As detailed in a recent Aberdeen InSight, “Supplier Revenues Warn of an Industry Realignment,” by Hugh Bishop, the twenty largest IT vendors have posted an aggregate 3.9 percent increase in Q1 revenues over the same period last year. Coupled with a 28 percent increase in combined net income, these latest financial results provide cause for optimism regarding a continued recovery for IT spending. Indeed, revenues for this group have shown steady progress over the last six quarters.

However, the most recent quarter also reveals signs of two fundamental changes in the market's landscape. The first is that mid-size technology suppliers are in danger of becoming marginalized. Although the largest suppliers showed revenue gains, many smaller firms showed continued declines. For example, Aberdeen's benchmark group of 20 application suppliers (whose annual revenues range from $150 million to $7.2 billion) witnessed an aggregate revenue decline of 3.5 percent. Similarly, Aberdeen's group of enterprise application integration (EAI) software suppliers saw revenues shrink 9.7 percent. Technology buyers are questioning whether these smaller firms have the financial wherewithal to compete against the likes of IBM, Hewlett-Packard and Microsoft and are rushing to the safety of these multibillion-dollar behemoths.

The second trend is the dramatic decline in software license sales for application providers. In Q1, license sales dropped 24.2 percent compared to Q1 2002. As a result, service revenues now represent over 71 percent of total revenues for application suppliers. This high service revenue ratio puts application suppliers in greater competition with systems integrators and signals the start of a battle between two supplier categories that traditionally have been allies.

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