Future Market for Web Services Products

Report Highlights

• Web services-related software products and related professional services are expected to grow by 50% in 2002.
• The overall Web services market is projected to have an average annual growth rate (AAGR) of 83%.
• This growth will be fueled in large part by growing sales of Web servicesenabled applications and associated professional services.
• Web services will have a significant impact on total software sales and the financial challenges facing both software companies and third-party integrators.
• Long term, winners of the race will be agile firms that perceive unmet customer needs and combine Web services in innovative ways to meet those needs.

INTRODUCTION

STUDY GOALS AND OBJECTIVES

This study has several goals and objectives. The overall goal is to provide a quantitative overview of the emerging global market for Web services or, more specifically, Web-services-enabled software and related professional services. Other objectives include answering such questions as:

• What are the factors driving market growth for Web services?
• Which market segments (type of technology, geographical markets) offer the best growth opportunities for Web services?
• What are the emerging channels of distribution for web services?
• Who are the early market leaders in these segments, and what other firms appear well positioned to assume future leadership?
• What features and functionalities are needed for success in these markets?
• What are the advantages and disadvantages of different distribution channels (e.g., application service providers) in reaching various market segments?

The final objective of the study is to analyze the probable long-term impact of Web services technology on the future of the software industry. As this study will show, Web services have the potential to transform the software industry's structure, economics and sources of innovation.

BACKGROUND

As the world moves in the direction of pervasive, anytime-anywhere computing, the current software paradigm of a stand-alone application residing on a PC is progressively being replaced by the "Web services" model. A 2001 study found that 60% of the software companies interviewed had plans to introduce new Web services in the near future, ranging from giants like IBM and Sun, to a host of new start-up ventures.

Web services have recently generated intense interest, not only among vendors and potential end-users, but in the analytical community as well. Even a cursory literature search turned up dozens of analyses, most of them brief analyst "alerts," but a few longer reports. Most of the analytical work has been done since early 2001.

Relatively few of these analyses are quantitative in nature, e.g., analyzing the economics of Web services in specific applications and using the results to project future trends in Web services-related spending. Even fewer analyses evaluate the potential Web services market from a macro perspective, i.e., in its totality and in the context of broader technology and developments.

This study is intended as the most in-depth analysis to date of the potential market for Web services, integrating technical, economic and trends to present a useful road map for the next five years.

INTENDED AUDIENCE

The report has been written for the entire web services interest community, but is tailored especially for readers in top management, including:

• Decision makers in the computer hardware, software and services industries;
• Chief technology officers of organizations that are implementing or considering implementation of Web services solutions;
• Vendors of Web services platforms and development tools;
• Application service providers, Web application brokers and other value-added service providers; and
• Integrators and consultants.

SCOPE AND FORMAT

This report is an analytical tool whose primary purpose is to describe the emerging market for Web services. The report covers the following topics:

• Industry structure;
• Global market size and segmentation, including market drivers and historical and projected sales by product/market segment (e.g., geographical markets, end-user industry and company size);
• User requirements and success factors;
• Early market leaders; and
• Conclusions and future trends: emerging technologies and impact of Web services on the software industry.

METHODOLOGY AND INFORMATION SOURCES

The findings and conclusions of this report are based on information gathered from vendors and early adopters of Web services and related technologies, as well as other informants. Additional data were obtained from extensive reviews of secondary sources such as trade publications, trade associations, company literature, and on-line databases.

Collecting and interpreting market data related to Web services involves unusual challenges because:

• Particularly in the near to mid-term, Web services technologies, for the most part, do not define a discrete market. In most cases, they add value by leveraging existing technologies to generate incremental revenues, rather than creating completely new revenue streams.

As a newly emerging technology, Web services lack a large existing user base and a historical track record of sales that can be used as a benchmark for future projections and a source of information about major market drivers

This study's approach to meeting these challenges is described below.

AGGREGATED MARKETS

The term "aggregated" markets refers to the fact that Web services technology for the most part does not define a discrete market; rather, it leverages existing products and technologies. In 2002, virtually all of the Web services-enabled software products on the market are either software infrastructure (e.g., application servers, electronic application integration, enterprise portals, process management engines, and specialized development environments) or applications that have been upgraded to include Web services functionality.

The market for Web services is thus largely aggregated with other markets, such as application servers or ERP (enterprise resource planning) applications. The analytical challenge is to find a way of isolating the market for Web services per se. The approach taken by this study is to focus on the incremental demand for software generated by Web services functionality, i.e., additional unit sales or higher prices that would not be realized without Web services, i.e.:

• What impact is Web services technology having on the amount of different types of software being sold (e.g., by making certain types of enterprise application more affordable and accessible to small and medium enterprises)?
• How is Web services technology affecting the price at which software and applications are sold?

When Web services infrastructure and applications providers add Web services technology and functionality to their products, the incremental revenues that result are based on the value the market places on Web services.

NEWLY EMERGING TECHNOLOGY

As a newly emerging technology, Web services require a different analytical approach from an established technology such as customer relationship management (CRM) or supply chain management (SCM). Established technologies have a sizeable user base and a historical track record of sales that can be used as a benchmark for future projections as well as a source of information about major market-drivers.

Surveys of vendors and end-users are an important element of any market study, including this one. However, vendors' sales projections are often influenced by internal corporate considerations, as well as a desire to generate market interest and hopefully sales.

Vendors and potential end-users alike generally have little information concerning the case for a Web services solution to their companies' needs, which in most cases will be the basis for a decision to implement Web services projects. Without a convincing case, survey findings like the one cited earlier (i.e., 60% of interviewees "intend" to implement web services projects in the next year) tend to be ephemeral, especially in an unsettled economic and climate.

The same approach that is used to overcome the problem of aggregated markets provides a partial solution to this difficulty, at least in the case of Web services-enabled versions of existing software and applications. The potential margin of error that results from having vendors and end-users project their sales or purchases of a new and not fully-tested technology like Web services is minimized by focusing first on trends in the baseline market for these products (i.e., the market without Web services).

The research and interviews can then focus on the marginal impact that Web services are having and will have on:

• The likelihood of companies' investing in different types of software or applications if they are Web services-enabled;
• The relative probability that they will invest directly in Web services vs. outsourcing;
• Vendor and outsourced services provider selection criteria; and
• The anticipated timeframe of their decisions.

AUTHOR'S CREDENTIALS

The author of this study, Andrew McWilliams, is a partner in the Boston-based international technology and software consulting firm of 43^rd Parallel LLC. He has over 25 years experience in market forecasting and strategy consulting, particularly in technology-intensive industries such as software and e-business.