The E-Business Software Weekly is a series profiling trends and developments in software and applications that support e-business, the Internet, and other electronic communication channels. Look for a new story each week in this space.
The Coming Software Shakeout
The computer software industry is suffering. It's an observation that would have been obvious to any stock market watcher throughout the first eight and one-half months of the year. But since the terrorist attacks of September 11, the software industry, like so many other sectors of the American economy, has watched bad turn into worse. And the hopes for improvement, once frail at best, now seem weaker than they have been at any point since this long downturn began.
Perhaps no firm epitomizes the software industry's troubles better than Redwood City, Calif., based BroadVision. Led by its visionary CEO Pehong Chen, BroadVision is one of the few Internet companies that was a success even before the Internet sector went crazy in late 1990s. Having essentially invented the category of "personalization software," BroadVision generated such a buzz among tech-savvy executives that virtually every major Web site owner rushed to personalize the content on their Web site, often without knowing exactly what that meant or how it could be accomplished. Over the three-year period from 1997 to 2000, the company acquired a customer roster, with its scores of household names, that would have been the envy of any B2B software firm.
Keep in mind that BroadVision was no wispy wonder like so many hundreds of Internet startups that hoped to make billions through Web advertising or some equally speculative form of Internet alchemy. BroadVision, in fact, was a rarity among Internet firms in that it actually managed to turn a profit. And the company's million-dollar-plus, industrial-strength software solutions satisfied a real need in corporate marketing departments by automating a proven, decades-old marketing technique: targeting advertising to customers based on demographics, geography, buying history, and other relevant factors. BroadVision's software thus made it possible for Web site owners to offer each site visitor a unique Web experience tuned to their specific preferences and consuming patterns, with the hope that this personalization would boost sales, customer loyalty, and site visitations.
And it worked--for a time. But then the bottom fell out. Although BroadVision, a member of the prestigious Nasdaq 100, had done a better job than most Internet software vendors in diversifying away from failing dot-com customers, even its blue-chip customers began in the second half of 2000 to slow their spending on BroadVision's pricey offerings. Investors' reaction was predictable. After trading at more than $90 per share in split-adjusted terms in March 2000, BroadVision's stock plunged into the 30s and 40s throughout the rest of 2000, then slipped below $10 per share during February 2001, less than a year after its stock price had reached its lofty peaks. And the slide wasn't finished. By mid-September, the company's stock was trading for less than a dollar per share--saved from consignment to the ghetto of the over-the-counter market only by a Nasdaq decision to suspend until January its policy of "de-listing" companies whose stock had spent more than 30 straight days in the sub-dollar range.
IT Retrenchment
Although its long fall is among the most dramatic experienced by Internet companies (due in part to the company's one-time strength and stature), BroadVision is hardly alone. In fact, by the end of last month, the stock of a startling 15% of Nasdaq's occupants had fallen to less than a dollar per share, including (like BroadVision) seven members of the Nasdaq 100. In the past two weeks alone, Exodus, once among the most respected of Web hosting companies, filed for bankruptcy. And Excite@Home, the nation's leader in providing cable-modem Internet connectivity, did likewise. These are not fly-by-night companies, mind you, nor are they companies (like Pets.com and Living.com) that, despite huge bank accounts and exceptional execution, discovered that there are some businesses for which the Internet is simply not well-suited. Rather, Exodus and Excite@Home, like BroadVision, are solid companies with proven technology and an established customer base. They should have become enduring institutions.
The fact that they--and scores of other companies like them--now find themselves in desperate straits worries a number of business leaders and analysts alike. Among them is Scott Herhold, technology and finance columnist for the San Jose Mercury-News. "Get ready for repercussions" of the September 11 terrorist attacks, he writes in an October 1 column. "If your company sells a product that deals with security--say, firewalls or data storage--you're in better shape than if it deals with more optional software like e-commerce or customer management." Of course, "that's not to say that any software company is in terrific shape. The attack just happened to come in the last month of the third quarter." Since typically 50 to 60% of software sales occur in that final month, he warns, "there's a good possibility that quarterly revenue will fall off a cliff."
Other observers are equally pessimistic. Herhold describes a presentation to venture capitalists in Silicon Valley in late September by Gene Munster, an analyst for U.S. Bancorp Piper Jaffray. Munster had already notched down third-quarter revenue estimates for the software companies he covers by 7%, but he sees even more troubling months ahead. While firms that provide security and related software services will see their markets expand dramatically, he predicts, they are likely to do so only at the expense of other software firms. Amid current economic conditions, he says, "for security to grow at 10 to 15% a year, it needs to draw dollars from other areas."
