B2C Partners estimates the size of the total US market for online retail software last year to be $415 million. (http://bit.ly/NSzsg)) That seems too small to me.
B2C Partners uses the following method for arriving at their estimate:
$ 166 billion online revenue (2008)
A. x 3% of revenue for development & technology
B. x 50% of dev/tech for site improvement (v. support)
C. x 50% of eCommerce platforms third party (v. in-house)
D. x 33.3% of Year 1 costs on software (v. services to deploy)
(I have added the A. – D. line labels for ease of reference.)
Let’s start with A. — the percentage of revenue spent on software development and technology. According to B2C Partner’s very respectable sources (SORO Report 2007, Forrester Research and Shop.org) the range is actually 3% – 5%, and I suppose using 5% would have a large impact. In fact, it pushes that $415 million dollar market size up to over $690 million, which I like better.
Moving on to B., apart from the difficulty that sometimes comes with distinguishing between improvements and support, I do not see any big problems there.
When we get to C. and D., however, things start to get interesting. At HotWax Media we have an enterprise software services business that specializes in Apache OFBiz, which is a suite of open source enterprise e-commerce and ERP applications. As we have worked with a variety of businesses on many different types of projects over the years, we have found that some customers think of Apache OFBiz as a 3rd party platform, while others think of OFBiz as the root of their own in-house platform. Both concepts can work out great, and it generally depends on the client’s internal technology staffing as to whether the client’s behaviors are more inline with a traditional 3rd party platform project, or more what we would expect with a traditional in-house platform project. We regularly see projects that blur the line.
As OFBiz implementation experts, I suspect that this would have the effect of making the market relatively larger from our perspective (given that we could theoretically count revenue from the 50% who implement a 3rd party platform as well as the other 50% who use an “in-house” system). Great, we’ll take that extra $2 billion dollars in market opportunity!
Then there is the question of line D., which divides the software spend by 1/3 to differentiate between the cost of licensing versus services to deploy. Apache OFBiz is free and open source, so our service engagement customers do not need to think about it this way (nor do they need to sacrifice 1/3 of their year 1 budget on licensing fees). So for HotWax Media’s enterprise software implementation services business, we can really leave line D. out of the equation, since there are no licensing fees.
So when we add in the extra $2 billion to cover the 3rd party versus in-house distinction, and we refrain from pulling out the 33.3% to represent licensing fees, using the 5% of revenue number mentioned above, our enterprise e-commerce and ERP online retail software services market size is actually well north of $4 billion. (And that’s just in retail.) Quite a big difference from $415 million estimate with which we began.
I see a 3-part moral of the story:
1. a system has an advantage if it offers the client the options of in-house development or 3rd party reliance;
2. software that does not require a licensing fee can present a huge opportunity for increased returns on project investment; and
3. vendors that are well positioned to deliver implementation services on open source enterprise systems have a lot of budget to go out and win if they can make the case effectively to online retail business owners and corporate CIOs!
Author’s note: I realize that over the course of the post I have transitioned from “online retail software” market size to “online retail software services” market size, but I hope the transition was instructive in some ways, especially as it relates to the potential value in using open source software to reduce or eliminate licensing fees.