ChangeWave Research: B2B Software Industry Trends

ChangeWave Research Report:

B2B Fighting Back! Rise in Software Demand Buoys Industry for 2nd Half 2003

Abstract

The B2B Software industry has been searching for the light at the end of the proverbial tunnel for three years, but there is now strong evidence of a reversal in the making. This special report summarizes three recent ChangeWave Alliance surveys on the outlook for the B2B industry for the second half of 2003, along with the prospects for some big-name B2B companies.

  1. Our recently completed 3Q Corporate IT Spending survey (June 2003;n=524) showed that buying behavior is improving for many sub-sectors in the B2B industry. The sub-sectors which garnered the biggest gains were database management, financial analytics, and enterprise management applications.
  1. We also surveyed Alliance B2B industry members (May 2003) on the state of the B2B industry for the rest of 2003, and Linux's impact on current and future business plans. A total of 59 industry members participated, and a majority(54%) believe business revenues for the B2B industry will be greater for the second half of 2003.
  1. Finally, the results of our 2Q/3Q Corporate Sales survey (June 2003;n=946) revealed an improvement for the B2B software industry vs. the last quarter, although the industry still remains in the bottom tier of our overall sector rankings. Importantly, 19% of respondents projected their company sales will come in "Above Plan" for 2nd Quarter 2003, a 36% increase over the previous quarter.

The combination of these three surveys points out several crosscurrents:

  • A significant rise in overall demand for IT products and services is buoying specific sub-segments within the B2B industry.
  • Measured by sales and momentum, who's the biggest B2B winner over the next six months? SAP was picked by 34% of our industry respondents, followed by IBM (21%) and Microsoft (14%).
  • However, while the majority of respondents are quite optimistic for the rest of 2003, 61% of B2B industry members still believe that big-name B2B companies will not experience double-digit growth for the foreseeable future.
  • Two-out-of-five industry members (41%) also believe Linux is impacting future business and product plans – a large number given the relatively small size of the Linux installed base. Interestingly, Microsoft hasn’t stalled due to Linux’s popularity; 56% see it continuing to gain share for enterprise products.

Bottom Line: These Alliance findings show definite improvement in the overall demand for B2B software for the second half of 2003, but we remain concerned about the industry's struggle to overcome a lukewarm business environment and tight IT budgets.

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Table of Contents

Summary of Key Findings...... 3

Overview...... 3

A Closer Look at our 3Q IT Spending Survey – Software Applications...... 4

B2B Industry Members Survey – Key Results...... 5

A Closer Look at our 2Q/3Q Corporate Sales survey – B2B Software Results.13

Summary and Analysis...... 14

ChangeWave Research Methodology...... 16

About ChangeWave Research...... 17

I. Summary of Key Findings

Overview

This report summarizes three recent Alliance surveys on the outlook for the B2B software industry for the second half of 2003, along with the prospects for big-name B2B companies.

  1. Our recently completed 3Q Corporate IT Spending survey(June 2003; n=524) showed that buying behavior is improving for many sub-sectors in the B2B industry. The sub-sectors garnering the biggest gains were database management, financial analytics, and enterprise management applications.
  1. We also surveyed Alliance B2B industry members (May 2003) on the state of the B2B industry for the rest of 2003, and Linux's impact on current and future business plans. A total of 59 industry members participated, and a majority (54%) believe business revenues for the B2B industry will be greater for the second half of 2003. The survey focused on six key areas:
  • Business Revenues
  • B2B Software Sub-Segments
  • B2B Software Winners
  • Linux's Impact on the Industry
  • Microsoft Enterprise Products
  • Negatives Affecting Customers
  1. Finally, the results of our 2Q/3Q Corporate Sales survey (June 2003; n=946) revealed an improvement for the B2B software industryvs. thelast quarter, although the industry still remains in the bottom tier of our overall sector rankings. Importantly, 19% of our respondents projected their company sales will come in "Above Plan" for 2nd Quarter 2003, a 36% increase over the previous quarter.

