The software industry is fast consolidating around only a handful of dominant players: IBM, Oracle, Microsoft, and SAP in the first tier, and Hewlett-Packard, EMC, CA, and Symantec in a second, more narrowly focused one. Quibble if you want about which companies belong where, but it's clear that software is going the way of the PC, auto, lighting fixture, consumer goods, and other mature manufacturing industries: ruled by the giants.
Are we done yet? Hardly. Expect much more consolidation in the months and years ahead. What follows is a purely speculative though objective analysis on what could follow, company by massive software company.
While Big Blue hasn't spent as much as Oracle to acquire software companies over the past few years, it's in the neighborhood. Besides the $5 billion it's now plunking down for business intelligence vendor Cognos, it spent $1.6 billion on content management vendor FileNet, $1.3 billion on Information Security Systems, $1.1 billion on information integration vendor Ascential, and billions more on many smaller software companies. Since 2000, IBM has acquired more than 40 software companies.
Until recently, IBM said it would steer clear of application vendors, but the FileNet and Cognos deals reveal a refined approach -- IBM is now saying it's interested in buying apps vendors whose products are extensions of its information management offerings. "There's no fundamental shift in our strategy that says we'll be going into the business applications market," insists Buell Duncan, IBM general manager for ISV and developer relations, in an interview with my colleague Paul McDougall.
McDougall notes, however, that IBM may have little choice but to move into business apps to keep pace with Oracle, SAP, and Microsoft, which are acquiring and developing more and more pieces of "the stack." One senior IBM software executive who came to the company through acquisition told me a year ago (with apparent scorn): "Why IBM chose not to acquire business apps companies, I have no idea. That decision was made before my time."
Jason Maynard, a software analyst with Credit Suisse Worldwide, speculates that the "No. 1 sea change deal" in the software industry over the next two to four years will be IBM acquiring SAP. IBM's Global Services and vertical industry expertise would introduce SAP into many more accounts, Maynard reasons, and SAP would be freed from focusing on its NetWeaver middleware layer to concentrate on what it does best: core business apps.
Last week's Oracle OpenWorld, now one of the premier industry conferences with 43,000 customer and partner attendees, shows Oracle in both development and digestion mode. Oracle announced new database, application, and virtualization products, as well as integration products that ostensibly will help glue together the wares from some of its 41 acquisitions over the past 45 months, including PeopleSoft, Siebel, and Hyperion.
In terms of acquisitions, Oracle isn't slowing down; its $6.7 billion hostile bid for middleware vendor BEA Systems is still on the table. After the BEA saga plays out, Oracle may be done with blockbuster software acquisitions -- who's left? -- but a foray into services isn't out of the question, perhaps a deal along the lines of IBM's $3.5 billion acquisition of PWC Consulting, says one industry insider. Maynard isn't buying that one -- Oracle isn't interested in the relationship business, he says, and system integration profit margins aren't nearly as juicy and sustainable as software margins. Still, Larry Ellison may have a few surprises up his sleeve.
More so than the other software titans, Microsoft is fighting a multifront war: on the enterprise front mostly against IBM and Oracle, on the consumer front against Google, Yahoo, and the Web 2.0 barbarians, as well as on the video game console front. Microsoft once talked with SAP about merging to create a business apps powerhouse, but it now appears that Microsoft is more concerned about fending off Google. A megadeal to buy Yahoo is still a distinct possibility. Microsoft's enterprise-focused acquisitions will continue to be small scale, to augment its SQL Server, Office, Exchange, Dynamics, and other major lines.
Historically the most conservative of the Big 4 software vendors, SAP isn't likely to make any acquisitions near-term of the scale of its $6.8 billion deal to buy Business Objects. SAP won't sit tight, though. It's likely to target companies with vertical industry and narrow technical expertise. If you prefer to think grander, there's the outside chance it will go after Salesforce.com, which would make SAP more of a player in CRM while thrusting it full-bore into software as a service. Should IBM come knocking, the big question is whether SAP would be interested.