Greenspan and AMR Research on innovation in enterprise software markets

Two opposing viewpoints on prospects for continuing innovation in enterprise business applications were debated at the recent AMR Research Executive Leadership Conference, and no less a personage than Alan Greenspan, former Federal Reserve chairman, contributed to the discussion.

Asked about the impact of vendor consolidation in high-tech markets, Greenspan said, "When you move away from the manufacture of physical things to conceptual products, you are in an environment where you have high fixed costs, but low variable costs."

In other words, it costs plenty of money to develop a software solution, but once done, making copies of it is relatively cheap.

"By its nature," continued Greenspan, "this kind of situation leads to the formation of monopolies, and it is a serious issue."

The real debate was joined later in the day by AMR's long-serving SVP of Research, Jim Shepherd. Despite an admittedly healthy, growing, $47-billion enterprise software market, Shepherd fears continuing vendor consolidation is stifling innovation. The top two vendors—SAP and Oracle—today capture 30 percent of the market and the top five, 80 percent.

"There are benefits in terms of de facto standardization," said Shepherd, "but what we're not seeing is the emergence of new vendors that drive innovation."

Shepherd sees at least two reasons for the contretemps: a lack of venture capital investment in new software companies, and the development and acquisition strategies pursued by the large software vendors.

"Large vendor development resources aren't devoted to innovation, but rather to entering new markets, addressing competitive threats, and moving from client/server to services-oriented architecture [SOA]," said Shepherd.

Historically, as product industries mature, brand owners tend to turn to tiered suppliers for product manufacture. But software application suppliers, said Shepherd, "aren't looking to suppliers, but are becoming even more vertically integrated. That's bad, because they aren't able themselves to build needed industry solutions, which entail unique requirements."

While the largest software vendors actively position themselves as platforms for third-party independent software vendors (ISV), "At the rate they're going, there eventually won't be any ISVs to look to," said Shepherd. "Vertical integration leads to higher costs, slower response, and less resiliency. It is not a good long-term strategy."

Looking at the reverse side of the coin, the discussion turned to prospects for market changes that would revitalize innovation.

"Over the next three to five years, software companies will deliver medium-to-large grained services," said Shepherd, "which will allow more flexibility in integrating solutions. This may create space where innovation can again thrive, and allow manufacturers to commit to smaller vendors."

While the large software vendors haven't yet articulated a position on Web services that they're comfortable with, AMR is beginning to see signs that as they move to SOA, these vendors may change how they work with partners.

Further, said Shepherd, "We do see some VCs or private-equity firms willing to back software companies that see themselves as Tier 1 software suppliers."

Shepherd sees no innovation panacea coming from mechanisms such as wikis, but rather remains convinced it takes the work of professional software developers.

Finally, in his earlier remarks, Greenspan pointed to one other important element impacting software markets. Alluding to what sounded like Microsoft Excel-based tools familiar to economists, he said, "Having invested the intellectual capital to learn those tools, I would be extremely loath to make a change now."