Software Prices to See Tepid Escalation in the Near Term

Spend Matters welcomes this guest post from IHS. 

Prices for software will move up hesitantly over the next couple years. The Producer Price Index (PPI) for application software is expected to add just 0.1% per year on average in 2015 through 2017, after posting modest gains of 1% each year in the prior 3 years. The PPI for software maintenance, technical support and other services is expected to add 0.8% over the next 3 years on average, after rising just 0.1% each year in 2012 through 2014.

Demand for software will continue growing steadily over the near term. In 2015 and 2016, total real spending on software will average 6.8% growth annually. This represents a slight acceleration in demand. For consumers, technology advancement continues to drive spending. For businesses, not all software purchases are discretionary, which has helped shield the industry from macroeconomic turbulences. To date, small projects with lower fixed costs and quicker, more tangible payoffs have been more the norm as companies waited for the economic recovery to take firmer hold. In 2015 and beyond, IHS expects long-term projects and capital spending programs with a distant return-on-investment horizon will become a higher percentage of ongoing software and programming spending.

IHS

Employment within the software sector continues to recover, but gains will be unenthusiastic over the next several years. Hiring within the industry resumed in 2010 and posted strong annual gains of 4.5% on average from 2011 through 2013 as a result of surging demand. But, even as strong growth in demand persists, payroll expansion is expected to decelerate in 2015 and 2016. Continued demand for new software from consumers and business alike will ultimately result in additional hiring over the longer term, but growth rates will remain subdued at less than 1.5% per year. With the modest growth in hiring, productivity gains will quicken. Real revenue per employee has been flat over the last 3 years during the surge in hiring, but going forward productivity is expected to rise 4% per year on average in 2015 through 2018.

Wage growth in the software industry, a key input cost, has been significant over the last year, driven higher by resurgent demand for software from businesses and consumers leading to strong expansion in employment. Wages rose 6.1% on average in 2011 through 2013, and wages are expected to average 2.5% annual growth over 2014 through 2016. To date, however, rapid wage growth has not translated into significant final goods escalation, and the outlook for prices reflects this continued absence of pricing pressure over the near term.

Rising wages notwithstanding, the data indicate little upward pressure on prices for software so far, and IHS sees continued minimal pressure on prices going forward. Greater international participation has led to strong price competition among firms offering computer software and programming services. The trend of outsourcing even complex software development tasks has increased competitive pressures on the industry, and consequently, the software industry remains a buyers' market and expectations surrounding prices should remain subdued.

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