Enterprise Search Market Poised For Constriction?

How many enterprise search vendors are too many? The answer to that question could become clear in the coming months. Traditionally, enterprise search suppliers have been able to charge a premium for their expertise, but such boom times have moved squarely into the rear view mirror. Currently, suppliers' margins are being squeezed, a change that may force some into the arms of willing buyers.

Enterprise search emerged at the turn of the millennium. Employees had become familiar with the quick and easy way that Web searches were conducted and desired a similar experience in the enterprise. However, delivering such capabilities was a challenge for a couple of reasons. There was a wide variety of data types in the enterprise, and they could not easily be consolidated. Also, users desired specific items rather than general locations where they could browse. Consequently, deploying an enterprise search system was a complex endeavor, one where vendors were able to charge premium prices.

That ability has been curtailed by the entry of two of the IT industry's most influential vendors.  Google came first and simplified search system deployments by taking an appliance approach. A customer could drop the search device into its network and have the solution running in a day or in some cases even a few hours. Also, the company's product cost a few thousand dollars compared to the tens of thousands and hundreds of thousands of dollars for alternatives.

Microsoft was the next behemoth to shake up the marketplace. The company began bundling its Search Server Express 2008 into its products and followed on with its inexpensive Search Server 2008. These products were suited to simple searches and were sometimes criticized as lightweight and superficial. To fill the void at the high end of its product line, the vendor decided to pay $1.2 billion and acquire Fast Search & Transfer, a Norwegian search solution supplier in Jan. 2008. Microsoft's plan is to integrate its different search solutions and become a one-stop shop for enterprise search products.

The entry of the industry giants dramatically impacted smaller suppliers who could no longer charge high prices for their products. Another problem was the enterprise search market was reaching a saturation point. "Nine out of ten companies have now deployed a search system and three out of four even have two or more," noted Whit Andrews, a vice president at Gartner.So, new sales began to slow, and the recent economic downturn exacerbated that problem. Spending on enterprise search systems is expected to be flat in 2009, and no one is sure if - let alone when - a turnaround may come. As a result, many search vendors are struggling. Most of these suppliers are small, with revenue ranging from the $10 million to the $100 million mark. Autonomy, which has been marching toward the $1 billion figure, is the notable exception.

The search vendors are largely venture capital or personal capital backed start-ups. Their current fiscal status is not clear, but what is clear is that they have not been able to take their companies public, which usually signifies that they have not been consistently generating a profit. The dramatic economic downturn in the fall of 2008 caught most companies by surprise, so some vendors may be feeling bottom line pressure. In fact, many have been tinkering with new business models, such as OEMing their products to software suppliers or focusing on turnkey applications like eDiscovery, in order to try and prop up their market positions. How effective such changes will be is anyone's guess.

So could more changes be coming? The stock market is starting to show signs of life. As vendors' stock prices rise, they will have more cash available for possible acquisitions. Could some of the larger companies go on a buying spree and usurp the competition? As mentioned, search features are working their way into a growing variety of applications. Will non-search vendors deduce that search has become key to their software line's future and acquire one of the search vendors?

Many observers think that there is a distinct possibility that a number of search companies will be acquired in the next few years. "There has been a general trend to consolidation in the IT industry," noted John Turnbull, President and CEO of Thunderstone Software LLC. The question now becomes: Who will end up where?