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Market Perspective

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The Principals have observed that capital expenditures for Enterprise Information Technology over the last decade have been anemic and virtually non-existent. Overall IT spending growth rates have been in the mid- to low-single digits. 

Most of the increase in IT spending has been on salaries and outsourcing contracts. Contrary to some market views, we are not observing major replacements of working systems.  Most of the business applications and infrastructure installed in the 90s are still in operation.  Consequently it’s the Principals view that technology once installed tends to hang around for a very long time.  The replacement cycle for business applications and infrastructure will continue to lag - as there is only so much money to go around.  Indeed the untold technology story is the trend for IT to do cost effective application modernization vs. forklift technology replacement. No wonder IBM’s most successful products remain the mainframe and the “i” series (AKA the AS/400).

Besides increased staffing costs, the other place we observe an increase in IT spending is in recurring fees for maintenance and support. As products get more and more entrenched in companies the vendors have significant leverage over support fees.  While the opportunity to raise fees is pretty much universal not all vendors have used this leverage to grow profits. The result is that certain very savvy vendors and investors are using this dynamic to grow returns to investors by acquiring the less aggressive companies and maximizing the profit potential of recurring maintenance revenue. A great example for this model is Oracle, which has by de facto, if not completely overtly, turned into a giant software Private Equity investment firm.  It has become regular process for them to purchase maintenance streams, reduce costs, and grow profits.

Interested in more views?  Aivars Lode writes several blogs...

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