Finnish IT and software industry

Finnish IT and software industry Mikko Rönkkö Aalto University Software Industry Survey 2011 – www.softwareindustrysurvey.fi Contents •  Overview o...
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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-

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