Consolidation in Application Software space – it is scary!
Tags: application software, Software industry, software innovation, software valuation, software vendor consolidation
Whenever I look at the applications software market, I get the scary feeling that most small and mid-sized application software vendors would be gobbled up by the larger ones. During one of my conversations with a pretty experienced and learned person in the industry, he was mentioning that there would be space for probably 10 software companies in the world in the long run.
I assumed that the ten companies he was mentioning would be Microsoft, Oracle, IBM, SAP, HP, Adobe, Nintendo, Symantec, EMC and CA. These would anyway acquire the remaining players.
The challenges that application software vendors face are:
A. There is an open source offering in every segment that you operate
B. The big players bundle your offerings as an add-on to their enterprise offerings
Either way, the software vendor would find it difficult to survive and be profitable. Essentially, you either have to be big or have a really differentiated offering that others including the big boys find it difficult to offer. This means, they either join hands with you through partnerships or acquire you to add capabilities to their offerings.
I see a lot of entrepreneurs today having acquisition as one of the key exit strategies. They even plan for it, but how successful they are when it comes to such plans are not clearly known. If you have to keep yourself away from getting acquired, then you have to be self funded or you have a differentiated offering, which is obscenely profitable. Else, you have a 50x valuation, which any of these biggies will find it obscenely pricey and stay away from it.
This form of consolidation, is it good for the industry? Good or bad, it is inevitable as big guys want to grow bigger through both organic and inorganic routes. This is anyway not the end of the road for application software vendors, as more and more companies keep coming up with differentiated and innovative offerings, which will keep challenging the established ones. They in turn, would get gobbled up and the cycle would continue.
If you have noticed, the funniest part of this post is that I have not even touched on the poster boys like Google, Sales Force etc. and that gives me hope.