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More Applications Software Market Disruption in 2016

The enterprise software market changed dramatically in 2015. Case in point: software applications revenue grew by only 3.9 percent year-to-year in 3Q15 for the 23 vendors tracked by Technology Business Research (TBR).

Meanwhile, worldwide cloud service adoption generated software subscription revenue growth of 39.9 percent year-to-year in the quarter, and caused new license sales decline to accelerate to -25.3 percent among the same 23 vendors.

As these two market segments balance each other, total product revenue grew 7.6% year-to-year.

According to the TBR assessment, while cloud compresses revenue per solution and the associated margins, some mature cloud models begin generating profits despite investments in portfolio and global expansion.

Most notably, Salesforce reached its second quarter of positive organic operating margin, beginning to prove the profitability potential of Software-as-a-Service (SaaS) cloud applications.

However, as these proof points multiply, greater scrutiny will be brought against cloud vendors still operating at a loss, and ongoing profit weakness should trigger more exits of some big enterprise players and consolidation of smaller-scale competitors.

Cloud Market Development in 2016

"Inability to compete with entrenched competitors prompted HP to bow out of the public cloud market, and we expect smaller-scale vendors to admit this same defeat in the coming year," said Meaghan McGrath, analyst at TBR.

The overall market outlook indicates that the business model shift will escalate during 2016.

Beyond the impact of cloud delivery options on sales and vendor financials, disruptive trends -- including the expected integration of analytics, APIs and intuitive user interfaces -- dictate application transformation for vendors to remain competitive amid these changing expectations.

TBR says applications-centric vendors show the greatest aggregate growth performance, as they do not have auxiliary businesses that dilute their focus. Multi-line vendors have a larger revenue base and greater profit margins but must invest in maintaining auxiliary growth or, at the very least, mitigating declines.

That said, applications vendors already see the impact of economic volatility. As Europe and China cause the largest drags on performance, the hardening of applications and methodologies in the Americas could drive performance improvements as vendors begin selling their repeatable frameworks abroad.

Furthermore, planned investments to build cloud computing data centers in India -- specifically by Microsoft and Amazon Web Services -- will help other applications vendors offer their SaaS solutions in that country.

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