Changewave Research: B2B Industry Future Trends and Consolidation

ChangeWave Research: B2B Industry – Future Trends and Consolidation

ChangeWave Research Report:

B2B Industry – Trends and Consolidation

Business Revenues Slow; Price Pressures Continue

Overview

The B2B software and services industry has had a downtick over the past two quarters. Our September Quarterly Sales Survey results showed a tough 3rd Quarter for the sector, and for the first time in a year more B2B members said their company sales will come in Below Plan (30%) than Above Plan (23%).

During the week of October 6 – 12, we conducted a follow-up survey on current B2B trends, with a special focus on consolidation and potential acquisitions. A total of 95 B2B industry members participated.

(A) B2B Industry Trends

B2B Revenue Slowdown. While 37% of industry respondents think they’ll see an increase in B2B business revenue for the 4th quarter and 16% a decrease, this is far worse than in February 2004 when 53% thought they would see an increase in revenue and only 3% thought they would see a decrease.

Pricing Pressures Continue. A total of 38% of B2B respondents expect prices to fall over the next 12 months, slightly more than in our February 2004 survey. Only 9% expect prices to rise, unchanged from the prior survey.

Top Sub-segments. Respondents see Security Software (Net Difference Score +40), Business Intelligence and Reporting (+28),and Customer Resource Management (CRM; +15) as the best performing B2B sub-segments over the next 12 months.

Losing Sub-segments. Legacy Platforms (Net Difference Score -42) was the worst performing sub-segment in the survey, followed by Enterprise Resource Planning (-14) and Database Management (-12).

Data Storage and Management Shows Improvement. Data Storage and Management showed the most improvement among B2B sub-segments since our previous B2B industry survey – its net difference score improved by 15 points.

IBM Nudges Past SAP. IBM (26%) topped the list as the B2B company expected to be the biggest winner over the next six months, beating out SAP (23%), the top choice of our previous survey. Microsoft (17%) came in third, up 8-percentage points from the previous survey.

Market Share Gainers: 2nd and 3rd Tier: Respondents chose TIBCO Software (Net Difference Score = +13), Business Objects (+12), Manhattan Associates (+12) and Webmethods Inc (+12) as the 2nd and 3rd tier companies most likely to pick up market share over the next 6 months.

(B) Consolidation and Potential Acquisitions

Significant Consolidation in 2005. Better than four-in-five respondents (83%) agree that 2005 will be a year of significant consolidation for the Application Software industry. And 79% agree that there will be more consolidation in 2005 than we have seen in any of the past few years.

Where Will It Occur? A quarter of respondents (25%) believe consolidation is most likely to occur in the Customer Resource Management sub-segment. Another 20% believe it will be in Enterprise Resource Planning and 19% in Supply Chain Management/Procurement.

Who is Most Likely to Be Bought? When asked to name the B2B companies with the greatest potential for being bought over the next 12 to 18 months, BEA Systems (25%) was the top choice, followed by Siebel Systems (15%), Web Methods (15%), Business Objects SA (14%), Cognos Inc (13%) and Salesforce.com (13%).

(C) Other B2B Trends

Winners in the Trend Towards Cheaper Storage. When asked who stands to win in the ongoing trend toward cheaper storage, more respondents mentioned EMC (21%) than the other two leaders, IBM (13%) and Veritas (8%). As HOW8127 puts it, "Storage vendor differentiation will increasingly be determined by software functionality. EMC seems to be taking the lead here with their acquisition strategy.” EWI0296 adds, "EMC will hold its own with better technologies, but prices will stay the same with added functionality offsetting commodity prices."

And Losers. Conversely, when discussing who stands to lose, 29% of responses said storage software companies in general. BLA3743 writes, "I believe storage software companies are likely to fall behind as their functionality is absorbed in more strategic solutions." CHA0069 adds, "Losers are those with big ticket items, winners are those that can provide good ROI."

Respondents Split on New Search Technologies for 2005. A total of 48% of respondents do not think 2005 will be a big year for new search technologies, while 37% of respondents do.

Bottom Line: The B2B Industry has entered a period of uncertainty characterized by slowing business revenues and increased pricing pressures. Security Software, Business Intelligence and CRM are seen as the best performing sub-segments for 2005.Among smaller companies,respondents see TIBCO Software, Business Objects, Manhattan Associates and Webmethods Inc as most likely to pick up market share. Respondents also see significant B2B consolidation for 2005, particularly in the CRM, Enterprise Resource Planning and Supply Chain Management sub-segments.

