Big-ticket software gets a trim

The market for big-ticket server software is going the way pork bellies and other commodities once did: Prices are going down.

The overall market for infrastructure software needed to run business applications grew in 2004 by nearly 6 percent compared with the previous year, to $6.7 billon, according to market research company Gartner, which released its results Tuesday.

Gartner analyst Joanne Correia forecast that the segment will continue to grow at a "slow but positive" pace--in the low single digits--for the coming years, as corporate customers invest in integrating their existing systems or building new applications.

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What's new:
The market for back-end infrastructure software is growing, but open-source offerings and discounting by larger vendors are putting pressure on prices.

Bottom line:
Market dynamics are heightening competition and changing the landscape. Companies increasingly are selling larger suites of server software--and this is where the "real battleground" will be, an analyst says.

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But despite the uptick in spending, providers of infrastructure software are facing more price pressure in an already highly competitive market. The culprits are discounts on product bundles by larger vendors and the effect of open-source products.

"There's more activity, there are more projects going on, but the price somebody is paying for this, compared to three years ago, is 15, 20, 30 percent less," Correia said. "And the value of what's in an application server today versus 2000 is huge."

The Gartner study tallied new license sales of server software worldwide, including Web portals, application servers and integration software, but did not include corporate databases.

This back-end "middleware" is expected to be one of the most contentious battlegrounds in the coming years as corporate customers spend on upgrading their infrastructure to be more flexible and cost-effective.

Instead of offering individual components, such as application servers, software makers have assembled suites that include tools to tie together existing systems and serve up Web pages to end users. "This is the real battleground moving forward," Correia said.

The database "drag"
To compete for middleware business, larger vendors can offer discounts by selling several components together. In particular, databases drag in follow-on sales of other back-end products, such as application servers, Correia said.

Database giant Oracle, for example, is using this bundling strategy to good effect, selling an aggressively priced application server to its

It's a good thing

I feel that small business will start to feel more comfortable about buying networking software and benefit highly from deals such as free tech support and upgrades. With the economy the way it is everywhere, I personally wouldn't be inclined to purchase high-end user software if it ate at my bottom line.

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Double-edged sword

Before you stop and cheer too loudly, consider the downside to this.

Almost certainly the number of vendors will decrease. When was this ever a good thing?

Traditional software companies will be forced towards the Microsoft model of selling low-margin products. This isn?t a dance many large companies do well. Expect more layoffs and declining stock prices.

Eventually, we?ll find a new equilibrium. But, in the meantime, it?s going to get ugly.