The software vendor market in 2008

In October 2007 I wrote an article Bye-bye Little BI which talked about vendor consolidation in the BI industry. The conventional wisdom is that the whole software industry will move in this direction with a small number (3–4) of suppliers dominating the industry.

Consolidation is the typical hallmark of a maturing industry. When innovation subsides, the big boys flatten the small players with their marketing muscle and ubiquitous channels to market. When a small software house does come up with something truly innovative, the big players could always acquire them. For example, Oracle has a run-rate of c. 15 acquisitions per annum, and boasts that it is now Oracle, rather than financial markets, which is the first port of call for a small B2B software house wanting to be acquired.

So is this the end for the small software house as we know it? Here at Bloor we talk to lots of rising star software companies wanting to make a name for themselves in 2008. What are they doing that is new and different? Can they develop sustainable competitive advantage? Have they got an independent future, or is it just a 3–5 year play before they sell up and the VCs walk away with a big bag of swag?

The action for the new small software companies is outside the firewall. Whereas big software companies are digesting their acquisitions to provide an end-to-end enterprise data management and governance solution inside the enterprise; small vendors are focused on external internet-based applications.

For example, Actuate provides better reporting for the customers of financial services companies. They are bringing wealth management to the desktop of the wealthy, rather than their financial advisors. Verix maps a pharmaceutical or insurance company’s sales performance against customer buying patterns extracted from the Web. Attentio scours blogs and wikis to extract and measure what customers feel and think about particular companies or brands. They measure customer sentiment on the web. Adify ensures that brands are represented in the “right” web sites which are frequented by the customer segments they wish to attract.

MarkMonitor looks for phishing scams, counterfeiting and other unlawful or unwanted Internet activities that could damage the brands of their customers. For example counterfeit cheap toys marketed on the Internet are a problem for the toy brands. Also MarkMonitor recently found 349 auction sites selling toys recalled by branded manufacturers for health and safety reasons.

So what are the attributes of these “new age” companies?

1. They operate a SaaS (Software as a Service) model, which is beloved by customers for its low commitment, low entry cost and fast speed to market, and by VCs for its guarantee of future cashflows.
2. They combine industry sector specialism with external internet-savvy applications.
3. They seek to manage, control and report on defined information and processes that are part of the endless sprawl that is the Internet.

These are “information services providers” that use software as a means to an end, rather than an end in itself. The ‘end’ is a potent cocktail of industry solutions, real-time information reporting from the Internet, and value-added professional services, all delivered in an intangible virtual form. This encourages customers to try and buy without the intervention of an expensive direct sales force. For example, MarkMonitor signed a large Asian bank as a customer for a six-figure deal without ever meeting them face-to-face.

The Internet will be the driver for a new generation of software vendors. In such a world the market is not maturing, it is only just beginning. So expect a plethora of new information services providers to appear in 2008. The challenge for them is to be heard above the clatter and noise on the Internet. As a result they will be using highly targeted online digital marketing techniques to build their brands and customers. Vendor marketing messages for these more complicated applications need to be more clearly articulated and crafted, so that customers “get it” and see the vendor as a trust-worthy source. Easy access to vendor information on the Internet is key to achieving this goal.

But slick marketing messages alone won’t do it. In 1996, Andrew Grove, the then CEO of Intel wrote his famous book ‘Only the Paranoid Survive’. Times have changed. Robin Saxby, the founder of ARM Holdings who produce chips for mobile phones said recently “nowadays only the innovative survive”. How true. Merry Xmas!