The UK is falling behind Germany and Israel as Europe's software factories, a new report reveals.
The Developing the Future report, published by the British Computer Society, the suppliers' trade association Intellect and Microsoft, includes for the first time a Software Barometer which shows that the UK still has about a quarter of all European software companies. But UK software start-ups' share of the venture capital pool dropped from around 35% in Q4/2005 to 27.1% in Q3/2008.
German and Israeli software companies now make up 39% and 40% of all VC deals in these countries, up from 24% and 35% respectively in Q4/2005. Germany increased its share of the total European venture capital-backed investment in the software sector from 11.4% to 18.8% in the same period.
Lars Lindstedt, a software economist at Microsoft, said the key indicators were all turning negative for the UK software industry. "There are bright spots, such as computer games, online betting, healthcare (excluding the NHS's National Programme for IT), and high-end automotive engineering, but the overall trend is down," he said.
"Why don't UK software firms go on to be the next Google or Microsoft?That is the $10bn question, given today's company valuations," he said.
Lindstedt said the government had to support a quicker roll-out of high-speed broadband. A "heat map" showed a greater concentration of software development firms where high-speed links were cheap and plentiful.
Government also had to change its procurement policies, he said, as having the government as a customer is often "more important to a small software firm than capital".
While there was still room for the very large, complex multi-year projects, government buyers could be "more creative" in their sourcing, he said. "Even bidding for the large contracts is too expensive for the small firms, but an order could make all the difference to a small firm because it establishes its credibility."
Lindstedt said around 430,000 people are employed in the UK software industry. Less than half now required a university degree, down from 62% in mid-2004, but fewer people were leaving school and university with qualifications in so-called cpSTEM (computer and physical science, technology, engineering, and mathematics) subjects.
He said few students know that three years after graduation, computer science graduates top the salary list.
Lindstedt said software houses with fewer than 10 staff are disappearing. Either they are getting bigger, or they are being bought, or they are going out of business, he said.
This has serious implications for the future in two ways. One is that fewer people developthe skills and experience to manage software development projects. This would hurt the UK's ability to manage off-shore and in-house projects, he said.
The other is that it reduces the chance of the UK emulating the earlier success of UK-based start-ups such as Bebo, Friends Reunited, and Last.FM, an internet radio station bought last year by CBS for $280m.