Must-know: Why the software industry is cyclical

The “Internet of Things” is the network of physical objects, that connects them to the internet.

Anne Shields - Author

Jul. 4 2014, Published 5:00 p.m. ET


Why the software industry is cyclical

Technology, spending budgets, and growth in emerging markets are the key growth drivers of the software industry. Due to fierce competition in the industry, companies invest heavily in research and development (or R&D), which leads to revolutionary ideas, differentiated offerings, innovations, and consequently “patents.” The software industry is highly concentrated with few players contributing to the overall revenue of the industry. Technology is the most important external factor. When it’s combined with the competition, it pushes industry to change constantly. The emergence and adoption of disruptive technologies (social, mobile, application, and cloud computing) proves this constant change.

Software industry dependent on the economy

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The previous chart shows that the entire information technology (or IT) sector fell during the 2007–2008 economic crisis. The financial crisis had a huge impact on the global economy. It led to shrinking consumption, lower consumer confidence, growing unemployment, and falling gross domestic product (or GDP). Leading players in the industry follow the S&P 500 (SPX) very closely. They track the stock markets’ and business cycles’ up and down swings because their software licensing caters to organizations. As a result, it shows the “cyclical” nature of the industry. The investment decisions of organizations are largely dependent on the state of the economy. During recessionary times, organizations cut back on their technology spending. Lower consumer confidence affects the sale of personal computers (or PCs) that in turn impacts the software sales, consequently impacting the industry.

Cloud and “Internet of Things” gaining traction

Although leading players like Microsoft (MSFT), Oracle (ORCL) and IBM (IBM) account for a major share of enterprise software revenues, it’s the “cloud,” that’s substantially impacting the industry. The leading players either buy or build the technology to support the client’s cloud and the “Internet of Things” projects.

The “Internet of Things” is the network of physical objects, that connects them to the internet. It can be controlled from anywhere. It’s a concept where day-to-day physical objects will have an online presence because of their connection to the internet. It includes sensor and wireless technologies. It excludes PCs, tablets, and smartphones. According to Gartner, the Internet of Things installed base is expected to grow to 26 billion units by 2020. Leading software players like Microsoft (MSFT), CISCO (CSCO), and IBM Corp. (IBM) announced plans to increase their Internet of Things capabilities. This indicates its growing presence. It’s a threat to the software security industry. Industry experts think that current anti-spam, anti-virus and anti-malware infrastructures won’t be sufficient enough to protect their organizations from the new endpoints created by the Internet of Things.


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