Software to be Spared?

In an article in this week’s Economist, the author posits the existence of a technology food chain, telling the story of Autonomy.  Autonomy is Britain’s largest software firm, and nearly capsized in the technology crash of 2000-2001 but is now riding high. The Economist‘s idea is that the current crunch is hurting the bottom of the food chain — semiconductor equipment, then semiconductor — worse than the next feeder — computer hardware — and so on up a chain where software is at the favorable extremity. The author reckons that hardware purchases are relatively easier to postpone than software, hence the relatively greater vulnerability to macroeconomic factors.

Enterprise Search — Autonomy’s field — doesn’t bear a lot of resemblance to Nakina’s telecom vertical, but the article got me wondering about the truth of the ‘food chain’ hypothesis in general, and the resilience of telecom software in particular. We see a lot more activity in our pipeline today than six months ago, but we’re a small and biased sample, so it’s hard to draw any general conclusions. Is software at the virtuous end of a technology food chain (or if not virtuous, at least comparatively safe from predators and carrion eaters)? Is telecom software living in a decently furnished bunker or is it lying face down in a shallow ditch?

There’s a right way to answer the question, but that would involve research assistants, an appropriate methodological attitude, and a greater attention span than I’m willing to devote. We can also take out a virtual cocktail napkin and figure it out in the new old-fashioned way.

Take a look at the one year change in three indexes — semiconductors, technology hardware, and software — relative to the Dow Jones Industrial Average.

One Year Change in DJ Index

US Semiconductor Industry	-43.27%
US Technology HW & Equipment	-40.69%
US Software	-32.19%

(data courtesy of bigcharts)

The broad sample of market indices certainly seems to support the food chain hypothesis, with software faring about ten points better than semi, and seven better than a (very broad) sample of technology hardware.

A lot of narrower anecdotal datoids seem to suggest that telecom capital spending — from which most telecom software revenue has to flow — isn’t necessarily drying up. Deutsche Telekom announced to Light Reading last week that it’s capital spending in ’09 would be maintained at a comparable level to ’08. That agrees with what Telekom executives have told us recently. Overall capital spending at Verizon may be past its 2008 peak (of about $18 bn), but that appears to be more a case of FIOS capital spending having reached its high point in 2007, rather than macroeconomic factors (next wave:  LTE). ATT plans to trim capital outlays by about 10%, but we also see them getting very aggressive about growth in new broadband services this year.

There are products that thrive in recession and others that are particularly vulnerable. Deodorant sales typically fall (fewer investment bankers partying all night) and cheap beer sales rise (Schlitz anyone?).  People stop paying for good wine before they stop paying their cellphone bills.   Software — and in particular software that helps networks to grow faster with fewer manual touches — looks like a good bargain when the Moët is gathering dust on the shelf.  And as for food chains, it’s always better to be the predator than the prey (or in Boston-speak, better a Fenway Fan than a Fenway Frank).