The end of the middle (in software, at least)

Interesting article in BizWeek on the consolidation in the software industry, triggered by IBM’s announcement that it’s acquiring Cognos.

Cognos makes products that CEOs and accounting types love and middle managers generally hate. Their flagship product is a performance management tool that eats data like candy, and–depending on how well you’ve cleaned and polished your input–spits out balanced scorecards, dashboards, and other strategic overviews that can actually make your life (or your bosses’ lives) easier…if you pick the right set of analytics.

Anyway, IBM’s buying them. BizWeek’s point is that it’s getting harder and harder to be a mid-sized software company these days. Unless your software products are only popular in some vertical market, or incredibly useful to an obscure niche nobody’s ever heard of, you’re in trouble. BizWeek says you’re likely too big to have Friday beer bashes and too small to effectively respond to serious challenges. If Microsoft or Oracle or SAP or IBM or Google or whoever decides to add your functionality to their products, you’re hosed. You can’t outmaneuver them, you can’t outspend them, and so you either die or are acquired by them.

They cite plenty of recent acquisitions to prove the point, and I’m not arguing with them. I just don’t think it’s a new and shocking phenomenon. Rather, it’s just the way that software evolves.

I’d be willing to bet that the vast majority of truly great innovations in software–at least in the last decade or two–have come from upstarts, not major players. If you grab any major operating system’s feature set and backtrack 3-5 years, you’ll find that a substantial chunk of of it was born outside the corporate campus, and made its way into the big guys’ products through licensing, M&A assimilation or “borrowing.”

That’s great for legacy apps, since it’s how my foundation software gets better, whether it’s from the IBMs or Oracles of the world or something farther down the food chain, like Adobe. For the most part (train wrecks caused by Computer Associates don’t count), it’s been of great benefit to consumers. As for the smaller companies, well, they have a validation that they out-innovated the big guys, and a one-in-ten thousand shot to become the next Microsoft.

The downside, of course, is figuring out where to find new innovation once you’ve eaten all your innovators. Once a big guy has won the field and cleared out competitors, that software category rarely keeps on showing innovations. Megacorps rare do much innovating with a successful product.

That doesn’t mean they can’t come up with some incredibly cool new products–that’s what R&D is for, after all–but extreme makeovers of existing products are very rare. It’s too scary (and admittedly stupid) to risk your userbase, and much safer to watch the market for innovations with legs and adopt them…once proven.

Office automation software is an interesting case in point. Now BusinessWeek is telling us that business intelligence is going the same way. I don’t necessarily think that’s a bad thing, as they seem to. For me, it’s the pregnant pause before an upstart blows a hole in the side of the boat and the survivors scramble to stay afloat.

Darwin would be proud.

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