Regular readers here likely has seen a few of my posts before regarding my entry in the Marketwatch.com Columnist contest. It is a 3 round setup with the final winner (chosen by Editors) getting a freelance writing contract. My first article was about the new new Asian emerging markets, specifically focusing on the Philippines. That article got me past the 1st round. The second article was about how to invest in the smartphone/tablet industry without investing in the companies everyone already knows, focusing on the various components and suppliers for those electronics.
I was pleasantly surprised by the 2nd round win. The setup for the 2nd round was 3 voter pickers and 3 editor picks out of 26. With some obvious campaigning from the top vote getter's, I was out of the voting game. However, the quality shined through and I made it through via editor pick which is a higher distinction than votes in my opinion.
That sets me up for the 3rd and final round and my article is about the other side of the technology industry. While everyone talks about the new shiny looking piece of product, few really look at the software side, the part that everyone interacts with. Below are some excerpts from my article, hit the link for the full article and help vote for me!
See my article on Marketwatch.com here.
For all the stories about declining PC sales, rise of smartphones, Web 2.0, and Cloud computing, an often missed discussion is on the other side of the industry: the computer software business. It’s an important omission as hardware without software is just an expensive paperweight. What differentiates a Windows PC from a Linux computer or Android phones vs iOS? Though there are some differences in design and features, in the end, software is king.
Looking through, software can be broken down into three main categories: enterprise (logistics, automation, corporate productivity, etc), infrastructure (OS, databases, cloud, etc), and general consumer software (videogames, media players, apps, etc).
In general, enterprise software has been strong as business productivity needs have only grown as the world, supply chains, and logistics become more and more complicated. The enterprise software market was expected to hit $267 billion in 2011 and projected to grow 10% for 2012. Of this market, resource planning is the largest component at $23 billion. The enterprise software is dominated by SAP AGwith sales of $10 billion (SAP: +35% YTD) in 2009 followed by Oracle Corp. at $6 billion (ORCL: +21%). The next two: Sage (SGE: +3.4%), and Infor (privately held), two lesser known players. For enterprise software, emerging markets are a key source of growth as many foreign companies are looking to catch up to the U.S. in productivity. IDC predictions peg emerging markets with 14% IT spending growth, three times the developed markets at 4.5%.
Infrastructure software has also been strong, largely driven by cloud computing. As per IDC, cloud spending is estimated to hit $60 billion in 2012, growing 26%. Cloud software management is expected to grow 62%, following 91% in 2011 and 109% in 2010. Infrastructure software is a slightly more crowded market than enterprise with companies such as Microsoft (MSFT: +8.7% YTD), IBM (IBM: +5.1%), Oracle (ORCL: +21%), VMWare (VMW: +2.2%), Google (GOOG: +4.5%) and others all in play. However, the two most famous names in Cloud are Salesforce.com Inc. (CRM: +44.5%) and Amazon.com Inc. (AMZN: +37.6%). However, with cloud revenue figures not publicly available and astronomical PE ratios, assuming it had earnings (see AMZN, CRM), jumping in the cloud today is a much more risky venture than growth figures would indicate.
For many readers, the most visible side to the industry is the consumer software side which you see every time you use a device. It’s also the most varied, comprising videogames, antiviral security, media and content creation, web activities, apps, and etc. Interestingly, consumer software is by far the weakest performing. There are several underlying reasons for this shift in consumer software. A simplistic way to understand this market is to ask yourself, when’s the last time you paid for a web browser? DVD or MP3 software? Email?
While great for consumers, it’s a different story for companies and investors with now outdated business models. The rise of open source software and the spread of programming is a strong trend that has affected consumer software in the past and potentially enterprise and infrastructure software in the future (see Rackspace).
There are however still several companies and sectors in the consumer side that has not changed. Videogames are still based on the old model. However, a quick look at the two software giants there, Electronic Acts Inc. (EA: -42.2%) and Activision Blizzard Inc. (ATVI: -12.4%) indicates longer term issues. Casual mobile games, escalating production costs, and slow core market growth are pushing changes in the gaming industry and many incumbents are likely to suffer. EA as an example has had negative yearly profits since 2008. Other companies such as Symantec Corp. (SYMC: +17.5%), maker of Norton Antivirus, are still profitable but will suffer the same competitive issues of free alternatives like MicrosoftSecurity Essentials. However, some consumer companies are still doing well such as Adobe Systems Inc. (ADBE: +20.3%) and Autodesk Inc. (ADSK: +6.5%) due to their focus and entrenchment in the professionals market. Long term however, these companies all face the same issues that has pushed other consumer software companies out.
Read the rest at and vote here.