The reshuffling of the deck in 2005 presaged even larger changes this year, introducing new players and effecting dramatic shifts. The industry grew at a healthy pace in 2006, with overall revenues expanding from an estimated $535 million in 2005 to about $570 million in 2006.
Some companies saw decreased revenues from core ILS products and increased income from new web-based interfaces and tools to manage electronic content. RFID products represented large revenue gains for others.
Legacy system migrations represented 63% of overall ILS sales in 2006, though migrations among the midsized to large academic and public libraries are continuing to wind down. K-12 school and small public migrations are just heating up, fueled by thousands of libraries running aging standalone systems. Opportunities for new automation in the small public library arena abound for companies willing to offer products and services at an affordable price.
No Goliath stood unchallenged. The Davids of the industry continued to prosper by carving out niches underserved by the larger companies and capitalizing on the growing interest in open source software alternatives. Following many years of near evangelistic rhetoric, 2006 was the year that open source ILS products finally gained a measurable presence.
In a rash of mergers and acquisitions, Endeavor Information Systems and Sagebrush Corporation disappeared from the roster of companies this year. Private equity firms took charge of SirsiDynix and Ex Libris, and Endeavor was merged into Ex Libris. Follett Software Company acquired archrival Sagebrush, and Extensity morphed into Infor Library Solutions.
In a year of limited opportunities for new sales, Innovative Interfaces took top place by attracting 67 new customers to Millennium. SirsiDynix made 48 new-name sales of Horizon and 45 of Unicorn for a combined growth of 93. In the small public library arena, Auto-Graphics and Polaris both had sales to 54 libraries, following the Software as a Service (SaaS) model. In Georgia, 252 public libraries migrated to Evergreen, a new open source library automation system.
This story would be incomplete without noting the continued penetration of OCLC into library automation territory, mostly through its OCLC PICA division in Europe. Last year, we noted acquisitions of Sisis Informationssysteme, Fretwell-Downing, and Openly Informatics by OCLC PICA. OCLC made no further acquisitions of library automation companies, though the January 2007 appointment of Eric van Lubeek, former managing director of Infor Library Solutions (formerly Geac and Extensity) piques interest.
In August 2006, OCLC acquired DiMeMa, developer of the popular CONTENTdm application for managing collections of digital objects, which it had been reselling since 2002. In the bibliographic services arena, OCLC's acquisition of RLG stands out as a seminal event for consolidation. OCLC declined to provide data regarding new sales and the installed base of the library automation products within its sphere. With a well-stocked arsenal of library automation products and technologies, OCLC is positioned to have a larger impact on the industry. The release of Open WorldCat also positions OCLC to expand its backend service to libraries.
Software as a Service
Many library automation products have been adopted through the SaaS model, previously dubbed ASP (Application Service Provider). This involves the software being hosted on hardware housed and maintained by the vendor, saving the library from having to install and administer hardware and software locally. The SaaS model relieves the library from much of the complexities normally associated with managing a library automaton system with lower overall costs. An increasing number of ILS sales to small libraries involve SaaS implementations, confirming the ability for this model to provide automation products at more affordable prices. SaaS contracts in 2006 included 100% of libraries selecting AGent VERSO from Auto-Graphics and 25 out of the 54 libraries moving to Polaris.
Open source inroads
The open source movement has long had its proponents in libraries. Before this year, however, the number of libraries in the United States actually using an open source automation system remained few relative to the larger realm of library automation. A number of separate events converged in 2006 to raise open source ILS status.
The PINES consortium of 252 public libraries in Georgia migrated from Unicorn to Evergreen, a new open source ILS created by a team of developers funded by the State Library Agency of Georgia. PINES, one of the country's most ambitious statewide library automation efforts, allowed any participating library's users to borrow from the collective collection of 7.7 million items. The Georgia Public Library Service (GPLS) chose Unicorn in 1999 as the basis for the project and was one of Sirsi's (now SirsiDynix) largest accounts. In June 2004, State Librarian Lamar Veatch announced a new automation strategy that involved a concerted effort to develop an open source automation system to replace Unicorn. Though threatened with a lawsuit from Sirsi, that system, later named Evergreen, was successfully completed within the timeframe originally announced. In September 2006, all the 252 Georgia PINES libraries migrated from Unicorn to Evergreen.
In January 2007, members of the GPLS development team launched a new company named Equinox Software to provide commercial support and assistance to other libraries interested in implementing Evergreen.
