How Consolidation Hurts Pricing for Software Buyers?

The Story:

Booz Allen Hamilton's publication Strategy+Business is a great publication and highly recommended to this blog's readers. They recently ran a piece titled "The Coming Software Shakeup". It was recently published in their Resilience Report of 4/13/06 (www.strategy-business.com).

Analysis:

Some of the data points in this piece are compelling. The authors remind us that five years ago, 11 vendors controlled 90% of the database market and now only six vendors control that same space. Similar reductions have occurred in the business applications space, too. The authors now speculate that that prices for business applications will increase as a result of the consolidation that has occurred.

What will likely happen is the following:

- pricing will not materially change as more buyers move to alternative solutions like business process outsourcing instead of re-automating with the same old application solutions available today

- software as a service/on-demand applications will continue to take hold in the mid-market and make better (but not always huge) in-roads in the high-end market segment.

- application vendors will not innovate enough to trigger customers to move from one installed product to another. After a firm has spent millions (or hundreds of millions) installing some ERP vendor's suite, how likely are these companies going to be to install a new solution? We're upside down on the cost/benefit ratio for new applications and this will stall market gains for vendors.

While consolidation is occurring in the applications space, other factors will likely keep pricing from jumping much.

Comments?

Comments

[Solidpoint]

The more significant impact is likely to be a lack of forthcoming innovation. Freed from the relentless crush of competitors' innovations, these fat, bloated, behemoths will grind innovation to a near halt as market share, and the pricing power it brings, replace innovation as the primary force driving the bottom line.

[vinnie mirchandani]

I called it bad advice in this post

http://dealarchitect.typepad.com/deal_architect/2006/04/booz_allen_on_s.html

Booz Allen customers call us - we can do much better helping you negotiate!