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Industry Outlook 1999 -- INFORMATION

Software

As the world hurtles toward the new millennium, the mood in the $154 billion global market for packaged software is swinging between euphoria and controlled panic.

William T. Coleman III has witnessed the swings close-up. Last fall, the chief executive of BEA Systems Inc. was making money hand over fist, licensing his transaction-management programs to the likes of AT&T, Northwest Airlines, and Motorola. Then, in mid-November, some key customers postponed purchases. In a single day, Wall Street knocked BEA's shares down from 26 to 14, vaporizing nearly $1 billion in value. All that BEA's customers had done was whisper Y2K. "We had to lower our growth estimates because customers were diverting their efforts to deal with the bug," Coleman recalls.

Customers swear by BEA. "There are very few products in the market I've been as happy with," says Debra J. Chrapaty, president of E*Trade Technologies, an arm of online invester E*Trade Group in Palo Alto, Calif. But such testimonials can't stand up to millennium-bug fears. Last fall, investors alternately inflated and pounded the shares of top companies such as SAP, PeopleSoft, and J.D. Edwards--mainly on speculation about Y2K. Some of the schizophrenia will carry over into 1999, warns Bruce M. Richardson, vice-president of market watcher AMR Research Inc. "It will be like Alice in Wonderland: `Curiouser and curiouser."'UPGRADES GALORE. By summer, however, many large companies will be looking beyond Y2K. And the prognosis is good. All told, says International Data Corp. (IDC), the world market for packaged software should top $154 billion. That's a gain of 14%, slightly ahead of growth in 1998.

In the sector of enterprise software--large packages that run corporate operations--AMR sees revenues growing 32% overall, to $9 billion. Big database programs from Oracle, IBM, and Microsoft will get a boost from companies rushing into electronic commerce, says Bear, Stearns & Co. analyst Richard F. Scocozza. He figures Oracle Corp.'s sales will grow 24% over 1998, to $9.9 billion.

Microsoft Corp. will account for a healthy chunk of the growth in packaged software, whatever the outcome of its legal battle with the Justice Dept. With several important upgrades in the pipeline, Microsoft should see a 26% increase in net profits, to $7.4 billion, on a 22% leap in revenues, to $19.5 billion, according to Christopher Galvin, an analyst at investment banker Hambrecht & Quist LLC. In November, Microsoft launched SQL Server 7, its first relational database aimed at the largest corporate applications. This year it will ship Office 2000, a successor to its wildly successful Office97 suite of business programs.

The most keenly awaited upgrade, however, may not materialize in 1999--and that's just as well. Microsoft's new operating system for office servers, formerly called Windows NT5 and now rechristened Windows 2000, is a powerful but complex system that will go head to head with Unix software, running on Sun Microsystems Inc.'s servers. But with resources stretched thin by the millennium bug, few potential customers would relish taking on Windows 2000 before 2000, according to Gartner Group Inc.

If Microsoft has its sights on enterprise applications--"back-office" programs dominated by SAP and PeopleSoft Inc.--it won't make headway before the new century, either. Lacking a strong contender in this category, Microsoft could try to buy its way in. "But it would be a challenge to get a major acquisition past the Justice Dept.," says H&Q's Galvin.

Elsewhere, however, the current merger wave will gain force. Tasty targets include i2 Technologies, Manugistics, and SynQuest, which sell analytical programs that large companies use to forecast product demands and coordinate deliveries from suppliers. "Enterprise-software companies like SAP, which have only made small acquisitions, may set their sights higher in 1999," says AMR's Richardson.

Also up for grabs will be the many small companies that build tools and applications for commerce on the Internet. Forrester Research Inc. reckons that demand for E-commerce software will surge 163% in 1999, to $619 million. Software companies that don't already provide Web connectivity--regardless of the type of software they sell--will have to acquire the capability fast.

This goal is on everyone's mind--especially in the booming niche called "customer-interaction software." These products help companies automate interactions between their customers and a help desk, call center, or other front-office operations. Each time a customer gets in touch with the company, such programs automatically collect information and add it to a database, which becomes a gold mine for anticipating customer needs and offering instant satisfaction.

Three years ago, top players such as Vantive, Remedy, and Siebel had just begun to link hot-selling programs to the Net. This year, they'll try harder, says Christopher Pavlic, an analyst at Aberdeen Group Inc. He pegs the market for Web-based customer-contact software at $750 million--triple 1998's figure.

The Internet is transforming the retail market for PC software in even more radical ways. "If you bought a computer three years ago," explains Chris Le Tocq, Dataquest's principal software analyst, "your experience was defined by software purchased in the store." Today, he says, you connect your PC to the Web and you may never need to purchase additional software. Instead of buying CD-ROMs, you subscribe to a Web site that lets you play games, compare mortgage rates, purchase stocks, or update your address book and calendar--all online.WEB FEAT. In part because of competition from such Webware, plus intense price-cutting at conventional outlets, retail sales of PC packages will climb just 12.8%, to $5.3 billion, says Ann Stephens, president of market researcher PC Data Inc. That relatively sluggish growth explains why Microsoft now sees its future in the fast-evolvIng "subscription" model. Microsoft is pumping $200 million into long-distance carrier Qwest Communications International Inc. so that together the two can create a business managing and updating key applications for mobile executives--mail, database access, and portfolio management--all over the Net. Yahoo! Inc. is chasing the same model. Using technology developed by Motorola Inc.'s Starfish subsidiary, Yahoo! will let consumers synchronize data on office and home PCs, as well as on portable devices.

Two categories of software will get a big boost as the subscription market unfolds. The first is "cross-platform" software. Programs written witH Sun's Java, for example, can run on almost any computer. IDC says this class of software will grow more than 100% in 1998, to about $500 million.

The other category is known as application-integration software, or just "middleware." These programs were recently branded on the imaginations of techie males by provocative ads featuring a lightly clad Katrina Garnett, CEO of CrossWorlds Software Inc. Middleware is aptly named. It glues together disparate functions within an enterprise, regardless of their physical locations. According to researcher Yankee Group Inc., the application-integration market will jump 41% this year, to about $2.4 billion.

Middleware contenders range from familiar suppliers such as NCR, IBM, and Fujitsu to CrossWorlds, TSI International, Neon Software, and BEA Systems. Despite BEA's yo-yo experience last fall on the stock market, CEO Coleman is confident that managers, unlike investors, won't be addled by the approaching millennium. So the middleware market could hit $3.5 billion in 2000. But anything is possible when you pass through the looking glass.By Neil Gross in New York, with Steve Hamm in San Mateo, Calif.Return to top


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