Finnish IT and software industry Mikko Rönkkö Aalto University
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
Contents • Overview of the Finnish ICT-industry • Brief overview of the study • Overview of the Finnish software industry after the recession • The effects of Nokia’s change of software strategy • Consolidation and acquisitions • Conclusions
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
The Technology Industry Is Comprised of Five Sub-sectors Electronics and Electrotechnical Industry
Metals Industry
ABB, Elcoteq, Ensto, Nokia, Nokia Siemens Networks, Perlos, Planmeca, Polar Elektro, Suunto, Vacon, Vaisala, VTI Technologies...
Boliden, Componenta, FNsteel, Kuusakoski, Luvata, Norilsk Nickel, Outokumpu, Outotec, Ovako, Rautaruukki, Sacotec…
Mechanical Engineering
Information Technology
Abloy, Cargotec, Finn-Power, Fiskars, Glaston, Kone, Konecranes, Metso, Normet, Oras, Patria, Pemamek, Ponsse, Stala, STX Finland, Valtra, Wärtsilä...
Affecto, Comptel, Digia, Endero, Enfo, Flanderm F-Secure, Fujitsu Services, IBM, Logica, Microsoft, Tieto…
Consulting Engineering Citec, Deltamarin, Elomatic, Etteplan, FCG, Finnmap, Granlund, Neste Jacobs, Pöyry, Ramboll, Rejlers, Sito, Sweco, WSP… 3
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
The Technology Industry in Finland in 2010 Electronics and Electrotechnical Industry
Metals Industry
• Data communications equipment, instruments, electrical machinery • Turnover 20.3 billion euros • Personnel 55 000
• Steel products, non-ferrous metals, castings • Turnover 9.0 billion euros • Personnel 13 500
Information Technology
Mechanical Engineering
• IT services, applications • Machinery, metal products, and programming vehicles • Turnover 7.2 billion euros • Turnover 25.9 billion euros • Personnel 54 400 • Personnel 125 000 Consulting Engineering • Expertise for construction industry and infrastructure • Turnover 4.8 billion euros • Personnel 43 100 4
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
The Technology Industry – the Most Important Sector in Finland • 60 % of total Finnish exports. • 80 % of private-sector R&D investment. • Some 290 000 employed directly in the sector, a good 700 000 employed in total, equalling over one quarter of the entire Finnish labour force.
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
5
Turnover of the Technology Industry Billion euros, at current prices 34 32 30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0
2000
2001
2002
2003
2004
2005
2006
2007
2008
Electronics and electrotechnical industry
Mechanical engineering
Metals industry
Information technology
2009 2010e
Consulting Engineering
Source: Statistics Finland, The Federation of Finnish Technology Industries
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
Turnover of the Technology Industry 250 240 230 220 210 200 190 180 170 160 150 140 130 120 110 100 90 80 70
2000,1=100
Change: 2010/2009, % | 1-2,2011 / 1-2,2010, %
Metals industry
+50 % | +38 %
Information technology
+5 % | +9 %
Mechanical engineering*
+5 % | +28 % Electronics and electrotechnical industry
+4 % | +7 % Consulting engineering
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
-2 % | +13 %
*) Excl. shipyards. Seasonally adjusted turnover index, last data 2/2011. Share of total turnover in 2009: mechanical engineering 40 %, electronics and electrotechnical industry 32 %, information technology 11 %, metals industry 9 %, consulting engineering 8 %. Source: Statistics Finland
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
25 Largest IT companies Rank
Company 1 Nokia 2 Tieto 3 Telia-‐Sonera Finland 4 Elisa 5 Also Nordic Holding 6 DNA 7 HewleF-‐Packard 8 IBM 9 Fujitsu Services 10 Logica Suomi 11 Tellabs 12 3 Step IT 13 Siemens 14 Tech Data Finland 15 Itella InformaMon 16 Accenture 17 Atea Finland 18 Osuuskunta KPY 19 Verkkokauppa.com 20 Eltel Networks 21 Teleste 22 Elektrobit 23 Cassidian Finland 24 L M Ericsson Ab 25 Digia
Revenue. M euro Growth
Personnell
Industry
42 446.0 1 713.7 1 694.0 1 463.2 919.1 690.5 504.4 455.0 420.2 394.5 312.7 302.4 287.0 266.0 259.7 255.0 209.3 192.4 173.2 170.8 167.8 161.8 149.9
3.6 0.4 0.5 2.3 3.0 5.9 7.2 17.0 14.8 10.4 12.1 37.0 -15.1 8.1 5.1 -1.8 23.2 5.8 12.5 -7.4 18.5 5.2 -3.2
