Enterprise Software Is Alive and Well

by: Dennis Byron

Ariba (NASDAQ:ARBA) said "enterprise software is dead" on December 20, 2010. It was a common meme on the blogosphere in 2010 and a bookend to similar (and almost perennial) mourning over the "death of the PC." (Interestingly, at least for enterprise software there was the counterclaim from some analysts that it was sexy or should be more like Facebook. In those analysts' opinion at least enterprise software isn't dead.)

Enterprise software as a market is alive and well and has another 20 years in it. From a market point of view, it is not as big as you might think from adding up the revenues of the players, but it is still a large vibrant market. The four multiple-function, multiple-industry enterprise-software market leaders alone -- IBM, Microsoft (NASDAQ:MSFT), Oracle (NYSE:ORCL) and SAP -- do almost $100 billion in revenue annually. (Microsoft also does $10 billion or so in the "dead" PC market.) Another 1000 viable enterprise-software market participants, most of whom specialize in single functions or single industries and many of whom are publicly listed companies, do another $100 billion each year. But those numbers include the respective companies' "maintenance" revenue streams. (Remember maintenance in terms of enterprise software is not about fixing things but about updating content such as tax tables.)

The annual decision to renew a maintenance contract for enterprise software is basically a decision not to buy some other enterprise software (it's kind of like saying that the choice NOT to buy healthcare insurance under Obamacare is part of interstate commerce). So it is fair and accurate and intellectually honest to count the maintenance stream in the market size. But in reality there is only about 10% of the total -- $20 billion -- in "new new business" appearing on requests for proposal each year. The delta that is not "new new business" or is not maintenance is add ons and upgrades where enterprises simply choose to put more people on an email system or add an accounts receivables module to a ledger/payables (latter examples purposely simplistic).

The multiple industries supported by industry-specific enterprise software can be broken down to almost all the active NAIC codes. The multiple functions include

  • infrastructure software such as databases and operating systems
  • personal/group productivity applications such as email systems and word processing, and
  • corporate applications for financial, HR, supply chain and similar company-wide purposes

Note that neither software as a service (SaaS) nor cloud computing is a type of enterprise software. SaaS is a delivery method for enterprise and PC software and cloud computing is a deployment technology for both. There is a tendency by some public companies to combine the two but in fact most cloud computing happens within enterprises and there is no market at all.

Enterprise software will not be replaced by cloud computing or SaaS but by what we currently call business process outsourcing (some analysts will come up with a better name by the time it happens). But I won't be writing end of year blog posts by the time that happens.

Disclosure: No financial interest in companies mentioned