Software: Expect The Giants To Stay Sluggish

-- Purchasing decisions are being delayed because of Sarbanes-Oxley and Microsoft -- Open source is going after niche business and putting pricing pressure on the titans

You'll have to pardon Marc Fleury if he's sounding awfully pleased with himself these days. Just three years ago, his company, JBoss Inc., 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 billion, predicts Gartner Inc. (IT ) 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 Corp.'s (MSFT ) 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system until at least 2006 have made some software buyers reluctant to purchase anything new, for fear it will be outdated when Microsoft finally delivers.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.

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 million, this year. Sure, it's a tiny market when compared with the $11.8 billion database-software market, which is expected to grow just 2% this year. But big companies such as SAP (SAP ) and Computer Associates International Inc. (CA ) are taking advantage of it. Likewise, security software spending, dominated by Symantec Corp. (SYMC ) and computer networking giant Cisco Systems Inc. (CSCO ), is projected to increase 13%, to $5.6 billion.

Analysts expect sector leaders like Microsoft, Oracle (ORCL ), 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 Inc. (CRM ), which rents customer management software like a service over the Internet, and Red Hat Inc. (RHAT ), which distributes a version of the Linux open-source operating system.


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 Inc. The Cupertino (Calif.) startup is tackling the industry giants that sell systems for customer relationship management. Likewise, Sourcefire Inc. in Columbia, Md., 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

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