Worldwide Software Spending Down In 2001

Worldwide spending on new software grew just 6 percent in the first half of 2001, according to Gartner’s Dataquest unit, which found that economic restraint has led many organizations to put discretionary spending on hold.

The software industry’s growth rate has slowed to less than one-half of last year’s rate when worldwide software spending increased 18 percent. Dataquest projects worldwide software spending for all of 2001 to grow slightly less than 7 percent with new license revenue of approximately $77 billion.

“The impact from the events on Sept. 11 will extend and intensify the economic slowdown impacting the global software industry for the next 18 months,” said Joanne Correia, vice president for Gartner Dataquest’s Software Industry Research group. “The verticals that could have slower software purchases will include the airlines, travel, automobiles, insurance and new consumer PC segments. Software vendors may see an increase in new software spending and market hype in segments such as security, network storage and systems management and collaborative applications.”

Gartner Dataquest analysts said well-managed software vendors have reacted rapidly to falling orders and trimmed operating expenses to limit their use of cash reserves. But many vendors that were managing on small cash reserves do not appear to have reacted fast enough to trim their expense line faster than the drop in orders and revenue.

“Not only has application spending slowed, but decisions on whom to buy from have clearly shifted in favor of the larger vendors with their broad one-stop-shop portfolios and deep financial pockets,” said Tom Topolinski, principal analyst for Dataquest’s Application Software Industry Research group.

This may mean trouble for small software vendors. “Many small companies are vulnerable because they have no underlying maintenance or service revenue to provide at least some ongoing income when new license orders stop,” Correia said. “There is a significant danger of these companies becoming cheap acquisition targets or disappearing totally from the market.”

The main challenge for both large and small vendors will be to manage their expenses with enough agility to remain solvent and profitable. Earnings reports for the second quarter of 2001 performance might look as if it’s a one-time bad quarter for software vendors, but Dataquest analysts warn it could be fatal not to treat it as a strong trend indicator.

“Those vendors that have managed to build an order backlog into their business model — against which they can draw future revenue — will be more shielded from the immediate effects of this spending shortfall,” Topolinski said. “Customer value propositions will need to be highly focused on lowering their risks, on short-term ROI results and allowing contractual flexibility. Discounts, delays and customer licensing terms will all become even more key factors in negotiations.”

Research on the retail software market by NPD INTELECT found that despite continued softness in the retail computer hardware market, retail software remained stable when comparing the first half of 2001 with the first half of 2000.

In the overall software market, retail unit sales of software titles approached the 70 million mark in the first half of 2001, gaining 0.2 percent over the same period in 2000. Revenues from retail software sales improved 1.2 percent, approaching $2.8 billion.

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