If there is an IT recovery in store for this year, the top software companies have yet to experience it.
Most major suppliers are warning that sales are slow. Analysts say the slump signifies a combination of spending jitters and deeper issues.
A fundamental change in how customers buy software could mean there is a rough ride in store for the industry's traditional leaders.
The biggest challenge is fierce competition, both from one another and from the rising pack of application service providers.
Siebel Systems used to sit comfortably at the vanguard of the CRM market; now, its potential customers are also being wooed by the top ERP makers - SAP, PeopleSoft and Oracle - and by a host of fledging companies.
This year, the ASPs went mainstream, with Salesforce.com cannonballing on to the New York Stock Exchange and reporting close to $100m (£54m) in annual revenue.
Some of that total comes from tapping a new market - the small companies with a few dozen employees willing to pay the $65 monthly per-user fees for basic sales-automation products.
But the ASPs are looking to swim upstream, and they're starting to win the enterprise deals that companies like Siebel compete for.
Salesforce.com signed contracts this year with ADP and SunTrust Banks for more than 2,000 seat licences each. Both companies run Siebel in parts of their business, yet both said they did not consider Siebel in evaluating suppliers for their sales-force automation projects.
Frank Tait, vice-president of marketing at DecisionOne, spoke with Siebel and SAP two years ago when he evaluated CRM options for his IT services firm. In the midst of a business-model overhaul, DecisionOne needed a system it could implement quickly, with a clear return on investment.
"From the date of the contract signing, Salesforce.com took 45 days to get our data converted and our system live. The others were in the six-month timeframe," he said.
"My customisation cost for Salesforce.com was under $50,000. The custom cost for the traditional suppliers was 10 times that."
AMR Research estimates that hosted services account for just 2% of the application market revenue today - but forecasts they will be the fastest-growing segment of the market in the next five years.
Independent analyst Amy Wohl said the ASPs are not yet a major factor in the market, but suspects they will be as early as next year.
All of the applications suppliers now offer hosting, with Siebel most aggressively going after the ASPs with its own subscription product, Siebel CRM OnDemand.
But a business model that can support a pure-play start-up (barely - Salesforce.com, the only public CRM ASP, has quarterly marketing budgets exponentially bigger than its profits) may not work well for an established supplier.
Siebel said that it expects to invest significantly more in the service this year than it will recoup in revenue.
The ASPs alone, however, are not causing the applications leaders' slowdown. IDC said that in 2003 suppliers worked feverishly to regain ground.
Siebel and PeopleSoft showed double-digit percentage declines in applications revenue last year, according to IDC - and this year, both followed shaky first quarters by falling short of expectations in the second.
Oracle has kept its results on track so far, but its database sales help to prop up its slow-growing applications business. Only SAP has remained unscathed this year, after struggling through a few rough quarters last year.
JMP Securities concluded that expectations were too high, and concerns about the economy had led to buying delays.
Jim Shepherd, applications analyst at AMR Research, agreed. "All the indications at the end of 2003 were that spending was up, and there is a lot of activity out there.
"People are evaluating projects and getting started, but when we talk to users, they are getting more nervous about the economy. Even though they did increase their IT budgets, they are not spending the money," he said.
"This is one of those cases where, when the suppliers say the pipelines are good but that the deals are slipping out, they are telling the truth."
The malaise has hit a cross-section of the software market. In addition to PeopleSoft and Siebel, shortfall warnings came from storage developer Veritas Software, integration specialists WebMethods, Informatica and Ascential Software, and infrastructure software makers Sybase, CA and BMC Software.
JMP Securities expects the floodgates to come loose - it forecast spending will increase 50% in the second half of the year. Others are less optimistic.
Gartner does not predict a return to normal growth in the software market until 2006. Citing factors such as rampant discounting, it said that the slow growth "reflects the conditions of the software market itself more than the wider challenges in the IT industry or economy".
In any case, analysts expect companies to have to fight hard for available cash.
Stacy Cowley writes for IDG News Service