Being top dog in enterprise applications brings a lot of close scrutiny from investors.
SAP found this out on Thursday when it announced a 7% increase in software license sales--ahead of the overall growth rate for ERP in general, but beneath analyst expectations of a 9% rise. SAP's stock price promptly dropped 7.5% on the news, although it recovered 3% in the U.S. the next day.
I wouldn't put too much blame on SAP for the shortfall, however. SAP now expects sales growth around 11% for 2006--still a healthy increase. But growth in the U.S., its largest market, was flat. The market is taking SAP's underperformance as a sign that IT spending growth in North America is slowing, which, if true, will be a problem for most other vendors as well.
Furthermore, SAP still has Oracle to contend with. Oracle, with its many new acquisitions, is able to compete with SAP in many more deals, and it's not afraid to compete on price. So much for fears that Oracle's acquisitions would be anti-competitive. As I noted in a comment on a previous post, if anything I see price competition even more fierce than it was prior to Oracle's bid for PeopleSoft.
What does this all mean for the enterprise software market? Just that it's going to continue to be hard for other horizontal application vendors to make money. The heavy discounting by SAP and Oracle make it hard to beat them on price, and slowing growth in IT spending for software means fewer deals to go around. Lawson's loss in the most recent quarter is another point of evidence.
Business Week has the most complete analysis of the story behind SAP's recent announcement.
Update, Jan. 15: Sharad Sharma has further analysis of SAP's and Oracle's financial results. He argues that the large enterprise market is getting saturated and agrees with me that a license price-war is breaking out. He sees both of these trends as evidence of ERP entering into a "falling edge dynamic" (the opposite of "leading edge"). If he's right, it's not good news for traditional license vendors in general.
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