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2017 Growth and Trends in Business Analytics and Enterprise Software Publishing

Business Analytics and Enterprise Software Publishing is a growing industry that provides products such as customer relationship management (CRM) and enterprise resource planning (ERP) software systems and services like customer support and consulting to other businesses.[1] The industry boasts a size of $41.3 billion in revenue and has grown 4.3% annually from 2011-2016 and is expected to grow 5.5% annually until 2021.[2]

Current and Future Industry Performance

The key external drivers for the industry are: 1) corporate profit, 2) private investment in computers and software, 3) yield on the 10-year Treasury Note (interest rates), 4) demand from health and medical insurance, and 5) regulation for the investment management industries.[3] Each of these key drivers directly influences the capability of businesses to invest in software technology. Generally, expected growth in corporate profit in the private sector will drive the growth in the industry, accounting for the increased growth from 4.3% to 5.5%.[4] Other technological advances, such as “big data” analytics, predictive analytics, and cloud-based services serve as new opportunities for the industry to cut costs and increase quality of products and services, and subsequently cut costs.[5]

The industry is marked by a high degree of consolidation, including software mergers and acquisitions. Due to the low barriers to entry to compete in the market, startups flourish in the industry seeking to capture niche markets. As a result, large companies such as Oracle and Microsoft notably pursue acquisitions in the industry, resulting in strong market share concentration, high profit margins, and lack of price competition.[6]

The industry is expected to grow 5.5% to $53.9 billion up to 2021, driven by mobile and cloud platforms, corporate profit, and investment in IT infrastructure.[7] Currently, the industry caters to large enterprises, which ordinarily have the budgets for the products and services that the industry offers.[8] Thus, a growing focus of the industry in the future is to target smaller businesses as a large, untapped customer segment.[9] The industry is also expected to continue its trend of rapid consolidation, as larger companies will seek breakthrough startups related to data mining and predictive analytics.[10]

Because of this continued and expected growth, the industry is in the growth phase of its life cycle. The opportunities for expansion into new markets and products, as well as higher product penetration, are responsible for the large growth of the industry.[11] Further, the growing necessity for information technology infrastructure, even for small businesses, will continue to drive growth in the industry.[12]

Products and Markets

The Business Analytics and Enterprise Software Publishing industry earns revenue primarily through the sale of new software and software license updates.[13] These products and services are segmented as follows by revenue: 33.6% ERP software, 19% CRM software, 13.5% statistical analysis software, 12.3% supply chain management (SCM) software, 9.9% other performance management software, 7.6% collaboration software, and 4.1% predictive analysis software.[14] Companies in the industry provide one or more of these products to their clients. CRM software coordinates the function of the sales, technical, and customer support teams in an organization, using a content management system to record data at each stage in the sales process.[15] ERP software automates back office functions such as payroll, quality control, accounts receivable, and work flow management.[16] SCM software coordinates the back office functions of inventory management and supply purchasing, most commonly used in manufacturing and retail.[17] Together, CRM, ERP, and SCM software comprise business analytics software that is frequently sold in packages to businesses.

Still, companies in this industry may also provide other products and services, including statistical analysis software that simplifies statistical tasks such as multiple regressions and analysis of variance, and includes software such as SPSS, SAS, STATA, and STATISTICA.[18] Other services include predictive analytics software, which automates the forecasting and identification of software trends using existing data, and collaboration software, including instant messaging, web conferencing, and project management software.[19] Businesses may also request custom-developed software, but this segment is quickly declining due to the difficulty of maintaining custom software.[20]

Market segmentation reflects different industries’ reliance on IT infrastructure. The market for the Business Analytics and Enterprise Software Publishing industry is segmented as follows: 23.2% banking, securities and insurance; 17.8% communications, media, and services; 17.2% manufacturing, pharmaceuticals, and life sciences; 17.1% government; 10.2% other; 5.6% retail; 4.7% healthcare; and 4.2% utilities.[21] Because the industry is so focused on large businesses, the market industries dominated by large businesses comprise the largest need and therefore highest segment for the industry. Banks and other financial institutions require a sophisticated IT infrastructure due to vast amounts of personal information, and thus require many of the services provided by this industry.[22] Similarly, healthcare and service industries require the services provided by the industry due to government mandates.[23] Manufacturing is a market segment with low usage of the services provided by the industry and a high demonstrated need, and thus represents a significant growth potential.[24] Other industries that utilize these services are academic institutions like research universities, and nonprofit research groups, which specifically utilize statistical analysis and collaboration software.[25]

The industry is highly concentrated in the United States West, generation more than a third of industry revenue with 26.3% of establishments.[26] The region is home to the Silicon Valley and Seattle environments, home of many software publishing titans and technology firms.

