There is a high risk of failure at Europe’s software companies as they restructure to reposition themselves in a sector transformed by new technology, with investments outweighing revenues.
Research of the top 100 European software companies, conducted by venture capitalist firm Truffle Capital, revealed many organisations are under pressure from the consumerisation of IT.
Truffle Capital general partner and co-founder Bernard-Louis Roques said the software industry going through a phase where sales are lower than investments.
“Can this situation last? Companies are not governments,” he said.
According to Roques, growth rates are low, with about an average of 2.7% being reported by most European firms, and companies have no choice but to invest in mobile and cloud delivery models.
Users want to receive software from the cloud to any device and only pay for what they use, and there are now many cloud-based alternatives to enterprise software.
More on new technologies
- New technology introduces software testing challenges
- Wearable technology creates new privacy issues for employers
- Don't let new technology products go undetected
- Companies driving growth of cloud
The research showed that in 2013 total revenue for the top 100 European software companies was €42.2bn, a 2.7% increase on 2012.
A total of 59 companies reported sales of more than €200m, compared wth 42 in 2012.
Profits in 2013 were up by 10% compared with the previous year at €6.3bn. The amount of investments in research and development has increased only slightly from €6.8bn to €6.9bn between 2012 and 2013.
“In the software business, there is no other choice than to invest in the future, particularly now at the eve of the ineluctable transition towards software as a service (SaaS) and mobile,” said Roques.
IDC research analyst Bo Lykkegaard said the European software industry is currently undergoing a massive transition: “Consumer-driven trends, such as smartphones and tablets, social networks, predictive analytics, and cloud computing, are affecting every corner of packaged software.”
Consumer trends are driving the change as users want the same experience with technology at work as they get in their private lives.
European software vendors are under considerable pressure
Bo Lykkegaard, IDC
“These business users are consumers in their private life, searching on Google, connecting on Facebook and purchasing on Amazon. They are not willing to accept old-fashioned, transactional, menu-driven, PC-based applications, which do not work on mobile devices or via the web,” said Lykkegaard.
“Those suppliers that are slow to adapt to the new consumer trends are experiencing declining revenues and falling profit margins, while innovators are reaping gains in market share and scale.”
SAP is the biggest European software firm with more than €16bn revenue, followed by Dassault Systems with just over €2bn and Sage at about €1.6bn.
“European software vendors are under considerable pressure," said Lykkegaard. "For the European region, the technology transition requires the formation of new IT skills related to cloud and consumer-related technologies. It also requires better mobile and fixed-line broadband infrastructure to fuel the adoption of the new mobile and cloud-based software models."