The upshot. Chris Shilakes, an analyst for Merrill Lynch who covers a variety of software firms, believes that "there will be more pressure than before on companies that do business-to-business software or sell software that lets companies categorize their customers." As reported by Herhold, Shilakes also forecasts that "established players, which can draw from existing banks of customers, will be in better shape than new software companies that will be hampered because they must send out their sales forces by airplane." Concludes Shilakes: "The budgets were tight to begin with and, after the World Trade Center attacks, you're dealing with companies that are undergoing even more significant layoffs. So in this environment, it's unlikely that additional money is going to be spent on information technology."
Rethinking Software's Benefits
A dark assessment indeed--but, unfortunately, one that is probably not far off the mark. If solid and once-thriving companies like BroadVision, Exodus, and Excite@Home can be brought to the ground, what hope is there for companies with less stature or a more limited track record? Or, viewed from a more ominous perspective, what other software giants can we expect to fall in the months ahead?
In an economic environment as uncertain as the current one, it is difficult to see the future with any degree of clarity. The stock declines and collapses of recent months could be a mere foreshadowing of losses to come, with some venerable names--say, a major computer maker or telecommunications company--potentially joining the ranks of the fallen giants. Or perhaps struggling companies like those noted above, which still possess a number of fundamental strengths, might bounce back to life if the economy recovers sooner than most analysts forecast. The San Jose Mercury-News' Scott Herhold, for one, is not terribly sanguine. He notes that, the more you think about it, "the more the September 11 attacks look like a bad fracture of the leg in the financial world. That's to say that American business will eventually heal. But its stride and pace will never be quite the same."
Herhold is almost surely right. Technology and business analysts had already accepted the fact that the Gold Rush Internet days of the late 1990s had been banished forever to the history books. But now it appears that the entire software industry may be on the verge of a major reworking. Even before the September 11 attacks, the personal computer industry's 20-year rise seemed to have reached a plateau, with the market saturated and demand for ever faster and more powerful machines starting to slake. Additionally, many of the most vaunted technologies of the 1990s, from Internet television to digital convergence to wireless commerce, remain in a growth-stunted infancy. And now even once secure technologies, like personalization and customer relationship management, seem to be inspiring more questions than curiosity. Where does it all lead?
The first development we can expect, as many of the analysts cited above indicate, is a winnowing of non-essential technologies, particularly those aimed at delivering business results previously beyond enterprises' pre-Internet technical capabilities. This course of events has already taken place among Internet offerings. For instance, a variety of interesting Internet applications, ranging from Web-based calendaring to online news tickers, proliferated as standalone services in the late 1990s, then were almost all either subsumed into larger sites or services or disappeared altogether, with only a mere handful remaining as independent entities. These applications vanished not so much because of any design or marketing failure, but simply because the marginal benefits they delivered were not great enough to justify their cost (which, oftentimes, was only a maintenance cost, since many of the services were free).
In the business software space, vertical-sector marketplaces and application service providers had already begun to crumble in large numbers long before the events of September, again primarily because they proved unable to deliver significant benefits to their customers. Other technologies, like personalization and customer relationship management--whose developers represented some of the Internet's earliest and most spectacular successes and whose benefits have long been taken for granted--are also being threatened by the coming software shakeout. Such technologies undeniably add power to businesses' marketing and sales efforts, but the magnitude of that value is increasingly being called into question. Consider that corporations' marketing and advertising campaigns prospered quite nicely for decades with relatively limited targeting and essentially no personalization. In view of the intensified corporate belt tightening, the cost and complexity of personalization and customer management systems has caused both marketing and IT managers to take a closer look at the systems' presumed benefits. All too often, these managers are finding less there than originally assumed, causing many to rethink the entire business case for technology-centered marketing.
Searching for Cost-Effective Solutions
In other circumstances, such as those involving core business activities like sales management and accounting, the value proposition for businesses is clear and the advantages of computer software technology indisputable. In such cases, costs rather than benefits are likely to be the determining factor in a software deployment decision. At the high end, therefore, look for an increasing number of expensive ERP and supply chain management projects to be placed on hold in coming month. Although these solutions offer significant operational benefits to the companies that employ them, they can cost millions of dollars to build and take years to complete. Like would-be homebuyers waiting for a jittery market to settle down, large companies are likely to take a "wait and see" attitude toward such massive IT projects, making do with more traditional if less operationally robust management systems for the time being.
General e-commerce vendors are apt to find their markets drying up as well as the bloom on the e-commerce rose continues to fade. Beyond the notable dot-com failures of the past year, a number of mainline retailers and manufacturers, like Ace Hardware, Zany Brainy, and Levi's, have also closed down their online stores (although Zany Brainy promises to reopen at some unspecified point in the future). Other companies, finding sophisticated proprietary e-commerce ventures too expensive, have opted to partner with one-time competitors. Following last Christmas season, for example, Toys ŚR' Us, the nation's leading toy retailer, shuttered its successful but costly e-commerce site and partnered with Amazon, which now sells Toys ŚR' Us inventory under a co-branded toy site. More recently, Borders, the country's number two brick-and-mortar book retailer, pulled the plug on its struggling e-commerce site and now sends all traffic to a co-branded Amazon/Borders Web site.
