Update: Traction President, Greg Lloyd weighed in via email. See below for his comments.

Traction Software, one of the blog and wiki vendors selling exclusively into the Enterprise 2.0 space, announced last week that “2008 marks the sixth year of consecutive revenue and customer growth at Traction Software.” This is the same drill as for MindTouch; with the wind at its back in (most of) 2008 Traction better be setting new revenue records. Congratulations to the Traction team; Jordan hasn’t been in my ear every other week as of late so it looks like things are busy over there.

The other news Traction announced is that “To thank existing customers for their support, and welcome new customers, we’re offering a 20% discount on commercial or non-profit price of all software licenses or upgrade purchases made between November 17th and the end of 2008. The promotion applies to perpetual licenses as well as the annual subscription options announced in June.”

My first thought after reading that announcement: “Uh-oh.” I applaud Traction for taking decisive action and slashing its already affordable pricing and grabbing customers now, but clearly there are larger forces at work here than a simple thank you to existing customers. My guess is they have 20% slack built into the pricing anyway, but to cut it right off the top is aggressive. Either the company is struggling to meet growth targets — despite the positive returns in 2008; the economy is taking a toll faster than I thought it might; or the competition in the market is really starting to hurt. I would guess it’s a bit of all three, though I’m not terribly bullish on Traction’s long term prospects; it feels like the market has started to leave the company behind.

I’ll be on the lookout for more discounts — advertised or otherwise. If we see more than a handful of vendors slashing prices I may need to revise my market projection downward with prices falling faster than I originally modeled.

Jordan, I’m looking forward to an earful, though I’m traveling the rest of the week, so you may not hear from me right away!

Update: Greg Lloyd, Traction software President sent me a quick note on the post and has agreed to let me share his comments.

“Hi Oliver — I enjoyed finding your Strategic Heading blog – via Google  alerts – and encouraged Jordan to speak for himself on  your ‘Traction Offers A “20% Year End Discount”‘ From me: it’s not a price cut, it’s a 45 day promotion. As Freud said,  sometimes a cigar is just a cigar.

“We have a limited downside closing deals one or two quarters earlier than we otherwise might, and a good opportunity make our case as the smart alternative for penny-pinching visionaries who have a business purpose firmly in mind.”

As I wrote originally, wrapping up customers today, before budgets flip to 2009, makes a ton of sense and Traction is smart in doing so. That said I’m not quite ready to believe that a cigar is just a cigar in this case; in all something just leaves me uncomfortable. But as usual I am more than happy to be proven wrong.

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Now that the dust has started to clear — or so we hope — from the financial meltdown over the past few months, I’ve been asked how badly the enterprise Web 2.0 market will be hit. I’ll be putting together a detailed report for Forrester next week, but it is worth looking a bit more closely at the role finance and insurance firms play in the US technology market.

A couple of years ago my colleague Andy Bartels was nice enough to publish the US IT spend broken down by industry (the graphic design was mine; nice right?). The exact spend numbers are no longer 100% accurate — the IT industry has been growing between 5% to 7% the last two years — but the relative proportions are likely still quite close. What we find is that overall the finance and insurance industries account for 18% of US IT spend and the finance industry specifically accounts for 15%. As you can see from the graphic above, finance and insurance firms with 500-999 employees spend like crazy, accounting for nearly 25% of all money spent on IT in the US SMB market. In other words, its a big, important sector.

So what does this mean for the enterprise Web 2.0 market? First, a fair number of finance firms have gone under or been acquired. I would estimate 3% to 5% of spend just dropped out of the market. Second, those firms that are left will be a bit distracted over the next six months to a year dealing with major IT integration projects focusing on exchange, CRM, and major legacy systems. If you didn’t go out of business you likely got bought or rolled up other firms. Even the smaller firms are going to be busy, so the IT cycles thrown at Web 2.0 projects is likely to be low*.

While I don’t expect the external, customer-facing side of the enterprise Web 2.0 market to get hit any worse than the IT market as a whole, the internal, employee-facing Enterprise 2.0 market is going to get hit hard. If you examine the client roster of most Enterprise 2.0 firms you find an inordinate number of finance and insurance firms. It makes sense that they would have been the best customers, since Enterprise 2.0 holds the most value for knowledge workers and finance is fundamentally about knowledge. The problem is that the industry is getting inordinately hammered. I unfortunately don’t have a proper estimate on the percentage or revenue coming from the sector, but I would guess 30% to 40% of the Enterprise 2.0 spend comes from finance and insurance firms. Again, a good portion of that is going to drop out completely and the rest is likely to stagnate.

In other words: its going to get ugly. I would expect to see more than a handful of enterprise Web 2.0 firms to go out of business in 2009. I’ve got some predictions as to whom, but we’ll leave that for later.

If you are a vendor in this space I’d love to hear from you. What proportion of your revenue comes from finance and insurance firms, and how bad do you think it will get? Leave a comment below, or shoot me an email.

*Yes, I know there is a strong argument to be made that this would be the perfect time to invest in Web 2.0 tools. I do believe that these tools have big value for worker efficency and reducing redundancy, but I just don’t belive that the market is thinking this way yet. Right now Web 2.0 is a nice to have, not a need to have.

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I had a great briefing this week with Ross Mayfield, the founder, Chairman, and a few other things over at Socialtext. In the course of the briefing we discussed my recent report predicting falling feature prices in the Enterprise 2.0 market — ReadWriteWeb has an excellent summary of the research and a lively discussion.

Ross’ concern — which seems like a reasonable one to me — is that customers may look at my report and ask “so, where is my price reduction?” This logic makes sense if the product set is not changing; if Socialtext was offering a wiki feature last year, and is only offering a wiki feature next year the revenue they can expect from that product is going to come down. There is just too much competition, too much bundling, too much commoditization.

With Socialtext, however, this is not the case. The company recently announced the launch of Socialtext People, a social networking module in Socialtext 3.0. Now, instead of simply facing falling prices for the its wiki feature Socialtext has added social networking to the mix, which will increase the average deal size for its customers. In essence it is moving up to a higher price plateau. That plateau is still going to lose value over time, but if Socialtext, and any other Enterprise 2.0 vendor, can continue to innovate and combine features the revenue the company sees will continue to rise — even as the price per feature falls.

It is still possible to improve the quality of the features offered, and if that improvement is compelling price erosion can be held off, however this treadmill is much more difficult to stay on, and Socialtext’s strategy of adding other features (while improving existing features) is the right strategy — it actually happens to be the exact strategy I advocated back in April in the recommendations of my market sizing report.

In the long run falling prices are going to make this a very difficult market in which to survive, but a nimble company that can continue to innovate should do well for the short run. And, as Keynes famously said, in the long run we are all dead (or at least happily retired).

*Upcoming research note: I’m trying to convince my colleague Gil Yehuda to take the analysis used for my report and write the “Users: Here Is How To Take Advantage Of Your Vendors” report. It won’t help Ross, but at least he has a compelling case to make to his customers.

*Briefing note: To brief me on your product please fill out this form with Forrester’s Briefing Central group. They manage all the scheduling (thank god) and the service is free. Hands down it’s the best way to get a hold of me.

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