this new forecast from a market size, because of our expansion of the definition of the PC business software market, now including a larger office suite component (see Figure 2). Figure 2 Changes in Software License Forecast Growth Rates From June and September 2003 Total Infrastructure Software Total Application Software Total Software September 2003 June 2003 Storage Management Design and Engineering Collaborative and PC Software Back-Office ERP, SCM, PPM Front-Office CRM System Network Management Information Management, BI Application Middleware and Application Development Percent Source: Gartner Dataquest (September 2003) Key Growth Determining Factors The key drivers in the software market continue to include: Buying behavior Our research continues to indicate a growing backlog of pent-up demand for software projects to improve corporate business performance and IT infrastructure efficiencies. However, buying behavior is still cautious and hinders rapid growth rates. Software price cutting Some vendors continue to discount to "whatever it takes" levels to feed their urgent need for revenue. This is a driver by promoting software purchase opportunities by presenting "gooddeals."weestimatethatthepriceofenterprisesoftwarehasbeen cut by 25 percent or more since the end of Consolidation More pressure from competition and the fight for survival and market share continue to pressure vendors to consolidate businesses, product lines, shared resources and channels. The key inhibitors in the software market include: 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 30 September 2003

5 Forecast Scenario Commentary Economic upturn timing The flow of constrained economic news around the United States and other countries is inhibiting corporate purchasing and investment decision making. Financial markets Although the stronger results from Wall Street on the technology sector is easing some buyers' concerns on the financial viability of their chosen or potential software suppliers, many smaller and pure-play software vendors are still holding low values, threatened by delisting, acquisition or even demise. Long-term faith in the markets is not evident as of yet, and expectations of how high these markets will grow and for how long are still questionable. Discretionary spending is often funded from outside established IT budgets. So, despite many 2004 IT budgets being set slightly above 2003 levels, as the economy improves, there is likely to be an increase in discretionary spending on software initiatives for business improvement. Lack of technology innovation No new next big thing has caught the imagination of IT or business communities. With license revenue down for an extended period, investments in R&D have been reduced. In addition, the software industry is now trying to focus on proving value (tying in the deployment of software and organizational change to the delivery of business results, most often through cost reductions). By the time 2004 is over, Gartner Dataquest expects the software industry to have been through a major shakeout and consolidation period, with only half of the software product companies that were active in 2000 still around in the same form. Therefore, we forecast that it will continue to be lean times for the next 18 months as customers seek to minimize their license commitments, affecting all aspects of their revenue lines (see Figure 3). The forecast includes: Infrastructure software In the short term, modest demand will be for infrastructure software that delivers more value out of established systems. The Web services evolution of infrastructure products will take longer than expected to reach market maturity. Application software Packaged application spending will recover more slowly as it is more dependent on new business initiatives and higher levels of confidence in the business value of IT. The software market is expected to grow to $114 billion by 2007 (see Figure 4), but total software spending, including support and maintenance, will grow to $175 billion in the same time period. This reflects a compound annual growth rate (CAGR) for software to be 6.7 percent for the next five years, while support and maintenance will be 5.7 percent Gartner, Inc. and/or its Affiliates. All Rights Reserved. 30 September 2003

6 6 Software Forecast Update, 1H03: Markets Start Their Slow Growth Figure 3 Total Software Forecast of End-User Software License Spending (Millions of Dollars) Millions of Dollars 120, ,000 80,000 60,000 Total Software Total Application Software Total Infrastructure Software 40,000 20, Source: Gartner Dataquest (September 2003) Figure 4 Software and Support/Maintenance Most Likely Forecast (Millions of Dollars) Millions of Dollars 180, , , , ,000 Software Total (End-User Spending) Software Support and Maintenance Total 80,000 60,000 40,000 20, Source: Gartner Dataquest (September 2003) 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 30 September 2003

7 7 Gartner Dataquest Perspective Not all of the issues facing the software industry are economically driven. Most software vendors are struggling to address a completely new set of buying behaviors. All the gloss and sparkle from the late 1990s has been rubbed off. Software vendors are faced, once again, with making strong financially sound business value cases in all of their sales propositions. Gartner Dataquest's forecast provides some planning insight to when and how improvements or delays will manifest themselves. Early indicators may come from stock market expectations, as vendors generally like to set expectations before they announce their final results. We continuously research buyer intentions, which also gives potential early indicators, up or down. However,thefirmestindicationsofanactualupturninsoftwarespending come from the analysis of vendors' quarterly and annual results. Only then do we see the combined effect of: An uplift in buying decision approvals The changing balance in the license/maintenance/services spending mix The consolidation of the software products and companies This last factor is one we continue to see and expect to pick up momentum in 2004, impacting our expected long-term scenario. Gartner Dataquest Recommendations Gartner Dataquest recommends the following for vendors, investors and buyers: Vendors and investors 2003 is a year of "right sizing" for the market. Plan for a better 2004 by perfecting sales and product strategies for the current and future markets. Prepare for 2005 as the return to more growth by revisiting R&D, product strategies and marketing programs. Keep an eye on adjacent market sectors for potential new opportunities and potential threats as markets continue to merge and consolidate. Software buyers Seek deep expertise in your application providers. Your software vendors must become a trusted advisor by showing deep vertical and business expertise as opposed to horizontal software knowledge. Financial due diligence must be part of your normal software selection process. Inventory your current software assets to make sure that your mission-critical software vendors are not in jeopardy of being part of the consolidation activities that are occurring in the market. Key Issue Where are the future growth prospects for this industry? 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 30 September 2003

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