For a great many other companies, partnering or doing nothing may not be viable options. Facing stringent budget limits, therefore, these firms are likely to take one of two paths. One will be to ally themselves with a proven solutions vendor whose experience and client base maximizes the probability of success and minimizes the costs of the necessary custom software development. Established vendors like IBM, with 20,000 e-business engagements under its belt, are in perhaps the best position to benefit from the new risk-averse mindset that has begun descending upon corporate IT departments and executive suites, while less battle-tested firms risk facing an even more skeptical client base than before. Indeed, the ranks of e-commerce consultants have already started to thin, with one-time market leader marchFirst (formerly US Web) recently closing up shop and second-tier players like US Interactive filing for bankruptcy and becoming mere shadows of their former selves. As their client base continues to shrink over the next six to twelve months, other e-commerce consultancies are in danger of disappearing as well.
A second course likely to be pursued by companies needing new software to support business-critical activities will be to turn to Web-shared services operated and hosted in a utility-like fashion and offered to customers on a subscription basis. By minimizing in-house hardware, networking, software, and technical support requirements, these Web-shared services virtually eliminate startup costs for such key business services as payroll, accounting, and sales management, while reducing ongoing costs to a fraction of those associated with in-house software solutions or ASP-hosted software. The appeal of Web-shared services can already be seen in the emerging match-up between Siebel Systems and Salesforce.com in the customer and sales management domain. Siebel has long been the market leader in this space, and for good reason: it offers a breadth of sophisticated, highly capable applications that have enabled many of its customers to significantly improve their sales and customer retention results. But the software is also expensive and can be difficult to install and maintain. By contrast, Salesforce, which offers many similar capabilities, is an online service that requires no hardware or software and costs only $65 per user per month. Cash-strapped companies may increasingly find the Web-shared services concept embodied in solutions like Salesforce's increasingly compelling, to the detriment of more traditional software vendors.
A Deep and Abiding Belief
Confronting this gloomy landscape, software makers of all stripes have ample reason to be concerned. But these companies also can do much on their own to improve their fortunes in the years ahead. After all, even in the most desperate economic times (a label for which the current situation hardly qualifies), millions of companies continue to prosper. There is no reason why many of today's software leaders should not be among them, an outcome they can promote by following a few prudent steps:
• Focus on cost-efficiency. In an era of belt-tightening, corporate managers often adopt the cost-efficiency mantra with almost religious zeal. Because IT projects are typically viewed as cost items, they are usually among the first to feel the budget knife. Software vendors would be wise, therefore, to retool their business cases to demonstrate the cost-efficiencies offered by their proposed solutions. To be successful, though, such cost-efficiencies need to be framed in terms that are concrete, specific, and relevant to customers' needs. Vague adjurations to the effect that "our software will save you money" are not likely to win many listening ears--nor sales.
• Develop new pricing models. The days of million-dollar-plus software sales are largely over, at least for now. Companies with expensive software solutions--no matter how worthy their offerings nor how beneficial their results--risk more than ever having the door politely shut in their face. To the extent they can afford it, software companies would be well advised to minimize initial costs and fixed long-term customer commitments and often more modular, service-based pricing. While short-term revenue generation is important, long-term survival is even more so. Since only two or three companies are likely to survive in each category, the "winners" are apt to be the firms not just that earn the most money, but that simply endure until the next recovery is in full swing.
• Avoid the pack. When the B2C Internet sector collapsed two years ago, many of the sector's key players adopted the prevailing pack mentality and rushed to "reinvent" themselves as B2B companies, only to fail again this year and last when the B2B market itself began to wither. The advice often given to writers--write what you believe, not what you think the audience wants to hear--is therefore just as applicable to software companies. Such firms will be most likely (though hardly guaranteed) to succeed if they develop and market what they believe in, not what the analysts tell them is "the next big thing."
Unfortunately, no matter what they do, a great many of today's software companies will not be around when the calendar turns to October 2002. But a great many others, if they adapt, are destined not only to still be in business, but to be prepared to thrive in the next recovery. Despite its current troubles, Pehong Chen's BroadVision is likely to be one of them. Chen spent much of the late 1980s and early 1990s building an interactive television company that, despite great promise, never achieved much success. Rather than giving up or continuing to run headlong down a dead-end path, however, he changed course--creating a software company, not that analysts told him was the market's next winner, but one in which he had a deep and abiding belief. The result was BroadVision, one of the Internet's greatest success stories--a success achieved despite early predictions that the chancy new company would never find a market.
Now Chen and hundreds of software executives like him must revise their plans and pricing and projections yet again to account for a dramatically changed--and dramatically more wary--corporate market. Which of them will become the survivors, the leaders of the New Internet? A prediction: those that are working right now to refashion their companies and their offerings, fueled by a deep and abiding belief in their own vision of the next big thing.
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