Despite the current economic downturn, the software industry is poised for growth in 2008, with worldwide enterprise software revenue totaling $190.7 billion in 2008, an 8.2 percent increase from 2007 revenue of $176.3 billion, according to Gartner, Inc. While the software market is forecast to grow, it will face challenges this year.

"Software vendors that have a balanced mix in channel, new license, and maintenance revenue streams and flexibility in contractual terms such as software as a service, open source and outsourcing, have the strongest options for continued growth and to even out their risk," said Joanne Correia, managing vice president for Gartner.

"Shrinking discretionary spending budgets will heighten competition for new maintenance and license revenue streams and place a renewed emphasis on vendor performance and viability," Ms. Correia said. "Market consolidations and restructurings may accelerate as mergers and acquisitions among smaller and larger vendors increase."

The software industry experienced unprecedented growth in the late 1990s, leading to an exaggerated, through short-lived, downturn in 2001. Since many of the factors in place during that period do not exist now, Gartner analysts do not expect an economic slowdown in the U.S. or other markets worldwide to have a strong negative effect on software spending.

"Although software investment is not likely to decline, extended macroeconomic weakness will mean slower growth in the industry," said Tom Eid, research vice president at Gartner. "No market is inherently immune to a softening in demand, however; the magnitude of a downturn will vary, affecting software markets and vendors differently."

Garter expects the second quarter of 2008 to be the first quarter in which some decline in revenues for software vendors is noticeable. Companies will need some time to get control of IT operations budgets and slow down discretionary budgets. In the short term, only a few types of software spending will be affected which in turn will compress the vendors in the vulnerable markets.

"The enterprise software market is undergoing major technology and business model transitions that will last through 2012," Mr. Eid said. "For the near term, software vendors will continue to face tough product life cycle decisions and short-term pressure on price and margins, which will put the ability to be innovative at risk. The fundamental changes that are occurring in how software technology is deployed and used means no software market or vendor will remain untouched."
http://www.gartner.com