The ChangeWave Alliance is a group of 4,900 highly qualified business, technology, and medical professionals in leading companies of select industries—credentialed professionals who spend their everyday lives working on the frontline of technological change. ChangeWave surveys its Alliance members on a range of business and investment research and intelligence topics, collects feedback from them electronically, and converts the information into proprietary quantitative and qualitative reports.

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Table of Contents

Summary of Key Findings...... 4

The Findings...... 5

(A) Overall B2B Industry Trends...... 5

(B) Consolidation and Potential Acquisitions...... 12

ChangeWave Research Methodology...... 21

About ChangeWave Research...... 22

I. Summary of Key Findings

Introduction

The report focuses on three key areas:

(A) Overall B2B Industry Trends

(B) Consolidation and Potential Acquisitions

II. The Findings

(A) Overall B2B Industry Trends

(1) Question Asked: Withregard to the B2B Software and Services sector, do youthink you'll see an increase in overall business revenues, a decrease, or will overall business revenues remain the same for the 4th Quarter (Oct-Dec) 2004 vs. the previous quarter?

Current Survey Oct 2004 / Previous Survey Feb 2004 / Previous Survey Jul 2003 / Previous Survey May 2003
Increase in Overall B2B Revenue for 4Q / 37% / 53% / 51% / 24%
Decrease in Overall B2B Revenue for 4Q / 16% / 3% / 8% / 12%
Remain the Same / 40% / 41% / 38% / 59%
Don't Know / 7% / 4% / 3% / 5%

B2B Revenue Slowdown. While 37% of industry respondents think they’ll see an increase in B2B business revenue for the 4th quarter and 16% a decrease, this is far worse than in February 2004 when 53% thought they would see an increase in revenue and only 3% thought they would see a decrease.

(2)Question Asked: What about B2B vendor pricing over the next 12 months? Do you believe that B2B software prices will rise, fall, or stay the same over the next 12 months?

Current Survey Oct 2004 / Previous Survey Feb 2004 / Previous Survey Jul 2003
Prices will Rise / 9% / 9% / 9%
Prices will Fall / 38% / 35% / 32%
Prices will Stay the Same / 44% / 48% / 52%
Don't Know / 8% / 8% / 6%

Pricing Pressures Continue. A total of 38% of B2B respondents expect prices to fall over the next 12 months, slightly more than in our February 2004 survey. Only 9% expect prices to rise, unchanged from the prior survey.

(3) Question Asked: Which of the following B2B sub-segments do you think will perform best in the next 12 months?(Choose No More Than Three)**

Current Survey Oct 2004 / Previous Survey Feb 2004 / Previous Survey Jul 2003 / Previous Survey May 2003
Security Software / 41% / 48% / 45% / 37%
Business Intelligence and Reporting / 35% / 29% / NA / NA
Customer Resource Management (CRM) / 28% / 22% / 15% / 15%
Supply Chain Management/Procurement / 25% / 19% / 15% / 8%
Data Storage and Management / 18% / 6% / NA / NA
Portal and E-Business Development / 14% / 18% / NA / NA
Enterprise Resource Planning (ERP) / 12% / 6% / NA / NA
Application Server Software* / 11% / 5% / 9% / 10%
Document and Content Management / 9% / 5% / NA / NA
Network Management / 8% / 11% / NA / NA
Legacy Platforms / 5% / 0% / NA / NA
Database Management / 4% / 10% / 14% / 17%
Don't Know / 16% / NA / 5% / 5%
Other / 1% / 1% / NA / NA

*Note: July 2003 and May 2003 surveys read “Application Development Tools/Platforms” instead of “Application Server Software.”

