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Years of software gloom ahead?

There are still too many companies selling too much software to too few people, a situation that will continue until 2007, according to Ovum.

The software market continued shrinking last year and is unlikely to recover in real terms until 2007, according to a report from the London-based research group Ovum.

In its annual Global Software Survey, Ovum said the software market declined 5 percent in 2002, to $152 billion. Though the rate of decline is slowing, the report said, the market will continue falling until at least 2005.

The research indicates that "small growth" is likely in 2005, but Ovum said this is misleading because of currency fluctuations.

"(The) currency shift flatters 2003 spending because the dollar has fallen 15 percent against the euro since December 2002, so the 2003 decline is actually one or two percent worse," said Julian Hewett, chief analyst at Ovum, in a statement.

The news is even more gloomy when inflation is taken into account, Hewett added. "In real terms, it's unlikely that the market will grow again until 2007," he said.

Although the market will not grow, Ovum expects it to continue changing, with a shift in the structure of enterprise software delivery. Hewett believes that Web services is a "disruptive technology" that may cause enterprises to move away from buying independent software products and to instead move to a "services-based architecture" that improves the outlook for outsourcing and application service providers.

Security, business intelligence, portals and content management are bucking the downward trend. For example, business intelligence company Cognos has seen its revenues increase by 25 percent this year, the report said. Meanwhile, companies that support mobile workers and wireless products are "beginning to attract serious interest."

Consolidation is common in industries where too many companies are trying to increase their share of a shrinking market, which explains what Hewett termed as the current Oracle-PeopleSoft-J.D. Edwards "love triangle." Ovum sees this trend continuing, especially with software infrastructure.

"EMC's acquisition of Legato has started the ball rolling," Hewett said.

The top five software vendors last year, in terms of revenue, were Microsoft in first place ($25.9 billion), followed by IBM ($13.1 billion), Oracle ($6.9 billion), SAP ($6.8 billion) and Hewlett-Packard ($2.6 billion), according to the report.

ZDNet UK's Munir Kotadia reported from London.