129 355 Telecommunications equipment 17 097 IT services 4 686 Telecommunications services 3 477 Telecommunications services 725 Wholesale 934 Telecommunications services 724 IT equipment and services 1 380 IT equipment and services 2 794 IT services 3 026 IT services 610 Telecommunications equipment 183 IT services 945 IT equipment 69 Wholesale 1 910 IT services 1 396 IT services 321 IT services 1 062 IT services 312 Retailing 1 127 Telecommunications services 1 215 IT services 1 561 Telecommunications equipment Telecommunications equipment
131.9 130.8
-19.7 8.7
935 Telecommunications equipment 1 508 IT services
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
National software industry survey 2011
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
Sponsors of the 2011 survey
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
Software Industry Survey • Run in Finland since 1997 • The longest running software industry survey in the world • Provides annual overview of the industry • Changing research themes Software Industry Survey 2010
November 19, 2010
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
Survey in the 2011 • Data collection in spring and early summer • Covers the whole software industry – Product and services firms – In 2011, 506 responding companies – In 2011, we excluded sole proprietors from the survey
• Three cooperating universities – University of Jyväskylä and Cloud software program – Fraunhofer institute, survey in Austria and Germany
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
Overview of the Finnish software industry after the recession
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
Finland has placed high on international benchmarks during the recent years • Finland has recently placed well in international benchmarks on ICT
IT industry competitiveness index 2009
– “Finland is one of the innovation leaders in ICT sector in Europe” (Sectoral Innovation Watch) – Finland is one of the few “independent” countries with a healthy and self-sustaining IT industry (PAC) – Finland ranked 6th in the number of companies in the 200 largest software firms in the world (PWC) – 6 Finnish companies in the top 100 European software companies in 2010 (7 in 2009) (Truffle)
Score
Rank
United states
78.9
1
Finland
73.6
2
Sweden
71.5
3
Canada
71.3
4
Netherlan ds
70.7
5
United Kingdom
70.2
6
Australia
68.7
7
Denmark
68.6
8
Singapore
68.2
9
Norway
67.1
10
Source: Economist Intelligence Unit
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
An industry dominated by SMEs by number and large firms by volume 100% 90%
0.51% 1.74% 3.06% 4.08%
80%
0-9
10-19
40.16%
20-49
50-249
250+
43.70%
45.74%
70% 60% 50% 90.61%
23.81%
23.08%
23.10%
40% 30%
12.01%
20%
7.02%
10%
11.83%
9.49%
6.50%
6.92%
16.99%
14.89%
14.76%
Employees
Revenues
Value added (factor cost)
0% Number of firms
Structure of the Finish Software and IT Service industry in 2007 based on employee size classes Source: Eurostat
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
We estimate that the industry grew 5% in 2010
– Nokia will increase outsourcing of Symbian development with the Accenture deal – Current subcontractors will lose some of their business
3212 3090
3059
2008
2009
2728 2547
2000
2316
1500
Total revenue, M euro
2500
3000
2985
1000
• Amount of software revenue and service revenue directly related to software is estimated to be 3.2B euro • 2010 was a year of recovery from the recession • Industry level growth in 2011 difficult to predict because of Nokia
2004
2005
2006
2007
Year Estimated data
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
2010
10
Realized growth Revenue < 1Meur Revenue 1-10Meur Revenue >10Meur Expected growth Revenue < 1Meur Revenue 1-10Meur Revenue >10Meur
-10
0
Growth of revenue, %
20
30
Firm level growth and growth expectations back on normal levels
2007
2008
2009
2010
2011
Year
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
Sources of revenue remain stable Sources of revenue
13% 2% 13% 2%
9%
8% 7% 10% 3%
33%
3rd party software licenses ASP and SaaS Content and ads Deployment project Development project Hardware Maintenance Not software related Other software related Own software licenses
N=491