**Note: All Previous Survey’s selection limit were “Choose No More Than Two.”

(4) Question Asked: On the down side, which of the following B2B sub-segments do you think will perform the worst in the next 12 months?(Choose No More Than Three)**

Current Survey Oct 2004 / Previous Survey Feb 2004 / Previous Survey Jul 2003 / Previous Survey May 2003
Legacy Platforms / 47% / 54% / NA / NA
Enterprise Resource Planning (ERP) / 26% / 24% / NA / NA
Document and Content Management / 17% / 8% / NA / NA
Database Management / 16% / 11% / 23% / 24%
Customer Resource Management (CRM) / 13% / 14% / 32% / 32%
Supply Chain Management/Procurement / 11% / 8% / 26% / 14%
Portal and E-Business Development / 11% / 11% / NA / NA
Business Intelligence and Reporting / 7% / 4% / NA / NA
Application Server Software* / 7% / 9% / 12% / 19%
Network Management / 5% / 4% / NA / NA
Data Storage and Management / 5% / 8% / NA / NA
Security Software / 1% / 0% / 2% / 2%
Don't Know / 22% / NA / 14% / 14%
Other / 0% / 3% / NA / NA

*Note: July 2003 and May 2003 surveys read “Application Development Tools/Platforms” instead of “Application Server Software.”

**Note: All Previous Survey’s selection limit were “Choose No More Than Two.”

Net Difference Score – Current B2B Industry Survey (October 2004)

Perform Best in Next 12 Months / Perform Worst in Next 12 Months / Net Difference Score
Security Software / 41% / 1% / +40
Business Intelligence and Reporting / 35% / 7% / +28
Customer Resource Management (CRM) / 28% / 13% / +15
Supply Chain Management/Procurement / 25% / 11% / +14
Data Storage and Management / 18% / 5% / +13
Application Server Software / 11% / 7% / +4
Portal and E-Business Development / 14% / 11% / +3
Network Management / 8% / 5% / +3
Document and Content Management / 9% / 17% / -8
Database Management / 4% / 16% / -12
Enterprise Resource Planning (ERP) / 12% / 26% / -14
Legacy Platforms / 5% / 47% / -42

Top Sub-segments. Respondents see Security Software (Net Difference Score +40), Business Intelligence and Reporting (+28), and Customer Resource Management (CRM; +15) as the best performing B2B sub-segments over the next 12 months.

Supply Chain Management/Procurement (+14) and Data Storage and Management (+13) also had double-digit Net Difference scores.

Losing Sub-segments. Legacy Platforms (Net Difference Score -42) was the worst performing sub-segment in the survey, followed by Enterprise Resource Planning (-14) and Database Management (-12).

Change in Net Difference Score – Current Survey (October 2004) vs. Previous Survey (February 2004)

Current Survey Net Difference Score
Oct 2004 / Previous Survey Net Difference Score
Feb 2004 / Change in Net Difference Score
Data Storage and Management / +13 / -2 / +15
Legacy Platforms / -42 / -54 / +12
Application Server Software / +4 / -4 / +8
Customer Resource Management (CRM) / +15 / +8 / +7
Enterprise Resource Planning (ERP) / -14 / -18 / +4
Business Intelligence and Reporting / +28 / +25 / +3
Supply Chain Management/Procurement / +14 / +11 / +3
Portal and E-Business Development / +3 / +7 / -4
Network Management / +3 / +7 / -4
Document and Content Management / -8 / -3 / -5
Security Software / +40 / +48 / -8
Database Management / -12 / -1 / -11

Data Storage and Management Shows Improvement. Data Storage and Management showed the most improvement among B2B sub-segments since our previous B2B industry survey – its net difference score improved by 15 points.

(5) Question Asked: Measured by sales and momentum, which B2B company do you think will be the biggest winner over the next six months?

Current
Survey
Oct 2004 / Previous
Survey
Jul 2003* / Previous
Survey
May 2003*
IBM / 26% / 13% / 21%
SAP / 23% / 28% / 34%
Microsoft / 17% / 9% / 14%
BEA Systems / 11% / 17% / 10%
Oracle / 11% / 11% / 7%
Siebel / 6% / NA / NA
Other / 8% / NA / NA

*Note: In previous surveys the responses were calculated based on an open-ended question.

IBM Nudges Past SAP. IBM (26%) topped the list as the B2B company expected to be the biggest winner over the next six months, beating out SAP (23%), the top choice of our previous survey. Microsoft (17%) came in third, up 8-percentage points from the previous survey.

