01/11/99
Business Week
Page 96
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.
Positives and Negatives
POSITIVES
-- Electronic commerce will fan sales of Web-site tools, billing software,
and other Internet applications -- Companies selling enterprise
applications should see sales grow about 30% or more
NEGATIVES
-- Asia's slump could stall global expansion by U.S. software startups --
Y2K will sap corporate information technology resources, diverting funds
from new, cutting-edge applications |
