Hardware giants to software BU: "thank you!"
I can’t wait to have a look at mid-2007 financial statements of all major hardware companies like EMC, HP & IBM. It seems software revenues account for the bulk of hardware manufacturers sales and profits – and I suspect the same goes for all major computer network companies (Cisco which has always and quite wisely heavily invested in software, Lucent-Alcatel, Nortel, etc.). Let’s quickly examine example of the above-mentioned companies:
1. IBM Software Group for instance, a world leader in middleware solutions & second-to-Microsoft in total software sales, represents one fifth of total IBM Corp. revenues, and published a gross margin (83,6%) roughly twice as high as IBM’s average gross margin (40,2%). See the 1Q results slides of their CFO Mark Loughridge here.
2. EMC, a world-leading data storage company, owes the increase of its 1Q profit almost exclusively to the tremendous growth of its software revenues. Such a performance from EMC software is due to strong competitive positions on a number of key and growing markets:
- dematerialization software with EMC Documentum;
- collaborative data exchange solutions with EMC eRoom;
- virtualization software with VMWare, which yearly turnover had even doubled in 4Q06 only;
- encryption solutions with RSA Security, a company EMC had acquired in end-2005 for US$ 2.1bn;
- I’m stopping here, the list would be endless.
3. HP invests so heavily in software that it had seen the size of its software group double in 2006, with the rather clever acquisition of Mercury Interactive only. Not to mention the 2005 acquisitions of OpenView (still not so well embedded within the HP offer I think) & Peregrine Systems (that filled a critical gap in the area of IT administration in my opinion). Again, HP software grew 81% over a year in 1Q07, vs.11% for the company.
Software has turned and is becoming everyday more a key cash inflow stream for global companies, which are looking for the right preys to hunt. Consequently, I believe opportunities to start software start ups have never been so wide opened: there exists a significant number of growth avenues for talented software teams. The quest is no longer for market-traction (it’s there, clients & consumers understand the value software as a strong enabler), money (there has been plenty of financing available @ venture capitalists for quite a while, and it seems to be a long term thing as new funds are being raised here and there everyday) or a good idea (I have plenty of these in case you need one).
The real bottleneck are: 1) guts to start up something on your own: too many people (including me), and software developers (not including me) join big, established companies while value creation lies in promising start ups; 2) the number of talents available to build up your team; I know it’s somewhat related to my first point, but although it’s nice to see an entrepreneur going out of the wood, (s)he isn’t going anywhere without a few lieutenants who share her/his vision and yet are complementary in term of skills & personality.
And don’t worry about the exit: a software pure player may acquire you, as well as any hardware or computer network company. In other words, digital convergence is something real, hence making of all technology companies potential buyers of promising software start ups, as software is getting hotter and hotter – revenue & profit margin-wise.
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