(6A) Question Asked: Let's focus on the 2nd and 3rd tier. Based on your own knowledge and what you are seeing in the industry, which of the following B2B vendors are most likely to pick up market share over the next 6 months?(Check All That Apply)

Current Survey Oct 2004 / Previous Survey Feb 2004 / Previous Survey Jul 2003
TIBCO Software (TIBX) / 20% / 13% / 14%
Webmethods Inc (WEBM) / 18% / NA / NA
Business Objects SA (BOBJ) / 16% / NA / NA
Manhattan Associates (MANH) / 14% / 11% / 8%
Ariba (ARBA) / 9% / 13% / 15%
Hyperion Solutions (HYSL) / 9% / 9% / 12%
Broadvision (BVSN) / 6% / 8% / 6%
FileNet Corp (FILE) / 5% / NA / NA
Agile Software (AGIL) / 4% / 15% / 11%
JDA Software (JDAS) / 4% / 3% / 9%
Manugistics Group (MANU) / 4% / 4% / 9%
Commerce One (CMRC) / 2% / 5% / 6%
Freemarkets (FMKT) / 2% / 3% / 5%
Progress Software (PRGS) / 2% / 5% / 3%
RightNow Technologies (RNOW) / 2% / NA / NA
Vignette (VIGN) / 2% / 5% / 8%
Other / 6% / 5% / NA

(6B) Question Asked: And which of the following B2B vendors are most likely to lose market share over the next 6 months?(Check All That Apply)

Current Survey Oct 2004 / Previous Survey Feb 2004 / Previous Survey Jul 2003
Commerce One (CMRC) / 19% / 19% / 29%
Broadvision (BVSN) / 11% / 8% / 17%
Ariba (ARBA) / 9% / 15% / 20%
Manugistics Group (MANU) / 9% / 14% / 14%
TIBCO Software (TIBX) / 7% / 6% / 3%
Vignette (VIGN) / 6% / 13% / 12%
Webmethods Inc (WEBM) / 6% / NA / NA
JDA Software (JDAS) / 5% / 14% / 6%
Progress Software (PRGS) / 5% / 9% / 9%
RightNow Technologies (RNOW) / 5% / NA / NA
Business Objects SA (BOBJ) / 4% / NA / NA
Freemarkets (FMKT) / 4% / 13% / 9%
Hyperion Solutions (HYSL) / 4% / 4% / 5%
FileNet Corp (FILE) / 3% / NA / NA
Agile Software (AGIL) / 2% / 3% / 3%
Manhattan Associates (MANH) / 2% / 3% / 11%
Other / 2% / 4% / NA

Net Difference Score – Current B2B Industry Survey (October 2004)

Pick Up Market Share / Lose Market Share / Net Difference Score
TIBCO Software (TIBX) / 20% / 7% / +13
Business Objects SA (BOBJ) / 16% / 4% / +12
Manhattan Associates (MANH) / 14% / 2% / +12
Webmethods Inc (WEBM) / 18% / 6% / +12
Hyperion Solutions (HYSL) / 9% / 4% / +5
FileNet Corp (FILE) / 5% / 3% / +2
Agile Software (AGIL) / 4% / 2% / +2
Ariba (ARBA) / 9% / 9% / 0
JDA Software (JDAS) / 4% / 5% / -1
Freemarkets (FMKT) / 2% / 4% / -2
Progress Software (PRGS) / 2% / 5% / -3
RightNow Technologies (RNOW) / 2% / 5% / -3
Vignette (VIGN) / 2% / 6% / -4
Manugistics Group (MANU) / 4% / 9% / -5
Broadvision (BVSN) / 6% / 11% / -5
Commerce One (CMRC) / 2% / 19% / -17

Market Share Gainers: 2nd and 3rd Tier: Respondents chose TIBCO Software (Net Difference Score = +13), Business Objects (+12), Manhattan Associates (+12) and Webmethods Inc (+12) as the 2nd and 3rd tier companies most likely to pick up market share over the next 6 months.

Market Share Losers. Commerce One (-17) was seen by respondents as the biggest market share loser.

