It's that time of year when we all like to reflect on the year that was, and postulate on the year that will be...and in the blogosphere it's almost as if there's a rule buried deep in the Blogging Bylaws which reads..."thou shall make bold predictions about the year ahead." The great thing about making predictions is...if you're right, you look like a genius and if you're wrong, no one really notices [hint hint, because you don't remind them!].
As a technology investor with a vested interest in enterprise software, I've found the back and forth between Vinnie Mirchandani and Jeff Nolan. Vinnie put forth his own set of predictions for the upcoming year and Jeff commented on where he disagreed [particularly as it related to Sarbanes Oxley and SAP].
In the spirit of the season, I too will put my prognostication cap on and give you my thoughts on the enterprise software [and investment] market for 2006 [and please, feel free to label me a Nostra-dummy 12 months from now if I completely fall short]...
Software-as-a-Service [SaaS] rhetoric will reach a crescendo
Taking nothing away from the salesforce.com and the success they've enjoyed in the last few years, 2006 is going to be a MUCH different year for the stand-alone SaaS companies, in my opinion. It's my contention that the public SaaS vendors currently enjoy a scarcity premium AND an M&A premium. The fast growth exhibited by salesforce [CRM], RightNow [RNOW] and to a lesser extent Concur [CNQR] and Ultimate [ULTI] have fueled the fire, but they'll have company soon...
- NetSuite will either come public OR be acquired by Oracle [Larry Ellison is the majority shareholder in privately-held NetSuite]
- Readen Commerce might also make its way to the public markets
- Oracle will become heavy-handed in their marketing message behind SaaS, proclaiming themselves as the "leader" in On-Demand software applications. They will make this claim thanks to the combination of Siebel OnDemand, Peoplesoft OnDemand and their own ASP-rooted efforts...Ellison will more openly combat Marc Benioff and salesforce much in the way he combated Tom Siebel in the late 90s.
- SAP will take a measured approach to this market, as they [correctly] recognize the limitations of offering hosted solutions in large enterprises for core transactional applications that encompass much of the mySAP suite.
- A number of second-tier public software companies will try to ride the SaaS wave by announcing new hosted versions of their software...but a closer inspection will show them to lack the true multi-tenant functionality needed to offer 100% hosted functionality.
- The VC lovefest for SaaS will continue apace, with announcements of more and more "me too" investments muddying the SaaS landscape.
- Dave Duffield's Workday will garner some attention, and he'll likely acquire his way into a broader suite of functionality than the HR/Payroll early forecasters envision.
Supply-Chain Software will rise from the ashes
The last few years have been devastating for the stand-alone supply chain management software vendors. Former high fliers like i2 and Manugistics have seen massive dropoffs in license revenue attainment, and the sins of the past [i.e., selling functionality that didn't exist] made the segment virtually toxic to CIOs.
But the value of supply-side optimization remains significant, and certainly enterprises are in constant need of improvements in the way they source, design, manufacture, store and ship their goods & services. Expect advancements in master data management, RFID and intelligent messaging to create a buzz for SCM in 2006; particularly in the industrial and process industries. Expect niche technologies such as fulfillment, order management and profit optimization to re-gain a presence in marketing decks.
Maintenance Revenues will become the new battlefront between customer and vendor
Maintenance revenues have quietly become the driving economic engine among healthy software vendors, and have been THE impetus for much of the M&A we've seen among public takeouts [i.e., paying a multiple on the expected NPV of future maintenance revenue streams.] As I discussed earlier this month, there is anecdotal evidence to suggest price rationalization on maintenance is a very real threat to enterprise software growth in 2006.
- undefined, among others, contends that SaaS vendors have been the most egregious in terms of premium maintenance and support pricing, watch for that to become a key negotiating point as the SaaS landscape widens out
Indian Outsourcing firms will become the primary lever for trends in application development, QA and testing
Mercury Interactive's deal with Satyam is an early example, but expect the floodgates to open in 2006 as vendors line up to be slotted in preferred positions with Satyam, Infosys, Wipro, Tata, et al...the leverage of the outsourcers has grown to the point where they can control the customer [something the tools vendors were reluctant to give up in prior negotiations], and the cost benefit of tactical testing being sent overseas is far too compelling for U.S. enterprises to ignore. Look for the outsourcers to drive the technical specifications of QA & development testing going forward.
- One offshoot of this trend will be whether Accenture and the other U.S. consultants are willing to make more committed partnerships with the testing vendors in order to combat competition abroad
M&A will continue to be a prominent them among enterprise software vendors [and investors]
2005 was a banner year for software M&A, ranging from the massive [e.g., Siebel+Oracle, Symantec+Veritas] to the niche [e.g., Captiva+EMC, Khimetrics+SAP] and we should expect no shortage of M&A activity in '06.
- The market is maturing
- There's excess capital, everywhere
- undefined are rationalizing the number of vendors, encouraging roll-ups of complementary feature sets
- Technology investors reward growth, and M&A is a cost effective means of acquiring growth at present
You can bet at least one massive, head-scratching software merger will take place, and it probably won't be one most of us see coming. I'm betting HP [ready to make noise after an impressive turnaround in '05 post Carly Fiorina's ouster] will become aggressive in the software M&A market, matching IBM and CA step for step going forward.
Microsoft will be accused of some type of anti-competitive act
Is there ever a year this isn't true? :)
Microsoft will be omni-present in the news, but will it re-ignite the share price?
I'm hardly the only one pointing out the importance of 2006 for Microsoft, but it still needs to be acknowledged formally. We've got Vista, XBox 360, Search [and possibly a Yahoo! partnership?], and Ray Ozzie's Web 2.0-ish initiatives [i.e., SSE, Live!] to name a few.
Business Intelligence [BI] will engender a slowdown after a torrid 24 months
The business intelligence vendors have enjoyed prodigious growth the last two years, as the need for data analysis, query and reporting tools extended beyond the analysts and power users within the enterprise. However, several headwinds are upon the sector which could curtail the investment momentum, at least for the early part of 2006:
- Product overlap is now significant -- The product sets of Business Objects, Cognos, Hyperion Solutions and Microstrategy [among others] have evolved into startlingly similar offerings. Each vendor has acquired missing functionality over the years [i.e., BOBJ+Crystal, Cognos+Adaytum, Hyperion+Brio] and now offer very little differentiation among core punch lists in competitive bake offs. This market will become more about sales and marketing execution [i.e., who has the best reps and message?] and product cycles.
- Product cycles are maturing -- Aside from Cognos 8 [which has been disappointing out of the gate], most of the major BI platforms don't have a major product cycle to ride in 2006 as they did the last two years
- Sarbanes Oxley comps are anniversaried -- Sarbanes Oxley compliance has been a driving force behind the uptick in demand for BI solutions. While Sarbox compliance costs aren't going away anytime soon, the BI vendors will now face 2005 comps which already included Sarbox-related growth
Open Source still won't be ready for prime-time among enterprise-class applications vendors
All apologies to SugarCRM, Compiere, and JasperSoft...but we're still several iterations away from one of these vendors emerging as a real threat at the high-end [i.e., someone capable of taking more than a few % of market share]. Software investors would do well to pay closer attention to these vendors [and other open source efforts] though, because you can be sure it's just a matter of time before one or two break away from the pack.
That's all for now [I may add some more as time permits], I look forward to hearing from everyone as to where you agree [i.e., Wood, you're Nostradamus] and where you don't [i.e., Wood, you're Nostra-dummy].
Note: At the time of this writing I and/or funds I maintain discretionary control over may have maintained long equity positions in a number of the companies mentioned but did not maintain a short equity position in any.