Koha, an open source ILS originally developed in 1999 by the Katipo Communications consulting firm for the Horowhenua Library Trust, a consortium of four libraries in New Zealand, has steadily been gathering a following ever since. In a bold move, the Nelsonville Public Library, a seven-branch system serving Athens County, OH, migrated from Spydus to Koha, rechanneling the funds it would have expended on sustaining Spydus's further development.
Addressing the need for commercial support options for open source library automation systems, some of the staff involved in supporting Koha at the Nelsonville PL started a new company in January 2005 called LibLime. This company, currently employing ten full-time and two part-time staffers, provides a variety of services related to the support of Koha and other library-oriented open source software.
In December 2005, LibLime engaged in a partnership with Index Data, a Danish company specializing in open source development, to integrate the Zebra database engine into Koha. The resulting product, dubbed Koha ZOOM, aims to elevate the product to serve larger and more complex libraries.
In February 2007, LibLime acquired the division of Katipo Communications involved with Koha, bringing together the two companies focused on the support of Koha and other open source library software, including some of the original Koha developers. By the end of 2006, 311 libraries worldwide had adopted Koha; 18 of them contract with LibLime for support. Six rely on Koha ZOOM, and four are LibLime clients.
Focus on the front end
Reacting to the need for libraries to compete with other web destinations, much product development industry energy focused on development and marketing of new web-based interfaces. The battle is on to deliver interfaces that showcase faceted browsing, relevance-ranked results, end user rating or tagging, and visual navigation--all standard fare in commercial web interfaces.
North Carolina State University (NCSU) launched the opening salvo with a new catalog for its Unicorn system based on Endeca's ProFind platform. The Endeca technology, well established in providing search and information access products in the corporate arena, specializes in search through its patented Guided Navigation process. NCSU plans to join the other Research Triangle (NC) libraries in implementing a shared catalog based on Endeca.
Though NCSU acquired the ProFind platform directly from Endeca, The Library Corporation (TLC) has had a nonexclusive agreement with Endeca since June 2004. Phoenix Public Library became the first TLC client to launch an Endeca-based catalog in June 2006.
The AquaBrowser Library interface developed by Amsterdam-based Medialab Solutions has sparked interest, too: it features a simple search, a visual word cloud, and facets for refining search results. TLC holds an exclusive contract with Medialab Solutions, initiated in September 2004 and renewed in January 2007, to distribute AquaBrowser Library in the United States, Canada, Australia, New Zealand, Singapore, and the Philippines. TLC made 67 new sales of AquaBrowser Library in 2006.
In September 2006, Medialab Solutions announced AquaBrowser Online, a fully hosted version of the product designed to make it even more accessible for small libraries with collections below 150,000 titles. The Queens Library, NY, one of the largest and busiest in the nation, adopted AquaBrowser Library as its primary catalog interface in March 2006.
Ex Libris announced its effort to develop a new library interface called Primo. Cast as a new discovery and delivery tool, Primo provides the ability to search across a variety of resources in addition to the library's catalog holdings, offering faceted navigation, relevancy-based ordering of search results, and a variety of features aimed at the efficient delivery of content to library users. General release of Primo is expected in 2007. Ex Libris library development partners for Primo include Vanderbilt University and University of Minnesota.
Innovative Interfaces focused on developing Encore, a new discovery services platform based on Millennium technology. Features planned for Encore include dynamically generated "popular choices," a tag cloud based on subject headings, and faceted navigation. Innovative enlisted 14 development partners to assist in the creation of Encore, including Binghamton University, Nashville Public Library, and Yale University's Lillian Goldman Law Library, among others.
Birth of giants
The library automation business arena has long been characterized as fragmented, which means that a large number of companies compete in an arena of finite market capacity with much overlap of undifferentiated products. Many companies struggled to attract investors with the capital to fund aggressive research and development. The top tier of library automation companies received a shot in the arm from private equity that will potentially lead to better financial health and higher-quality products.
Giants emerged, each standing a head taller than its competitors in its slice of the library automation arena, and the latest round of consolidations reduces competition significantly. The cumulative effect of years of mergers has resulted in some very large companies, though smaller companies continue to survive--even flourish--by staking out niche markets.
Mergers and acquisitions
We now see an industry less fragmented, dominated by consolidated companies, kept in check by a slate of smaller companies that continue to grow without the distractions and overhead of integrating acquired businesses.
