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The death of the independent software firm is greatly exaggerated.

MicroStrategy (NASDAQ:MSTR), SAS, Informatica (NASDAQ:INFA), Actuate (NASDAQ:ACTU) and Teradata (NYSE:TDC) are just some of the independent firms that are probably getting tired of hearing that they are no longer viable. And their long-time and happy customers are probably wondering what the industry analysts and pundits are smoking when they proclaim that the software titans have taken over the world of BI and DW.

After all, the titans did not take the market over, but rather they acquired companies – Business Objects (NYSE:SAP), Cognos (NYSE:IBM) and Hyperion (NYSE:ORCL) - who were the market leaders. If, as the pundits proclaim, IT departments are only buying from the titans because they want “one throat to choke” then why were Business Objects, Cognos and Hyperion kicking the titans’ butts before they got acquired?

And, do the pundits examine IDC market share numbers? The titans and their acquired companies only had 37% of the market in 2006. That means nearly two-thirds (!) of the market is not buying the titans-only purchase plan. And most market share studies under-represent open source, on-demand software and emerging technologies provided by innovative independent software companies.

Rather than opinion and anecdotal feedback (primarily from the software titans themselves and their systems integration partners and customers), the market place, i.e. what the customers are buying, shows that they continue to purchase solutions from independent software firms. The independents will continue to be alive and well.

Many companies have long-standing relationships with these firms and are not dropping successful implementations because pundits tell them that they should. Their business people are quite happy and productive, so why migrate? Companies like SAS, Information Builders and Dimensional Insight (to name just a few) have been providing successful solutions to their customers for more than a decade.  Why is that going to change?

Innovative companies and emerging technologies generally come from independents and new ventures rather than the titans. On-demand software, open source software, data visualization, industry specific performance management solutions are just a few areas where the innovation is coming from the independents. And it seems companies are willing to buy that software from them.

Another reason why independents will continue to thrive is, besides innovation, they often provide a much lower TCO (total cost of ownership) that the titans. First, as the titans acquire and absorb companies and products the resulting product lines are almost always more complex and costly to use. The titans will point to increased functionality, but there is no free lunch to gaining that functionality; the customer pays for it in many ways.

Second, as a former software engineer, I am inclined to believe that as your product line continues to be expanded through acquisitions and products “integrated,” these product lines have increasing amounts of “kludges” to get the those products to work together. I know you can use SOA and services to “integrate” products, but these can be used as a modern band-aid to integration. Finally, the titans’ licensing schemes always seem to expand with each release and acquisition. The independents can much more easily under-price the titans.

Mergers and acquisitions (M&A) have always been part of the software industry. As any industry matures, M&A activity increases and consolidation is inevitable. You can make a persuasive case that software independents are unlikely to grow to be multi-billion titans themselves before they are acquired. But it is tough to make the case that many independents cannot exist and grow in this marketplace. The evidence does not support that case.

In addition, at various times in the last couple of decades pundits made the case that IBM, then Microsoft and then Oracle so dominated the landscape that independents could never grow and thrive. But somehow companies such as Business Objects, Cognos, Hyperion, PeopleSoft Seibel and many others grew to be large and then got acquired. And there are still many successful tech firms such as Google, SAS and SAP. And we have dozens of successful independents providing solutions that are being bought by companies across all industries.

Just look at the large pharmaceutical and medical device companies. They are behemoths that continue to grow organically and by acquisition. No one in that industry is declaring the biotechs dead just because they often get acquired. In fact, the biotechs are often the innovative companies.

The BI, DW and performance management industry is maturing and the titans will continue to grow both organically and through acquisition. But the death of independent software companies is greatly exaggerated.

Source: Death of the Independent Software Firm?