(1) A Closer Look at our 3Q IT Spending Survey (June 2003) –

Software: Applications

Our recently completed 3Q Corporate IT Spending survey (June 2003) showed that buying behavior is improving for many sub-sectors in the B2B industry. The sub-sectors garnering the biggest gains were database management, financial analytics, and enterprise management applications. In addition, demand for the Enterprise Resource Planning (ERP) and Enterprise Integration sub-categories has stabilized.

Software: Applications / (A) Percent
Upgrading/
Buying
for 1st Time / (B) Percent
Downgrading/
Phasing Out / (C) Net %
Change Score
(A-B) / (D) Percentage
Point Change
From Previous Survey
(a) Database Management
Feb 2002 / 19% / 3% / 16% / --
June 2002 / 15% / 5% / 10% / -6%
Sept 2002 / 15% / 2% / 13% / 3%
Nov 2002 / 13% / 2% / 11% / -2%
Feb 2003 / 12% / 3% / 9% / -2%
June 2003 / 15% / 2% / 13% / 4%
(b) Financial Analytics
Feb 2002 / 11% / 3% / 8% / --
June 2002 / 8% / 3% / 5% / -3%
Sept 2002 / 7% / 2% / 5% / --
Nov 2002 / 7% / 2% / 5% / --
Feb 2003 / 4% / 3% / 1% / -4%
June 2003 / 6% / 2% / 4% / 3%
(c) Enterprise Mgmt Apps
Feb 2002 / 9% / 2% / 7% / --
June 2002 / 8% / 3% / 5% / -2%
Sept 2002 / 7% / 2% / 5% / --
Nov 2002 / 6% / 1% / 5% / --
Feb 2003 / 5% / 3% / 2% / -3%
June 2003 / 7% / 2% / 5% / 3%
(d) ERP
Feb 2002 / 7% / 4% / 3% / --
June 2002 / 8% / 3% / 5% / 2%
Sept 2002 / 5% / 3% / 2% / -3%
Nov 2002 / 5% / 3% / 2% / --
Feb 2003 / 4% / 4% / 0% / -2%
June 2003 / 5% / 4% / 1% / 1%
(e) Enterprise Integration
Feb 2002 / 16% / 3% / 13% / --
June 2002 / 12% / 2% / 10% / -3%
Sept 2002 / 9% / 2% / 7% / -3%
Nov 2002 / 9% / 2% / 7% / --
Feb 2003 / 7% / 1% / 6% / -1%
June 2003 / 8% / 2% / 6% / --

(2)B2B Industry Members Survey (May 2003) – Key Results

We also surveyed Alliance B2B industry members (May 2003) on the state of the B2B industry for the rest of 2003, and Linux's impact on current and future business plans.

The survey focused on sixkey areas:

  • Business Revenues
  • B2B Software Sub-Segments
  • B2B Software Winners
  • Linux's Impact on the Industry
  • Microsoft Enterprise Products
  • Negatives Affecting Customers

Among the Key Findings:

  • Business Revenues: By a 24% to 12% margin, industry respondents see an increase in overall business revenues in the 2nd Quarter, with another 59% seeing no change.
  • B2B Software Sub-Segments: We asked industry respondents to choose the best-performing B2B sub-segment in 2003. A total of 34% chose Security Software, followed by Web Services (29%). The worst performing sub-segments were CRM and Enterprise Systems.
  • B2B Software Winners: Thirty-four percent (34%) of respondents think SAP will be the biggest winner measured by sales and momentum over the next six months, followed by IBM (21%) and Microsoft (14%).
  • Limits on Growth: While the majority of respondents are quite optimistic on the rest of 2003, 61% of B2B industry members still believe that big-name B2B companies will not experience double-digit growth for the foreseeable future.
  • Linux’s Impact on the Industry: Two-out-of-five respondents (41%) believe Linux is having an impact on future business and product plans – a large number given the relatively small size of the Linux installed base. In addition, 37% believe the growing number of Linux users is helping applications vendors.
  • Microsoft Enterprise Products: The growing strength of Linux does not mean Microsoft has stalled – 56% of respondents see Microsoft as continuing to pick up market share in operating systems and enterprise-related markets.
  • Negatives Affecting Customers: Lukewarm economic conditions and IT budgetary restrictions were the most commonly cited negatives among our respondents. Pricing and product performance/complexity were also identified as factors impacting customers.