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
Finnish software industry is predominantly B2B business • Mainly B2B business – Information systems software – Development and deployment services – Professional applications
Typical customers
16%
• Some notable consumer businesses
22% Firms, 51-250 employees Firms, over 250 employees Firms, under 50 employees Consumers Public sector
5%
26%
– Computer games – Data security products
31%
N=481
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
More than third of the companies have international revenue 5% 21% 27%
25%
International operations Significant international revenue Minor international operations Plans to internationalize Not currently relevant Have previously had
22%
N=469
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
The industry is half and half global business and traditional exports 110
.4
55
Nordic Countries West Europe East Europe and Russia North America Mid and South America East Asia South Asia South Pasific Middle East Africa
56
50
.6
Number of firms
.8
100
1
113
37
.2
23
22 18
16
Global distribution
Traditional exports
Type of international operations
0
0
6
N=222
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
The effects of Nokia’s change of software strategy
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
Perceptions about the impact of Nokia’s new platform strategy 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
• Less than one in four (22,8%) expect some direct effect on their business • However, Nokia’s situation does not seem to affect the clear majority of firms
6.7%sure 16.1% 6.9% 22.1% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 48.2% Disagree Not Agree Strongly No N=461 direct Disagreeeffect on our business Agree No 6.7% 16.1% 6.9% 22.1% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 48.2% Disagree Not Agree Strongly N=461 sure direct Disagreeeffect on our business Agree NoNo direct effect onon our business direct effect our business
48.2% 48.2%
22.1% 22.1% 16.1% 16.1%
6.9% 6.9%
6.7% 6.7%
Strongly Disagree Strongly Disagree
Disagree Disagree
Not sure Not sure
Agree Agree
N=461 N=461
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
Strongly Agree Strongly Agree
Perceptions about the impact of Nokia’s new platform strategy • Even fewer see that the viability of their core business is threatened (3,3%)
25.7% Agree 16.0% 25.1% 26.4% 30% 25% 20% 15% 10% 5% 0% 6.9% Disagree Neutral Agree Strongly N=451 Offers Disagree us new business opportunities
Offers us new business opportunities
30%
Threatens our core business 66.1%
25.7%
25.1%
26.4%
16.0%
30%
15%
40%
20%
50%
25%
60%
70%
66.1% Agree 23.9% 6.8% 1.8% 70% 60% 50% 40% 30% 20% 10% 0% 1.5% Disagree Neutral Agree Strongly N=457 Threatens Disagree our core business
• A third see that the situation creates new business opportunities
20%
10%
23.9%
5%
10%
6.9%
1.8%
1.5%
Agree
Strongly Agree
0%
0%
6.8%
Strongly Disagree N=457
Disagree
Neutral
Strongly Disagree
Disagree
Neutral
Agree
N=451
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
Strongly Agree
Perceptions about the impact of Nokia’s new platform strategy 6.6%sure Agree 20.8% 37.2% 27.9% 40% 35% 30% 25% 20% 15% 10% 5% 0% 7.5% Disagree Not Agree Strongly N=226 Benefits Disagree the Finnish software industry
10% 15% 20% 25% 30% 35% 40%
Benefits the Finnish software industry 37.2%
27.9%
20.8%
7.5%
5%
6.6%
0%
• A majority find Nokia’s strategy change to be beneficial to the Finnish software industry (35.1% vs. 26.4%) • However most firms (38.6%) expect no change
Strongly Disagree
Disagree
Not sure
Agree
N=226
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
Strongly Agree
Platforms for which companies developed software for in 2010 and plans for 2012 • Server and desktop platforms have high and steady shares • The industry is becoming more “mobile” despite Nokia’s hardship: – About twice as many companies will develop for mobile platforms by 2012
• Cloud and social media are growing fast but remain at smaller shares
Embedded Social Cloud Mobile Desktop Server 10.4% 11.0% 15.1% 22.4% 61.7% 62.1% 13.7% 17.8% 26.3% 40.6% 60.5% 64.4% 0% 25% 50% N=517 Platforms platforms media platforms platforms platforms platforms used to be in used 2010 in 2012
