Software Prices Expected To Fall In The Next Few YearsSoftware Prices Expected To Fall In The Next Few Years

Ongoing consolidation in the software industry--such as Oracle's mega-acquisition of rival PeopleSoft earlier this month--will drive down the cost of packaged software during the next three to five years, according to a study released Tuesday by the Meta Group.

The consulting firm says the traditional software market will condense by as much as 35% by 2008, and another 15% by 2010. Intensified competition among new application providers building on top of existing services from IBM, Microsoft, Oracle, SAP and other major vendors, along with increased availability of open-source technology, the growth of third-party providers, and continuous use of offshore labor, also will affect pricing. "In the past few years software prices escalated dramatically and as a result, users are upset with how much they have to pay for software," says Dale Kutnick, research director at Meta Group. "Vendors will reduce prices because they will see significant pressure from competition."

The Meta Group suggests in its report that users should try to isolate and maintain the basic ERP software in which they've already invested and build bridges to the new business applications that are more innovative and transformational.

That's what Ogilvy & Mather Worldwide is doing. The ad agency is investing in IBM WebSphere middleware to link existing systems, including its ERP applications. "We don't make big investments anymore in ERP, but we will in middleware," says Ogilvy senior partner and CIO Atefeh Riazi. "Software has become a commodity."

But emerging server technologies could drive up the cost of software licenses by at least 50% by 2006, according to Gartner. Trends in hardware such as the move toward multicore chip architectures, virtualization, server capacity on demand, and increased interest in rapid-provisioning tools might threaten the pricing model of software companies like Oracle, IBM, and Sybase, which are based on hardware capacity or central processing units. "New server technology is coming out with dual-chip CPUs and some software vendors like Oracle are telling their customers that they now have to pay double for every one of these licenses," says Jane Disbrow, research director at Gartner. The research firm suggests businesses renegotiate software licensing contracts to accommodate the new technology.