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Economic uncertainty and low business confidence in software spending are hurting software sales, but the sector will experience an upturn in 2003.

The software industry is expected to return to positive growth this year after a poor 2002, according to research firm Dataquest. It forecast that the sector would have worldwide end-users sales of $76.1 billion for 2003, a 3.5 per cent increase from the year before. In 2002, global software revenue fell 0.7 per cent.

"Renewed IT software spending will only occur in many organisations after a prudent review of the supplier options and the business priorities," said Joanne Correia, vice-president for Dataquest's software industry research group. "Despite the backlog of pent-up demand, vendors will continue to deal with a new extended sales cycle, resulting in more pressure on margins."

Dataquest, however, said that a combination of the current difficult economic climate and the uncertainty surrounding when or if there will be an upturn meant that it had to be cautious in its outlook for the industry's near-term future.

"While some sectors are seeing increased demand, other sectors are losing their share," remarked Thomas Topolinski, vice-president in the company's software industry research group. "The most prudent planning assumption is that, at least for the next 12 months, overall global demand for software licenses will remain as static as it is today."

The constraints on budgets will spell some good news for top-tier software vendors, as they will continue to take market share from pure-play vendors, Dataquest said.

Top-tier vendors, as defined by Dataquest, are vendors that have achieved dominant market share in more than one software market segment by offering a diversified and often integrated line of software products. Pure-play vendors, on the other hand, derive most of their software revenue from the sale of products within one market.

Dataquest also predicted that enterprises will continue to invest primarily in technologies that bring about business process cost efficiencies from their existing investments during 2003 and 2004.

"The business value of IT has become a major factor in decision making," said the research firm's report on the issue. "For enterprises to make new software investments, it will be critical for simultaneous investment in new technologies (hardware, wireless and Web services) that will help achieve short- and long-term return on investment." © ENN

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