Software: Expect The Giants To Stay Sluggish

You'll have to pardon Marc Fleury if he's sounding awfully pleased with

himself these days. Just three years ago, his company, JBoss, was a shoestring

operation being run out of his in-laws' Atlanta garage. Today, tens of

thousands of businesses have downloaded its software-used for running Internet

applications. JBoss is part of a new generation of companies taking software

built in the open-source method into virtually every corner of the industry. In

the process, they're making even the mightiest of old software titans nervous,

since open-source software is typically much less expensive than what

traditional companies sell. "Our business model is completely

disruptive," boasts Fleury.

Disruption is the last thing the software industry needs. Due to slack

demand, the glory years of double-digit growth just keep on receding in the

rearview mirror. Sales of new software licenses and technical support, ranging

from the antivirus software that consumers pick up at the local electronics

store to giant financial systems for multinational companies, will increase just

6% in 2005, to $152 bn, predicts Gartner. That's slightly higher than in the

last couple of years, but it doesn't compare to the roaring 15% growth rate of

the late 1990s.

Several

factors are combining for yet another tough year. Delays of Microsoft's next

PC operating system until at least 2006 have made some software buyers reluctant

to purchase anything new, for fear it will be outdated when Microsoft finally

delivers. And the time and expense of complying with Sarbanes-Oxley financial

reporting regulations is putting some big projects on hold. "Compliance

issues are the biggest disruption to a return to normal spending," says

Joanne M. Correia, an analyst at Gartner.

Spotlight 2005 Prospects

Of course, some companies benefit from the spending shift. Sales of software

that helps companies deal with paperwork and business processes-a must-have in

the new regulatory environment-are forecast to increase 15.5%, to $875.4 mn,

this year. Sure, it's a tiny market when compared with the $11.8 bn

database-software market, which is expected to grow just 2% this year. But big

companies such as SAP and Computer Associates International are taking advantage

of it. Likewise, security software spending, dominated by Symantec Corp. and

computer networking giant Cisco Systems, is projected to increase 13%, to $5.6

bn.

Analysts expect sector leaders like Microsoft, Oracle, SAP, and Symantec to

continue to gain share against second-tier competitors. At the same time,

though, tech buyers looking for innovative designs are handing their business to

groundbreakers. These newcomers include salesforce.com, which rents customer

management software like a service over the Internet, and Red Hat, which

distributes a version of the Linux open-source operating system.

In Frugal Fashion



At one time, it looked as if the effect of the open-source phenomenon on the

software industry would be limited to Linux and a handful of other programs. But

new companies are going after parts of the industry many felt would be untouched

by open source. Take SugarCRM. The Cupertino (Calif.) startup is tackling the

industry giants that sell systems for customer relationship management.

Likewise, Sourcefire in Columbia, is selling software that detects hackers

trying to break into computer networks.

Open-source software is putting major pricing pressure on traditional

software suppliers. It's typically delivered in two different ways: One is

free, with the company making its money by offering maintenance and support.

That's what JBoss does, giving away its Net software and charging for

services. The other is offering one version of the software for free and

another, more capable version for a license fee. That's the business model of

Sourcefire and MySQL, a company that sells an open-source database. Either way,

the open-source model allows them to do more with less money. And in this age of

tech frugality, that approach seems guaranteed to win not just friends but

customers-and bug the heck out of the industry's giants.

By Jim Kerstetter in San Mateo, Calif., with Steve Hamm in New York

in Dallas in BusinessWeek. Copyright 2005 by The McGrraw-Hill Companies,Inc