The CRM industry returned to positive growth in 2004 with worldwide CRM new license revenue totaling $3.5 billion in 2004, an increase of 2% over 2003, according to Gartner, the world’s largest high-tech market research firm. That means there could be some major changes in the vendor community.

Let’s look at the numbers. The relative size and growth rates of the five largest vendors are shown in the following table.

  Source: Gartner Dataquest (September 2005)

Note that in 2004 SAP apparently dominated the CRM market, making nearly $125 million more than its nearest rival, Siebel. Some of SAP’s performance isn’t due to selling more licenses, however, but to the fact that SAP reports its revenue in Deutschmarks. This created a favorable rate of exchange that makes SAP’s performance look better when translated into dollars.

SAP’s market dominance is an illusion in another way as well. If we fold both Siebel and Peoplesoft CRM revenue into Oracle’s to reflect that company’s recent purchases of both firms, Oracle would have booked $25 million more than SAP, making it the largest CRM vendor in the world.

Salesforce.com nearly doubled its revenues, an impressive feat. While this rapid growth propelled Salesforce.com into the top tier of CRM vendors, the achievement is less significant now that Salesforce.com is facing two much larger competitors.

Overall, the big market losers were the smaller CRM vendors folded into the other category. Although that segment declined by 5.5% there are dozens of vendors in that category, which still accounts for well over half of all CRM revenue. Within that $2 billion in revenue there’s more than enough room for some smaller winners, especially in niche markets such as marketing automation.

What emerges is a picture of the CRM industry where consolidation at the top among the big money vendors is accompanied by differentiation at the bottom among the small companies. This is a well-recognized pattern in mature software markets where two or three vendors tend to dominate a sector, accompanied by a much greater number of opportunistic firms that focus on implementation services and niche applications.

Even though Salesforce.com racked up the highest growth rate over the year, the danger exists that Salesforce.com may be too small to compete against SAP and Oracle/Siebel/Peoplesoft and, at the same time, be too large and generalized to position itself into a niche market. Therefore, it now is likely that Salesforce.com will begin purchasing smaller CRM firms to increase its market share. In short, we expect further consolidation and mergers.