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Is software dead as a growth industry?

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PALO ALTO, California (Reuters) -- In the midst of Silicon Valley's biggest downturn in years, two of the industry's biggest names have taken opposing views on whether the software business will return to life.

Larry Ellison, captain of the Valley's biggest software shop Oracle Corp., kicked off the great debate at the start of the year by declaring that the industry's best days are over.

Ellison, known for his outspoken views, was downcast in January as he told Barrons weekly newspaper that high-tech's mind-boggling growth spurt is over -- never to return again.

"It's (Silicon Valley) not coming back ... The industry's maturing. The Valley will never be what it was," Ellison said.

Tom Siebel, Ellison's biggest Silicon Valley rival and CEO of Siebel Systems Inc., has shot back with the view that the industry is poised to start growing again soon.

Siebel made his upbeat remarks in a strange setting -- a conference call reviewing quarterly software sales that dropped to half what they were a year earlier. Despite the fall in sales, he declared: "This is a growth story."

Siebel isn't alone in seeing better days ahead.

"I don't agree with Ellison that growth is dead," said Sanford C. Bernstein analyst Charlie Di Bona, who argues that high-tech is not some monolith lumbering down one path.

The growth figures could be more modest than during previous spurts like the dotcom era, but Di Bona said some software makers still have double-digit, or better than 10 percent, growth in their futures.

"I would even argue that Microsoft is a growth company," Di Bona said, referring to the world's biggest software company started by Ellison rival Bill Gates.

That's even though Microsoft has had trouble growing in new markets beyond the desktop computer software business it has long dominated. And despite the recent move to begin paying its first-ever dividend, a mark of growing corporate maturity.

JMP Securities analyst Pat Walravens, another proponent of the "software has a future" camp, sees the long-term trend for software to be one in which it gobbles up an ever bigger share of total technology spending.

Walravens, who like Di Bona is an independent analyst, said he expects the industry to grab an even larger percentage as it packs more intellectual property into software, and hardware becomes more of a commodity. Software represents $46 per every $100 spent on technology, up from $2 per $100 in the 1960s when most went toward hardware. There is room to pick up still more, he argues.

Stalled growth

If there is something that virtually everyone agrees on, it's that technology spending will remain stalled in the near-term.

Over the last two years, SAP AG, PeopleSoft Inc., J.D. Edwards & Co., i2 Technologies Inc., Siebel, Oracle and others -- have blamed everything from the weak economy to war jitters and the outbreak of Severe Acute Respiratory Syndrome for weak new software sales.

But some analysts say the industry's problems go deeper. Customers already have all the technology products they need and software makers haven't come up with innovative new products to spur buying. Indeed, many are fed up after being aggressively sold complex systems that cost millions to install and did not deliver.

"There's a lot of backlash," said First Albany analyst Mark Murphy. As a result, sales of former "hot" software products, like those that automate human resources, accounting, call centers, and online purchasing have shrunk.

Through the technology slump, established companies like Oracle and Microsoft have come up with ways to win more recurring revenue from existing customers through licensing and maintenance fees.

Last year Microsoft shifted to a long-term corporate licensing plan that has inoculated it from the slumping software sales that have plummeted revenues at other software companies.

Growth engines

So who will grow? While the biggest companies are struggling with cost-cutting and trying to push sales up, some areas look promising. Indeed, the industry has made a habit of making doomsayers look silly in the past. A decade ago, nobody forecast the growth of the Web as a mass medium.

Di Bona says Web services, a new platform for linking computer systems and applications, will spur growth over the next few years at infrastructure companies like BEA Systems Inc. -- a maker of software and tools to build, run and integrate Web-based applications -- and Microsoft, which is making a major Web services play with its .Net initiative.

The next major cycle of growth, still several years away, will come as customers buy applications to run on those new Web services platforms, Di Bona added.

Murphy, like other analysts, now likes business intelligence companies, which sell software that sifts business data to identify trends, such as those that make marketing campaigns more effective.

Investors already have taken note and bid up the stocks of players like Business Objects SA and MicroStrategy Inc. So far this year, Business Objects shares have gained 40 percent and MicroStrategy's stock price is 80 percent higher.

Copyright 2003 Reuters. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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