“Such are the advances in sales of the software sector that the post recession flat economy merely stunted growth in the market. 2014 saw a return to double-digit growth and the continued challenges of corporate cost control and adding value in the enterprise sector will further stimulate the market over the next few years. Software as a Service is developing into a major quantum change in the market, offering lower initial capital expenditure to the corporation, and security against both technological capability advancements in software and potential growth in the corporation. At the same time, it offers secure long-term income to the software industry.”
– Terry Leggett, Senior Analyst

The market

The software market is stimulated by the ever increasing capabilities of products, combined with the constant drive by businesses to drive costs down while adding value to the product or service. Even in the stagnant market conditions that followed the recession, there has been a notable growth in software sales. The major constraint to sales is procrastination as customers wait to see what the next development can bring, but this ‘wait and see’ mentality is being replaced by the rapid development of Software as a Service (SaaS), which is expected to ultimately account for as much as 60% of the market.

Figure 1: Development of the UK market for software, 2010-14 actual and 2015-19 forecast
(£ billion)
[graphic: image 1]
Source: MBD and trade estimates and forecasts

The market can be segmented by type of software and is led by applications, with operating systems accounting for just 6% of the total:

Figure 2: Segmentation of the UK market for software, 2014
(% by value)
[graphic: image 2]
Source: MBD and trade estimates

The overall software market is dominated by business usage, where a wide variety of products are significant:

Figure 3: Segmentation of the UK market for enterprise software, 2014
(% by value)
[graphic: image 3]
Note: CRM = customer relationship management

DCC = digital content creation

ECM = enterprise content management

ERP = enterprise resource planning

PPM = project portfolio management

SCM = supply chain management
Source: MBD and trade estimates

An analysis of the market by end use illustrates that while computers and software are now almost ubiquitous, there are major variations in the utilisation of software, with disproportionately high importance in sectors, such as information and communications, insurance and finance and the retail sector. Manufacturing also remains an important market, while software utilisation in the hotel and restaurant, and agriculture and construction sectors remains low.

Figure 4: Segmentation of the UK market for software, by industry application, 2014
(% by value)
[graphic: image 4]
Source: MBD and trade estimates

In 2013 and 2014, major market developments have tended to focus on trends involving cloud, mobile technology and big data.

Market factors

Software sales have continued to strongly outperform average business development in the UK in the post recession period, largely reflecting the continued efficiency drive by industry combined with a quest to develop value-added opportunities, and the major role that software plays in this development.

Figure 5: Development of enterprise software sales and total asset investment, 2009-2014
(Index 2009 = 100)
[graphic: image 5]
Source: MBD and trade estimates, ONS

Keeping pace with new trends, such as mobile, big data analytics and the move towards cloudbased systems, has brought new and more challenging issues to the forefront of application development.

Software vendors are continuing to add new functionality to their software as they look to become a “onestopshop”, providing all the functionality an organisation requires. This increased functionality, combined with changes in the flexibility of software, is resulting in a slowly increased share of the total software and IT market:

Figure 6: Development of software sales compared with the SITS market, 2010-2014
(£ billion)
[graphic: image 6]
Source: MBD and trade estimates

There has been a quantum shift in the strategic targeting of markets, with operators traditionally serving the largest enterprises moving into the middle market. The opposite trend has also occurred, with vendors that have traditionally focussed their applications towards smaller organizations moving products upward to target large enterprise markets.

A further market driver is the increasing functionality of operating systems, and their launches tend to be associated with major re-writes and updates of existing software to utilise the new operating system’s functionality. Instrumental in this ‘product obsolescence’ are releases of major operating systems, though the impact of such obsolescence may now serve to further the development of SaaS.

Companies

Globally, software companies have traditionally been highly acquisitive. Smaller innovative companies tend to create new markets continuously, while the larger traditional IT vendors tend to enter such markets through acquisitions. In 2013 and 2014, following wider market trends, software corporate acquisitions have focused on cloud computing, social media, database and technology and analytics.

In the past, the largest software vendors such as Oracle and SAP targeted the very largest companies as their prime market. However, the recent marketing activities of such vendors have moved to higher volume (but lower individual price) mid-sized companies. There have been a variety of strategies adopted, including offering scaled down, preconfigured versions of their applications, trying new methods of implementation, pursuing new distribution channels to sell and implement their software, and acquiring midmarket software companies.

At the same time, software vendors that have traditionally focussed their applications towards smaller organizations are moving products upward to target large enterprise markets. These vendors have significantly improved functionality and scalability, allowing smaller companies to grow without having to change systems.

Software companies have a variety of industry classifications to describe themselves, and there are major differences in their percentage changes in what is a highly volatile industry. Very rapid growth is a realistic achievement and can result in the sale of operations to one of the global industry giants.

Figure 7: Changes in the structure of software sector, 2009-13
(% changes in number of businesses)
[graphic: image 7]
Source: MBD analysis of government data

What we think

Software is a unique market in that the expression “clouds on the horizon” is a strong positive observation. No longer are those clouds on the horizon, they are here now, and will continue to represent a market with the potential to account for some 60% of all software sales. At the same time expenditure on business intelligence has been a high priority for companies in the past few years, but there has been a degree of procrastination with the effects of the stagnant economy that followed the recession. This has been partly fuelled by the limitations on investment capabilities, but is also a reflection of the delay encouraged by waiting for software developments to be furthered. The emerging data-as-a-service trend is likely to change this conceptual thinking, allowing corporations to constantly benefit from improvements in software capabilities and therefore reduce purchase obstacles. The other major trend that has become established in the marketplace is that enterprises will focus on providing mobile users with access to data and data applications.

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