What Is Packaged Software?

How does IDC identify the companies it measures and the resulting value of the markets? Our objective is to define companies and markets that are relevant for market research purposes — not for legal or accounting purposes nor simply for publishing historic lists. Clearly, many companies have software and other types of business units; this taxonomy is not about deciding on the relative strengths of these business units and applying a single label to the entire company.

The question therefore is, When does a company market and deploy software that should be counted as such for market research purposes?
IDC uses the term packaged software to distinguish commercially available software from "custom" software, not to imply that the software must be shrink-wrapped or otherwise provided via physical media. Packaged software is programs or codesets of any type commercially available through sale, lease, or rental, or as a service. Packaged software revenue typically includes fees for initial and continued right-to-use packaged software licenses. These fees may include, as part of the license contract, access to product support and/or other services that are inseparable from the right-to-use license fee structure, or this support may be priced separately. Upgrades may be included in the continuing right of use or may be priced separately. All of the above are counted by IDC as packaged software revenue.

Packaged software revenue excludes service revenue derived from training, consulting, and systems integration that is separate (or unbundled) from the right-to-use license but does include the implicit value of software included in a service that offers software functionality by a different pricing scheme (as described directly below in more detail).

Increasingly, packaged software is also being marketed and deployed on a subscription and transaction basis, as well as via other arrangements (e.g., for "free" with the packaged software's "owner" taking a percentage of the revenue enabled by the software as implicit "product" revenue), some of which do not involve a license. Software has also long been available for lease or rent, typically on mainframes. Furthermore, we must not be limited by accounting directives (such as those released by AICPA and FASB) because this would neglect to count large segments of software markets in a way that accurately reflects market dynamics and future opportunity.

IDC's Software Market Forecaster research database includes revenue from a company if the company competes in a packaged software market defined in the taxonomy. From the market research standpoint, this is the most important question. Software revenue is defined in terms of two types of offerings from the viewpoint of the customer:

• The market for software code of a given functionality sold as such, typically via a perpetual license

• The market for software code bundled and marketed in another way (e.g., an application service) that competes with perpetually licensed software products

To be classified as packaged software revenue attributed to a company in the Software Market Forecaster research database, all of the following have to be true:

› Ownership of intellectual property. Application service providers (ASPs) that do not own the software code (e.g., Corio) are not software vendors but channels for software vendors. However, some vendors own the code and also provide an ASP offering (e.g., Oracle). In this case, IDC estimates a value for the software provided in that manner. However, in the case of packaged open source software (where there is no "owner" of the intellectual property), revenue is attributed to the distributor.

› Product is replicated. Software companies assemble a package of code from components and "sell" multiple copies in a one-to-many business model. The software product is replicated to support that model. Even though it may be customized as it is being installed, when the customization capability is an attribute built into the code, it is still considered replicated. Value-added resellers (VARs) do customization to packaged software, often on a one-to-one basis. In this case, VARs are a channel for the software. When a company takes code and adds its own changes and sells the resulting package substantially as changed to many customers, it is — in turn — an ISV that resells or OEMs components and adds value. (In these cases, IDC estimates the pass-through revenue and deducts it from the reseller and attributes it to the original owner of the intellectual property so as not to double count revenue and artificially inflate the size of the software market.)

› Competitive domain includes packaged software companies that license intellectual property rights to functionally similar software code. There are companies that offer to their customers packaged software functionality not via a right-to-use license but as a "service" that is wholly or partially based on software functionality. In this case, the question becomes, Does the company compete with packaged software companies that provide the same functionality? If so, a significant part of the basis of competition is the functionality of the software. Thus, there is a software component of the service company's revenue stream, and the value of the software must be "implicitly derived" or "attributed" and subtracted from the commingled revenue stream. Counting becomes difficult if the commingled product never has had a history of standalone software sales, and thus there is no requirement (from accounting rules) for calling out the revenue on the income statement. This accounting rule does not change the market dynamics — as far as the customer is concerned, services with the same functionality are available as substitutes for licensed software products, and IDC must account for this in our estimate of the size of the software market. This procedure has been used by IDC in the operating system market for many years when operating system revenue is bundled with hardware platforms. The operating system is an important part of the value of the competitive hardware offering. Software vendors sometimes do not offer the same functionality in standalone form.

See Lexicon: for a definition of terms used frequently throughout the IDC software taxonomy but that are not defined within the body of this study because they are not markets or submarkets. Also see IDC's Methodology, an overview of the Methodology employed by IDC's software analysts for collecting, analyzing, and reporting revenue data for the categories defined by the software taxonomy.