(A) Business Revenues

(1) Question Asked: With regard to the B2B Software and Services sector, do you think you'll see an increase in overall business revenues, a decrease, or will overall business revenues remain the same for the 2nd Quarter (Apr-Jun) 2003 vs. the previous quarter?

Increase in Overall B2B Revenue for 2Q / 24%
Decrease in Overall B2B Revenue for 2Q / 12%
Remain the Same / 59%
Don't Know / 5%

Slight uptick in B2B revenue for 2Q. By a 24% to 12% margin, industry respondents see an increase in overall business revenues in the 2nd Quarter, while 59% see no change.

(2) Question Asked: Looking ahead, do you think that overall business revenues for the B2B sector will be greater for the second half of 2003 than they were in the second half of 2002?

Yes / 54%
No / 12%
The Same / 27%
Don't Know / 7%

Greater optimism for second half of 2003. Business revenues for the B2B sector will be greater for the second half of 2003, according to better than one-in-two (54%) respondents.

(B) B2B Software Sub-Segments

(1) Question Asked: Which one or two of the following B2B sub-segments do you think will perform best in 2003? (Choose No More Than Two)

Security Software (e.g., Internet Security Systems, Checkpoint) / 37%
Web Services (e.g., BEA Systems, IBM) / 29%
Enterprise Systems (e.g., SAP, Computer Associates) / 20%
Database Management (e.g., Oracle, Microsoft) / 17%
CRM (e.g., Siebel, Kana) / 15%
Data Management (e.g., Veritas, Legato) / 15%
Vertical Software (e.g., Barra, Cerner) / 14%
Application Development Tools/Platforms (e.g., WebMethods, Tibco) / 10%
Supply Chain Management (e.g., Ariba, Commerce One) / 8%
Don't Know / 5%

Security Software leads. According to 37% of respondents, Security Software will be the best-performing B2B sub-segment, followed by Web Services (29%).

(2) Question Asked: On the down side, which one or two of the following B2B sub-segments do you think will perform the worst in 2003? (Choose No More Than Two)

Enterprise Systems (e.g., SAP, Computer Associates) / 36%
CRM (e.g., Siebel, Kana) / 32%
Database Management (e.g., Oracle, Microsoft) / 24%
Application Development Tools/Platforms (e.g., WebMethods, Tibco) / 19%
Supply Chain Management (e.g., Ariba, Commerce One) / 14%
Vertical Software (e.g., Barra, Cerner) / 14%
Data Management (e.g., Veritas, Legato) / 10%
Web Services (e.g., BEA Systems, IBM) / 3%
Security Software (e.g., Internet Security Systems, Checkpoint) / 2%
Don't Know / 14%

Enterprise Systems – still a big loser? No!While 36% of the industry respondents from our May survey believe Enterprise Systems will perform the worst in 2003, the later findings of our June 3Q Corporate IT spending survey show Enterprise Management Applications and ERP clearly experiencing upticks in demand (see p. 4) – signaling a potential rebound for Enterprise Systems.

Net Difference Score

B2B Sub-segment / Perform Best
In 2003 / Perform Worst in 2003 / Net Difference
Security Software / 37% / 2% / +35
Web Services / 29% / 3% / +26
Data Management / 15% / 10% / +5
Vertical Software / 14% / 14% / 0
Supply Chain Management / 8% / 14% / -6
Database Management / 17% / 24% / -7
Application Development Tools/Platforms / 10% / 19% / -9
Enterprise Systems / 20% / 36% / -16
CRM / 15% / 32% / -17

(C) B2B Software Winners

(1) Question Asked: Measured by sales and momentum, which B2B company do you think will be the biggest winner over the next six months?

