Software industry defies economic crisis

2008 was another good year for the software industry. Revenues of the world’s largest software companies have grown 18% on average in defiance of the economic crisis. Only 15 out of 100 companies reported lower software revenues than last year.

The leading companies are the same as in 2008, securing their positions with healthy revenue growths. Microsoft is in the lead by far, with almost 50 billion USD software revenue (up 10.4%). Nintendo (#5) continued rise after moving up from #10th to 8th position last year. Nintendo more than doubled its gaming software revenues because of the success of the Wii.

Activision Blizzard, the newly formed gaming giant after the merger of Activision (2008: #12) and Vivendi Games (2008: #19), enters the Top 10 at 8th position. The company is well known for best selling games like Guitarhero and the online role-playing game World of Warcraft. The new company surpasses main rival Electronic Arts (#9), which unsuccessfully tried to acquire Take 2 Interactive in 2008. CA (#10) and Adobe (#11) dropped down a few places to make space for the gaming companies.

The 10 largest companies earn two-thirds of the software revenue of the Top 100; Microsoft alone accounts for a quarter of the revenues. This year, a record of 32 companies had software revenues of over 1 billion USD.

US companies are leading
US companies dominate the software industry with 74 companies in this year’s list. Japan is second, followed by large European countries, Israel and the Netherlands. Just outside of the Top 100 are some software companies from upcoming economies, particularly China, growing fast. In the coming years, more non-US companies are likely to enter the list.

Exchange rates
The revenue data in the list is displayed in US Dollars; fluctuations in the exchange rates influence the ranking. As the Dollar gained a bit on the Euro (5%) and a lot more on the British Pound (26%), many European companies dropped a few positions on the list.
The Japanese Yen on the other hand, was much stronger than last year (+23%), boosting USD revenues of the Japanese companies.

Mergers and Acquisitions: buying revenue growth
There has been M&A activity in the software industry, but less than last year; software CEOs were cautious in the light of the economic conditions. In the years to come, M&A activity is expected to pick up and continue at a firm pace as the industry giants use their free cashflows to buy smaller competitors. Since most acquired companies have revenues in the range of 20-200 million USD, their disappearance is not visible in the Top 100; of the mergers and acquisitions in 2008 only two had a direct effect on the ranking. The merger of the Vivendi gaming division (19) and Activision (12) was the most notable change in the list since last year.

Arrivals and departures
This year’s Top 100 counts 13 sizable new arrivals, raising the entry threshold significantly again from 228 million USD to 263 million USD. Among the new entries are 5 gaming companies that were below radar until now. Konami is the highest ranked newcomer at place 13.

The other new entrants earned their ranking as one of the 100 largest software companies in the world by increasing their software revenues. Some of the new entries also appear on the list of fastest growing companies. Russian antivirus company Kaspersky more than doubled its revenue to around 360 million USD. Kaspersky, that exists only 12 years as a company, plans to expand aggressively in the corporate segment and in upcoming economies. Right now, the company is the fourth antivirus company in the world, with ambitions to climb further on the ranking. If Kaspersky can sustain its current growth rate, the company will be able to challenge McAfee and Trendmicro in only a few years time.

Google still makes the bulk of its revenue through advertising, but made it to the list after spectacular growth of non-advertisement and software revenues. As the company continues to broaden its product portfolio Google enters the ranking at #79 and also leads the fast growth list. Over the past twelve months, Google and Microsoft have increased their competition. Microsoft launched Bing in 2009 to compete with Google on the search engine market. Google on the other hand announced a free operating system, to be added to Google Chrome in 2010, and an alternative to Microsoft Windows.
Omniture, founded in 1996, provides web analytics for online business optimization. The company was listed on the NASDAQ in 2006 and since then witnessed years of triple digit revenue growth. After the 100% year-on-year revenue growth in 2008, Omniture entered the Top 100 at place 96 and it is the fourth fastest growing company on the list.

Of the bottom 6 companies of last year, 5 dropped out of the top 100 as they could not meet the threshold. Only the British company Autonomy grew fast enough to maintain and even improve its position on the ranking, partly through the acquisition of Interwoven (up from #99 to #78). Thanks to the acquisition, Autonomy is in the Top 10 of fastest growing companies.

Sector performance
Security Software companies experienced the highest overall sector growth (41%), with Kaspersky as the prime example (+177%).

Gaming is booming business, signaled by the spectacular growth of Nintendo (113%) and the number of gaming companies in the list (13). The combined software revenue of the gaming companies in the Top 100 is over 28 billion USD, which is 13.6% of the total revenues of the Top 100. With five new entries in the list, strong overall revenue growth and high M&A activity, the gaming sector is alive and kicking. Economic growth and increased consumer spending on leisure activities are likely to spur gaming revenues further in coming years. Revenue development can be volatile as new versions of blockbuster games and consoles hit the market irregularly.

Conclusion
The majority of The Top 100 companies showed strong revenue growth last year, which is not to say that the economic downturn has not been noticed in the sector. However, the wide-spread assumption that software is a cyclical business has been proven incorrect. Although license revenues were under pressure at many software companies, subscription revenues were growing at a healthy rate, keeping average total revenue growth at 18% while the worldwide economy was in decline.