Server platforms
62.1%
Desktop platforms
61.7%
64.4%
60.5%
Mobile platforms
22.4%
Cloud platforms
40.6%
15.1%
Social media platforms
11.0%
Embedded platforms
10.4%
50%
Platforms used in 2010
25%
26.3%
17.8%
13.7%
0%
25%
50%
Platforms to be used in 2012
N=517
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
Platforms for which companies developed software for in 2010 and plans for 2012 2012
25%
2010
23.8%
20%
23.8%
15%
16.2%
10%
13.9%
8.5%
7.9%
5%
7.0% 5.6%
4.8% 3.9%
4.1%
4.1%
5.0% 3.7%
0%
• Android development to surpass iOS development • Windows Phone development will be as common as Android development • Windows Phone will be the largest gainer
Android iOS (specifically tailored for iPad) Symbian Other (specify below)
iOS (iPhone / iPod touch) MeeGo / Maemo / Moblin Windows Mobile/Windows Phone
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
Consolidation and acquisitions
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
Industry Consolidation Revenue and Profit distribution
Largest firms
Largest firms
1 000 001100 001-1 000 000 10 001-100 000 1 001-10 000 101-1000 11-100 1-10
1 000 001100 001-1 000 000 10 001-100 000 1 001-10 000 101-1000 11-100 1-10
20%
20%
40%
40%
60%
60%
80%
80%
100%
100%
• Revenue distribution has little variation • Profits have been increasingly accumulating for the largest companies
2004
2005
N=1311043
2006
Year
2007
2008
2009
2004
2005
2006
Year
2007
2008
2009
N=769637
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
Firms
500000
550000
600000
650000
700000
Industry Consolidation Number of companies and M&A deals
2000
2002
2004
2006
2008
Year
Deal volume Deal count
50
3000
100
3500
150
Count
Million Euro
4000
200
250
4500
250 count 200 150 100 50 Count 4500 4000 3500 3000 Million 2002 2004 2006 2008 2010 Year Deal volume Euro
• Number of companies increase steadily • Deal count and volume has dropped due to recession • No sign of accelerated consolidation, or “shakeout”
2002
2004
2006
Year
2008
2010
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
Industry Consolidation Number and Value of Deals in Finland 20 companies 0 80 60 40 20 Number 2000 2002 2004 2006 2008 2010 Year Between From N=624 All Abroad Finland of Finnish Deals to to Abroad Finland Companies
0
20
40
Number of Deals
60
80
All companies
2000
2002
2004
Year
2006
2008
2010
Between Finnish Companies From Abroad to Finland From Finland to Abroad
25
N=624 11 8 13 18 19 23 9 1 5 25 20 15 10 Million 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Year N=114 1 3 0 (6 Euros extreme (mean) observations removed) 23
20
23
Million Euros (mean)
18
15
15 13 11 9
10 5
19
8 5
5
2000
2001 2002
2003 2004
2005
Year
N=114 (6 extreme observations removed)
2006 2007
2008 2009
2010
• Number of domestic deals peaked in 2005, declined towards 2008 • A rise in number of deals after recession (+45% from 2009-2010) • Mean value of deals has not recovered after recession – Some missing data for the last two years, but the trend is clear
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
Exiting the Finnish Software Industry Potential Exit Avenues 25%
22.0% 5.4% 3.2% 2.9% 2.4% 25% 20% 15% 10% 5% 0% 2.7% Acquisition company Transfer to Discontinuance liquidation Initial offering N=410 Employee Sale other to public an family ofbuyout individual by ownership other members and/or
20%
22.0%
Acquisition by other company
10%
15%
Employee buyout Transfer of ownership to other family members Discontinuance and/or liquidation Sale to an individual Initial public offering
5%
5.4%
0%
3.2%
N=410
2.9%
2.4%
2.7%
• 22 % of surveyed companies would choose trade sale as exit avenue • Other avenues rated very low • The same pattern applies for every age class – Even mature companies will not choose IPO
Software Industry Survey 2011 – www.softwareindustrysurvey.fi
Exiting the Finnish Software Industry Who is willing to sell or buy?
Willing to buy: Those willing to grow, with good revenue
0% 5% 10%15%20%25%30%35%
Those willing to grow, but who have trouble finding external financing
0% 5% 10%15%20%25%30%35%
Willing to sell:
16.3% Meur 5.7% 9.6% 32.6% 6.5% 13.0% 27.0% 7.9% 31.7% 11.1% 33.3% 25.9% 26.7% 6.7% 35% 30% 25% 20% 15% 10% 5% 0% 20.0% 0-