Company / # of
Mentions
SAP / 34%
IBM / 21%
Microsoft / 14%
BEA Systems / 10%
Veritas / 7%
Oracle / 7%
Seibel / 7%

Momentum for SAP. Thirty-four percent (34%) of respondents think SAP will be the biggest winner over the next six months, followed by IBM (21%) and Microsoft (14%).

(2) Question Asked: Some analysts believe the ground has permanently shifted for big name companies selling large applications that run across the enterprise (e.g., Microsoft, Oracle, PeopleSoft, SAP, Siebel, Veritas, etc.) What about yourself? Do you think the big name B2B companies will return to double-digit growth rates within the next 12 months, within the next 24 months, or will they not return to double digit growth rates for the foreseeable future?

Yes, they will return to double-digit growth rates within the next 12 months / 14%
Yes, they will return to double-digit growth rates within the next 24 months / 24%
No, they will not return to double-digit growth rates for the foreseeable future / 61%
Don't Know / 2%

Double-digit growth not yet on horizon for big-name companies. While the majority of respondents are quite optimistic for the rest of 2003, 61% of B2B industry members still believe that big-name B2B companies will not experience double-digit growth for the foreseeable future. Another 38% do see double-digit growth within the next 24 months.

(D) Linux’s Impact on the Industry

(1) Question Asked: Some analysts consider Linux the hottest product in the B2B industry. Is Linux having an impact on your business and future product plans?

Yes / 41%
No / 54%
Don't Know / 5%

Two-out-of-five respondents (41%) believe Linux is having an impact on their future business and product plans – a large number given the relatively small size of the Linux installed base.

(2) Question Asked: Linux is one logical alternative to Microsoft and Sun Solaris products. Does the shift to open-source computing and the growing number of Linux customers and users help or hurt applications vendors?

The growing number of Linux customers and users is helping applications vendors / 37%
The growing number of Linux customers and users is hurting applications vendors / 22%
Don't Know / 41%

By nearly a two-to-one margin (37% to 22%), respondents believe the growing number of Linux customers and users is helping applications vendors.

We asked respondents to elaborate on this issue:

(3) Question Asked: Please elaborate.

a. Sample Responses: Members who believe Linux is helping applications vendors (37%)

  • DHA0965 writes, "As the costs of operating systems drops there is more available operating budgets for applications."
  • RON0076 writes, "Competitive presses to out perform the competition."
  • FEG8928 writes, "Having more than one or two platforms is helping the Application vendors."
  • DOO0042 writes, "I encounter more and more use of php, sql and related programs than ever before. Many people are annoyed by Microsoft's handling of JavaScript."
  • VEL1388 writes, "It helps the apps vendors who have ported their products to Linux because customers like the feeling of not being "beholden" to too many software vendors. If customers feel they at least have some choice, and feel that Linux is a viable choice, then in their minds then can control one of the variables in total cost of ownership."
  • KEN8259 writes, "Linux customers can improve their software applications by using all the Linux code writers free."
  • DON3052 writes, "Linux offers an alternative to the licensing that Microsoft has defined as part of its new strategy."
  • GUP6814 writes, "Linux will be big in 2004-05."
  • RGU7938 writes, "Linux works, and it uses less hardware and less support. One can even use old hardware that is inadequate for new Microsoft OS. The cost savings mean there is more budget left over for applications."
  • CRA8018 writes, "Occasionally cheaper and faster, Linux is causing rethinking of basic assumptions about how standard work gets done -- and this rethinking also exposes opportunities for new applications."
  • MEL9106 writes, "On the positive side, possibility of choosing open and cheap components to build up a solution. On the negative side, need to support different platforms (Linux, Unix dialects, Wintel)."
  • KVD9114 writes, "This is the same trend we saw when UNIX was introduced. Software companies will retrofit there products and come out with a new wrapper on them and we will see growth in all software and related services industries due tot he fact that companies will want to keep up with their competitors. New software = services = training = $$$."