Competitive Landscape

The industry has modest concentration, with the five largest firms controlling 69.5% of the market.[27] These five companies by market share are International Business Machines Corporation (IBM) with 20.1%, SAP SE with 15.9%, Salesforce with 12.9%, Microsoft Corporation with 12.4%, and Oracle Corp with 8.2%.[28]

Companies in the industry are highly profitable, due to the low cost of producing additional copies of a product, and low percentages of depreciation and utilities of revenue. Because the products provided by the industry are intangible, it incurs few purchase costs, especially with the dying mode of physical media as distribution with the rise of the internet and the cloud.[29] Wages comprise a large portion of costs (33.5% of revenue) in the industry, as highly skilled software developers are in short supply and the industry is highly labor intensive, leading to very high wages for the average employee (at $146,426 annually).[30] The industry also spends heavily on research and development, as the emerging field of predictive analytics and data mining continue to shape the future of the industry.

Major factors for competitive advantage are the usability of the product, ubiquity and compatibility with existing frameworks and operating systems, and external competition.[31] Usability is a major aspect of any software, and increasingly complex software tends to isolate customers. Both consumers and businesses prefer to use widely used software because files are easily transferred between computers or even across operating systems, leading to ubiquitous and compatible software as the most profitable.[32] Finally, the industry also faces external competition from warehouse appliance vendors, which sell prepackaged solutions for analytics and database needs.[33] As a result, the largest software companies are acquiring these data warehouse appliance vendors to take advantage of this segment.[34]

The key barrier to entry in the industry is existing competitors’ retention of clients; because of most clients’ existing investment in a particular software system, it represents a high opportunity cost to convert to a different system.[35] As a result, new players in the industry would likely target small businesses or otherwise convince conversion by developing more powerful or usable software.[36] Another barrier to entry is the limited supply of skilled software developers, especially as the industry competes with other software industries for the same pool of talent.[37] Business analytics and data mining in particular require talent beyond that of ordinary software engineers, typically requiring PhD level candidates.[38]

The larger big data analytics market is measured at $203 billion, so competitors in this industry not only face competition for engineering talent, but also competitors for acquisitions and research.[39] Players in this industry include behemoths like Google, Facebook, and Amazon, who are also rushing to acquire the latest in big data analytics.[40]

The industry is moderately globalized, with only SAP of the five major companies based abroad.[41]

Operating Conditions

Capital intensity in the industry is low, as software companies require only limited capital goods such as server computers and office space.[42] As expected, the level of technology change in the industry is high, and change in the industry will be heavily affected by advances in technology in the future. Revenue volatility is low in the industry, due to long-term trends that favor the wide adoption of information technology by businesses.[43] The industry enjoys little to no regulation and little to no government assistance, but could face an increasing number of intellectual property law and litigation in the future.[44]

Summary and Conclusion

Generally, the Business Analytics and Enterprise Software Publishing industry is a fast-growing industry spurred by continued technological advances and increasing corporate profitability. The industry provides software products and services to other businesses, mostly large enterprises, for customer relationship management, enterprise resource planning, and supply chain management, among other products and services. The industry is marked by a moderate consolidation of 70% in the five largest companies, predicted to continue in the next five years. Key outlooks for the industry include an increased investment in and acquisitions of predictive analytics, artificial intelligence, and data mining services, a shift in segmentation to smaller businesses while continuing profitability with large enterprises, and diminishing external competition.

Works Cited

  1. Gavan Blau, IBISWorld Industry Report 51121c: Business Analytics & Enterprise Software Publishing in 2016. IBISWorld (2016).
  2. Gil Press, 6 Predictions For The $203 Billion Big Data Analytics Market. Forbes (2017). https://www.forbes.com/sites/gilpress/2017/01/20/6-predictions-for-the-203-billion-big-data-analytics-market/#1d659a772083

 

[1] Blau, 5.

[2] Blau, 4.

[3] Blau, 5-6.

[4] Blau, 7.

[5] Blau, 7-8.

[6] Blau, 8.

[7] Blau, 9.

[8] Blau, 9.

[9] Blau, 9.

[10] Blau, 10.

[11] Blau, 13.

[12] Blau, 13

[13] Blau,14

[14] Blau, 14

[15] Blau, 15

[16] Blau, 15

[17] Blau, 15

[18] Blau, 15

[19] Blau, 15

[20] Blau, 16

[21] Blau, 17

[22] Blau, 17.

[23] Blau, 17.

[24] Blau, 18.

[25] Blau, 18.

[26] Blau, 20.

[27] Blau, 21.

[28] Blau, 25.

[29] Blau, 22.

[30] Blau, 23.

[31] Blau, 23.

[32] Blau, 23.

[33] Blau, 23.

[34] Blau, 24.

[35] Blau, 24.

[36] Blau, 24.

[37] Blau, 24.

[38] Blau, 24.

[39] Gil Press, 6 Predictions For The $203 Billion Big Data Analytics Market. Forbes (2017).

[40] Ibid.

[41] Blau, 24.

[42] Blau, 31.

[43] Blau, 32.

[44] Blau, 33.

Nate Nead on LinkedinNate Nead on Twitter
Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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