Change in Net Difference Scores – Current Survey (October 2004) vs. Previous Survey (February 2004)

Current Survey Net Difference Score
Oct 2004 / Previous Survey Net Difference Score
Feb 2004 / Change in Net Difference Score
JDA Software (JDAS) / -1 / -11 / +10
Freemarkets (FMKT) / -2 / -10 / +8
TIBCO Software (TIBX) / +13 / +7 / +6
Manugistics Group (MANU) / -5 / -10 / +5
Vignette (VIGN) / -4 / -8 / +4
Manhattan Associates (MANH) / +12 / +8 / +4
Ariba (ARBA) / 0 / -2 / +2
Progress Software (PRGS) / -3 / -4 / +1
Hyperion Solutions (HYSL) / +5 / +5 / 0
Commerce One (CMRC) / -17 / -14 / -3
Broadvision (BVSN) / -5 / 0 / -5
Agile Software (AGIL) / +2 / +12 / -10

*Note: This was the first survey in which Webmethods, Business Objects, FileNet Corp and RightNow Technologies were included, so we are unable to calculate a Change in Net Difference Score for these companies.

Showing Improvement. JDA Software had a Net Difference Score improvement of +10 since the previous survey, followed by Freemarkets (+8) and TIBCO Software (+6).

(B) Consolidation and Potential Acquisitions

(7) Question Asked: Do you agree or disagree with the following statements:

(a) 2005 will be a year of significant consolidation for the Application Software industry - as the big Platform and Tool companies (e.g., MSFT, ORCL, etc.) buy up a number of Application Software companies (e.g., PSFT, BEAS, etc.).

Strongly Agree / 21%
Somewhat Agree / 62%
Somewhat Disagree / 8%
Strongly Disagree / 0%
Don't Know / 8%
Other / 0%

Significant Consolidation in 2005. Better than four-in-five respondents (83%) agree that 2005 will be a year of significant consolidation for the Application Software industry.

(b) There will be more consolidation in the B2B software industry in 2005 than we have witnessed in any of the past few years.

Strongly Agree / 23%
Somewhat Agree / 56%
Somewhat Disagree / 14%
Strongly Disagree / 0%
Don't Know / 7%
Other / 0%

More Than in the Past. Similarly, 79% of respondents believe there will be more consolidation in the B2B software industry in 2005 than we have seen in any of the past few years.

(8)Question Asked: Which one or two of the following B2B sub-segments do you believe are most likely to experience increased consolidation?(Choose No More Than Two)

Customer Resource Management (CRM) / 25%
Enterprise Resource Planning (ERP) / 20%
Supply Chain Management/Procurement / 19%
Application Server Software / 15%
Business Intelligence and Reporting / 13%
Portal and E-Business Development / 13%
Security Software / 9%
Database Management / 6%
Document and Content Management / 6%
Legacy Platforms / 5%
Data Storage and Management / 5%
Network Management / 2%
Don't Know / 21%

Where Will It Occur? A quarter of respondents (25%) believe consolidation is most likely to occur in the Customer Resource Management sub-segment. Another 20% believe it will be in Enterprise Resource Planning and 19% in Supply Chain Management/Procurement.

(9) Question Asked: Focusing on the following list of B2B vendors, which do you believe have the greatest appeal to larger companies looking to make acquisitions - and thus have the greatest potential for being bought over the next 12-18 months?(Choose No More Than Four)

BEA Systems (BEAS) / 25%
Siebel (SEBL) / 15%
Webmethods Inc (WEBM) / 15%
Business Objects SA (BOBJ) / 14%
Cognos Inc (COGN) / 13%
Salesforce.com Inc (CRM) / 13%
Manhattan Associates (MANH) / 12%
Lawson Software (LWSN) / 11%
Ariba (ARBA) / 8%
BMC Software (BMC) / 8%
Manugistics Group (MANU) / 7%
Broadvision (BVSN) / 6%
TIBCO Software (TIBX) / 6%
Commerce One (CMRC) / 5%
Vignette (VIGN) / 4%
FileNet Corp (FILE) / 3%
JDA Software (JDAS) / 3%
Progress Software (PRGS) / 3%
RightNow Technologies (RNOW) / 3%
Agile Software (AGIL) / 2%
Hyperion Solutions (HYSL) / 2%
Interwoven Inc (IWOV) / 2%
MAPICS (MAPX) / 2%
QAD (QADI) / 2%
Chordiant Software (CHRD) / 1%
Freemarkets (FMKT) / 1%
Kana Software (KANA) / 1%
Don't Know / 25%
Other / 1%

Who is Most Likely to Be Bought? When asked to name the B2B companies with the greatest potential for being bought over the next 12 to 18 months, BEA Systems (25%) was the top choice, followed by Siebel Systems (15%), Web Methods (15%), Business Objects SA (14%), Cognos Inc (13%) and Salesforce.com (13%).