Wedbush Says Software Industry At End of Golden Age

Wedbush believes the margins in the enterprise software sector will be under pressure for the foreseeable future

A September 1st research report from Wedbush Equity Research argues that the software industry is already in the midst of a cyclical decline in margins and profits driven by developments in technology and that margins are going to continue to be squeezed. A quote from the introduction to the report illustrates the perspective of Wedbush analysts Steve Koenig and Kevin Takeda:

Software industry struggling to maintain their earnings momentum

“Even as software gets woven into the fabric of our enterprises, pubic infrastructure, networks, and devices, vendors are struggling to maintain their earnings momentum. Our industry analysis indicates revenue growth is slowing as operating margins have begun contracting over the last several years. We think several factors are pressuring the industry:the adoption of cloud computing; the incursion of Internet companies into enterprise computing; the consumerization of enterprise software; and greater acceptance of open source models.

The pair then go on to offer a more fundamental explanation for the gradual decline in software margins which have been decreasing steadily since 2009. “However, these developments are mere manifestations of a more fundamental dynamic: an inexorable march towards zero marginal costs for distributing and consuming digital information.”

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Software Industry

Enterprise software firms facing headwinds

The Wedbush report highlights that there are certainly lots of opportunities for small- to mid-sized software firms to innovate and succeed, the same can’t be said for enterprise software firms. The analysts say that the large business customers of enterprise software firms are trying to implement technological change in communications, logistics, and manufacturing that will drive down the cost of producing and sharing a variety of products and services, but are struggling to coordinate their people, processes, and infrastructure, resulting in a kind of inertia that favors incumbent vendors. However, as Koenig and Takeda note, “the power of incumbency doesn't last forever.”

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