The enterprise software market is shrinking — and old stars ain’t shining

I am off to CES in less than 3 hours, so I’ll make it quick: Bill Burnham has a series of great posts regarding the Internet and Enterprise software sectors of the public market, particularly:

• Software IPOs: 2005 Year In Review

• Top 10 Worst Performing Software Stocks of 2005

• Software Stock Update: 2005 Year In Review

• The Incredibly Shrinking Software Industry

In a nutshell, and I recommend taking a look at the compilation of data points and analysis work done by Bill: 4 software IPOs in 2005, a lot of Web 1.0 software darlings are in the list of worst performers for 2005, and the aggregate valuation of the Software sector has shrunk by 10% in 2005 — to compare with a modest 1.4% growth of the Nasdaq and a nice uplift of 14.4% of the Internet sector.

Bill lists five reasons behind this systemic decrease of the sector, which does not look too good for 2006:

1. Software is moving from “growth” to “value”

2. Open Source and Software as a Service

3. No big platform transition.

4. Networking companies are encroaching on software company turf

5. Being public ain’t so great

I would also add that the consolidation of the Software sector around IBM, Oracle, SAP, Microsoft and a few others is leading to limited M&A premiums — both for public and private companies.

There are exceptions though such as the $375M acquisition of Wily Technologies by CA, a 6X multiple on revenues and a nice payoff for VC investors who put in $37M.