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Editor's column |
The Maturity Effect |
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The software industry is showing signs of maturity, technology-wise and business-wise. Let’s look into the consequences. The beginningIt’s been almost 60 years now, since the introduction of the UNIVAC, the first commercially available electronic computer from Remington Rand (1951), and the IBM 701 two years later. As soon as computer hardware became available, a market for computer software was created.And a good market it was, especially when the number of operating systems had decreased to allow advantages of scale to kick in for software publishers. Disruptive growthOver time, we’ve seen many disruptive innovations shake the software industry, I am naming a few that are on top of my mind:
By 2010, we’ve had almost ten years without such disruptive technological innovations. And as technology matures, so does the business. When looking at the average growth figures of the Top 100 software companies in the world, they clearly have been growing double-digit (over 10%) in most of the last ten years, making it look like a growth industry. But if you look closer, most of the revenue growth of the top companies comes from acquisitions, it’s not organic growth. The top companies consistently swap cash for growth by buying smaller software companies. Organic growth is more in the range of 3-4%, and comes mostly from price increases. So what does this mean for the foreseeable future? Customer loyaltyAccording to economists, high prices call for competitors with cheaper substitute products. However, the software market is one in which customers are very loyal; once they have started to use something, they continue using it. Even when it’s obsolete, they have a hard time separating from it. Example: IBMs hierarchical IMS database is still being used, even though relational databases have been on the market since 1979.MaturityIn this environment with modest technological change, and little customer ‘drift’, software companies can enjoy their maturity for a long time ahead, and even lean back a bit. Predictable and recurring software maintenance revenues bring in most of the cash – year after year.What to do with the excess free cashflow? Buy another company! |
ABOUT THE EDITOR
Balder Verberne brings a fresh, long-term business perspective to the tech world in his column. He is the editor of the Software Top 100 since 2003.
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