Economy Drives Growth in Web-based Software

BOSTON (Reuters) – Web-based business software sales are growing briskly, even as most of the industry stalls, as the segment pioneered by Inc (CRM.N) benefits from the weak economy and fading concerns about security.

Gartner Research now expects 2009 sales of so-called cloud-based software to grow 22 percent to a record $8 billion, a touch higher than before, the firm said on Tuesday.

“We are still going strong,” said Gartner analyst Sharon Mertz, who advises IT managers on software purchases. “The model is pretty solid, even in these tight economic times.”

This puts pressure on established software companies such as Microsoft Corp (MSFT.O), International Business Machines Corp (IBM.N), Oracle Corp (ORCL.O) and SAP AG (SAPG.DE) to play catch-up, after standing on the sidelines for most of the past decade as Salesforce and others gained credibility with corporate clients.

Providers of cloud-based software, also known as Software as a Service or SaaS, host the technology in their own data centers, allowing customers to access it via ordinary Web browsers. That saves clients the cost of buying licenses in advance and running programs on their own computers.

Thus, SaaS sales have outperformed traditional software as the economy worsened. “It has low cost and low risk,” said Rebecca Wettemann, an analyst with Nucleus Research, which helps IT managers evaluate software programs.

SaaS provider NetSuite Inc (N.N), founded by Oracle chief Larry Ellison, this week reported a 22 percent increase in quarterly revenue, showing that its products were beginning to be accepted by larger companies in addition to its core base of small and medium-sized businesses.

While NetSuite is growing from a much smaller base, its performance contrasts with a 33 percent fall in software revenue at SAP, a 6 percent drop at IBM and a 5 percent rise at Oracle. Salesforce, which reports results later this month, is forecast to post a 23 percent increase in sales, according to Reuters Estimates.

Shares Reflect Growth

Gartner expects the SaaS market to grow at average annual rates of 19.4 percent through 2013, far above the 5.2 percent growth for the overall business management software market.

Investors have noticed and shares of major SaaS providers currently trade at a premium. Salesforce, whose stock has gained 40 percent this year, is trading at about 56 times forward earnings according to Reuters Estimates. NetSuite, which is up 48 percent this year, trades at a multiple of 93.

By comparison, SAP, whose shares have gained 12 percent this year, trades for about 14 times forward earnings. Oracle, whose stock is up 7 percent, trades at a multiple of 13.

Such a scenario was hard to imagine a decade ago, when Marc Benioff quit an executive job at Oracle to develop Web-based business software as easy to use as consumer websites such as (AMZN.O).

He assembled a small team of programmers who worked out of a small apartment in the building where he lived on San Francisco’s Telegraph Hill. They developed Salesforce’s first software programs for managing sales and marketing fairly quickly, but getting customers was a bigger challenge due to security concerns.

“The idea of putting corporate information on the Internet was something that people thought was just not going to happen,” said Parker Harris, one of Benioff’s first employees and one of Salesforce’s top developers. “The real question was: Would people trust it? It is a huge issue.” 

Small Business Computing Staff
Small Business Computing Staff
Small Business Computing addresses the technology needs of small businesses, which are defined as businesses with fewer than 500 employees and/or less than $7 million in annual sales.

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