b. Sample Responses: Members who believe Linux is hurting applications vendors (22%)

  • BRI3082 writes, "Many existing applications vendors primarily rely on standard OS platforms to build upon. If industry mood swings toward open source platforms, the development and deployment could be fragmented."
  • SOL0029 writes, "Not enough of them support the Linux OS."
  • JIM7025 writes, "It's hurting profits initially because it's another platform that needs to be supported, so initial development expenses are incurred. Thereafter, it should help the bottom line for B2B vendors because their existing customers that are adding the Linux platform will look to them first for a solution. Assuming they do a decent job in supporting Linux, the current vendors will get the majority of the new orders."
  • GQU7626 writes, "Web developers are starting to use PHP and Perl. Free development software and application software. That is going to hurt!!!"
  • HOS8562 writes, "Linux customers are going to invest their $ for other products than MSFT, SUNW, since they can get for free Linux from the web and start to use it next day."
  • CHA2247 writes, "Can utilize open source versus buying applications - impacts primarily small to mid market today, but will creep into larger companies."
  • EWI0296 writes, "It is creating downward price pressure on products."
  • CAR2283 writes, "Results in fragmentation of support and development resource for those that support Sun, Microsoft and Linux. Closes off a part of the market for those that choose not to support Linux."
  • RMO2586 writes, "On the whole the fragmented market results in a smaller customer base for any given platform. Developing the same application in multiple environments simply raises development and operating costs to be able to compete in the same fixed-size market."
  • ISO8098 writes, "Linux customers want an alternative to the overpriced software sold by applications vendors. Therefore these customers either looking to buy alternative software products or are putting pressure on the vendors to lower their prices."

(E) Microsoft Enterprise Products

(1) Question Asked: Despite Linux, are Microsoft Enterprise products continuing to take market share in operating systems and related markets?

Yes / 56%
No / 25%
Don't Know / 19%

Microsoft remains strong. The growing strength of Linux does not mean Microsoft has stalled – 56% of respondents see Microsoft as continuing to pick up share in operating systems and related markets.

(F) Negatives Affecting Customers

(1) Question Asked: Finally, what would you say is the most important factor negatively impacting your customers today?

Economic Conditions / 38%
Budget Restrictions / 26%
Pricing / 8%
Product Performance/Complexity / 6%
Other / 23%

Economic Conditions and Budget Restrictions lead the list of negatives. Economic conditions (38%) and budget restrictions (26%) were the most commonly cited negative factors affecting customers. Pricing (8%) and product performance/ complexity (6%) were also identified as factors.

a. Sample Responses: Economic Conditions (38%)

  • SAV8382 writes, "Economic growth."
  • DON3052 writes, "Market stability. CIO's and upper management are extremely cautious about funding initiatives due to instability in the market and economy."
  • JIM7025 writes, "The overall business climate stinks. It's very hard to justify major platform changes when there isn't enough business to strain the existing systems. For this reason Microsoft Enterprise products will suffer a slow initial rollout. However, I believe there will be a major movement toward enterprise level systems (of any brand, not just Microsoft) as the business climate reaches a better level."
  • SCO8848 writes, "The current economic uncertainty which tends to limit large expenditures."
  • SMU3129 writes, "The economy. Customers are still in yellow light mode and are waiting for an upturn in the economy before committing to new capital investments."
  • GAR5838 writes, "Economy is still very uneven. CPG manufacturers are still positioned defensively, not taking initiatives that would increase sales."
  • RGU7938 writes, "Many customers have excess capacity. Uncertainty about the future economic conditions makes them reluctant to invest in increased capacity/efficiencies."
  • BUS7586 writes, "Uncertainty about the future of the economy."
  • DHA0965 writes, "Fear of the economy not rebounding."

b. Sample Responses: Budget Restrictions (26%)