The software services industry is one of the most important components of the global economy. Software is ubiquitous, from the operation of cellular phones all the way to launching and communicating with satellites and spaceships. With such a wide variety of uses, the industry has some of the most diverse fields and as many companies operating within them. Within the broad technology sector, software services occupy a significant pie.
The software services industry is also one that has grown at a rapid pace consistently and is slated to do so for the next several years. Industries across the world, from banking to manufacturing allocate increasing amounts of capital towards the software that runs their business, be it payroll or process automation. The chart below gives a snapshot of the revenues generated by the software services industry in the recent past and the estimates for the near future.
Source: Company Statement and US Government
The software services industry includes a staggering number of companies that operate across a plethora of categories. Some of the types of software are Application software, Firmware, gaming software, security software, embedded systems, programmable logic, design software, automation software, graphics software, animation software, artificial intelligence, machine learning software, publishing software, and mainframe software.
However, the industry can be categorized into three broad categories namely, System software, application software, and Enterprise software.
System software:
System software can be defined as the backbone of any device, on top of which various applications can be built and deployed. The system software industry is dominated by a few players globally. Some of the code within the system software includes components such as assemblers & compilers, file management tools, system utilities, and debugging.
The leading players in this area are
Microsoft is one of the largest technology and software companies in the world. The firm operating system runs on most personal computers and servers. In addition to its ‘Windows’ Suite of the system software, Microsoft also makes application software through its ‘Office’ suite. The company is also a major player in the cloud computing market. In addition, Microsoft runs a successful video gaming business with its Xbox consoles and several published and licensed games.
Google parent Alphabet makes to next most widely used system software. The company’s Android operating system powers the bulk of the smartphones used globally. The other key businesses of Alphabet include search engines, cloud computing, artificial intelligence, robotics, autonomous driving, and media.
Apple makes system software that runs all its devices. Despite controlling a smaller share of the personal computer and smartphone market, Apple takes the lion’s share of the profits in these businesses. Apple’s other businesses are device hardware, entertainment, cloud computing, etc.
Source: Morningstar
Application software:
Application software encompasses a variety of end-user-oriented programs. Simple examples are spreadsheets, browsers, databases, and smartphone apps. Thousands of companies operate within this space and cater to both broad use and niche applications. These range from personal applications, educational functions, or business applications. Business use is further spread across end uses such as project management, database management, web applications, etc.
Some of the unique players in this space are:
Adobe, based out of San Jose, is a maker of application software. The firm’s key products include Adobe Photoshop, Adobe Illustrator, Adobe Acrobat Reader, and the Portable Document Format (PDF). Adobe also offers solutions that bundle many of its products in a software as a service (SAAS) model. Adobe generated over $15.8 billion in 2021 revenues. ,
Autodesk is a US multinational software company. The firm offers application software catering primarily to engineering and design fields. Autodesk’s products are used in architecture, engineering and construction, manufacturing, and entertainment businesses. One of its key products that have remained a design mainstay is AutoCAD. Autodesk generated over $ 4.0 billion in 2021 revenues.
Intuit, based in Palo Alto, makes application software for accounting and finance. Some of the firm’s key products include QuickBooks, TurboTax, and Mailchimp. Intuit’s products are used by CPAs, bookkeepers, and other financial professionals. The firm also makes a personal finance application and runs an email marketing platform. Intuit clocked over $9.0 billion in 2021 revenues.
Source: Morningstar
Enterprise Software:
Enterprise software, as opposed to application software, is aimed at organizational-wide uses rather than a single or a small group of users. Enterprise software addresses IT solutions across content management, resource management, supply chain, IT management, customer relation management, business intelligence, data visualization, HR management, and process automation.
Some famous players operating across different segments of the enterprise market are
Salesforce, based in San Francisco, is one of the largest cloud-based enterprise software companies. The firm provides customer relationship management software (CRM) over the cloud and provides marketing automation and analytics services. The firm’s business follows what is popularly known as a platform-as-a-service (PAAS) model. Salesforce generated $21.25 billion in 2021 revenues.
VMware is a leading application software company and is based out of Palo Alto. The firm provides virtualization software. Virtualization is the process by which a virtual version of a system is created to share resources, do secure transactions, and run applications without having to physically install it on a system. VMware clocked over $11.7 billion in revenues, in 2021.
Twilio is an enterprise software company that provides cloud-based applications for the communication services industry. Offered as a communication platform-as-a-service (CPaaS) service, the firm software helps automate processes such as phone calls, text messaging, and other customer engagement functions. Twilio IPO’d in 2016 and generated $1.76 billion in 2021 revenues.
Source: Morningstar
Investment Options:
Investing directly in stocks is one way of getting exposure to the software services industry. However, with thousands of companies operating in the space, picking a set of stocks can be an overwhelming task. ETFs offer a simpler way of investing in the industry through a basket of diversified securities. While most technologies focus on ETFs, which are numerous have exposure significant exposure to software services, pure-play software ETFs are available as well. Some of the popular ETFs are SPDR S&P Software & Services ETF (XSW), iShares Expanded Tech-Software ETF (IGV), and Invesco Dynamic Software ETF (PSJ).
Source: Morningstar
Globalise also offers curated portfolios such as Tech Giants, Next-Gen Technology, and Future Innovation, all of which include software services as a key component.
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