The pattern of mergers in the last two years brings together companies that formerly competed directly for the same types of library clients. Prior to the 2005 merger, Sirsi and Dynix customer lists consisted of a remarkably similar mix of public, academic, and special libraries. Mergers in 2006 followed a similar pattern, with Follett Software Company and Sagebrush Corporation both focusing on the K-12 school library market; Ex Libris and Endeavor specialize in products for academic libraries. There were no mergers that expand a company's market focus into other library types, which may indicate market saturation.
Private equity discovered library automation in 2006. While private equity has played a bigger role in the business world in the last few years, the library automation industry had not previously captured the interest of these strategically minded investment firms.
Over the past two years, there has been a shift from venture capital investments in library automation companies to ownership by private equity firms. The differences are subtle but important. Venture capital gravitates toward companies in earlier phases of their business development cycle--not necessarily start-ups but still working toward developing mature products and establishing their position in the market. Venture capitalists tend to make modest investments in their portfolio companies; many companies have relationships with multiple venture capitalists.
By contrast, private equity firms invest in more established companies, making larger investments to gain complete ownership so that they can strategically manage the company to increase its value over time. According to New York private equity firm Veronis Suhler Stevenson, most firms expect companies in their portfolios to achieve an internal rate of return of 20% to 25%, and the average length of time a company is held before sale is around five years.
Geac Library Solutions became the first company in the industry to enter the private equity fray when Golden Gate acquired its parent company in November 2005. Although library automation represented only a tiny portion of Geac's overall business activity in recent years, now focused mostly in Europe, the company exemplifies the changes that have rippled through the industry. Golden Gate folded the other parts of Geac into Infor, another large company in its portfolio. In March 2006, the library division was part of a new company Golden Gate spawned named Extensity, an Atlanta-based company wholly owned by Golden Gate, along with other industry-specific software and services divisions. In August 2006, Infor acquired Extensity. In the course of nine months, the business unit offering the Vubis Smart automation system changed from Geac Library Solutions to Extensity Library Solutions, to its current Infor Library Systems.
SirsiDynix became the largest automation company by its June 2005 acquisition of Dynix by Sirsi. In December 2006, the company entered a new phase when it was acquired by Vista Equity Partners. Vista, a modest-sized private equity firm with about $1 billion under management, purchased 100% of SirsiDynix. Prior to the transaction, SirsiDynix was owned by Seaport Capital (about 80%), a New York based venture capital firm, and HM Capital (10%), with minority ownership by the current and previous executives and directors.
SirsiDynix made headlines in February 2007 with the abrupt departure of Patrick Sommers, president and CEO of the company since 1999. Sommers's tenure coincided with Seaport's involvement. Sommers helped assemble a company that grew from $25 million in 1999 to $120 million. His departure gives Vista the opportunity to install its own leadership to execute the business strategies needed to take its investment to the next level.
Ex Libris emerged in 2006 as a new industry giant, after beginning the year with uncertain prospects. In 2005, the company attempted to raise development capital through an initial public offering on the London-based AIM stock exchange, which was aborted in September 2005. This attempt signaled the company's need to gain funding for its ambitious product development agenda. Previously, Ex Libris was owned by Hebrew University of Jerusalem, Walden Israel, Tamar Technology Partners, and some minority ownership by current and former executives.
The financial standing of the company changed dramatically with its acquisition by Francisco Partners, a private equity firm based in Menlo Park, CA, in July 2006 for $62 million. Francisco Partners has $5 billion under management and is focused solely on technology.
With the acquisition by Francisco Partners of Endeavor Information Systems from Elsevier in November 2006, Ex Libris emerged as the second largest company in the industry and the largest focused solely on academic libraries. Endeavor ceased to exist as a separate company. Roland Dietz, Endeavor president and CEO since December 2002, exited, and staff have merged into consolidated U.S. facilities in Chicago and Boston and worldwide. The new consolidated company is headquartered in Jerusalem under the leadership of Matti Shem Tov, president and CEO of Ex Libris since May 2003. The initial acquisition involved a relatively gentle transition for the staff of the companies, with only a 6% reduction in work force. At year end, the combined company employed 393, compared to 417 at the end of 2005.
Ex Libris and Endeavor have both been focused on technology products for academic libraries, with ALEPH 500 and Voyager having nearly 3000 combined installations. Both products appeal to academic libraries and each brings its own strengths and weaknesses. From the onset, Ex Libris asserted its intent to support both systems for the foreseeable future and to shore up the development of Voyager, which was not a priority under Elsevier's ownership. The non-ILS products of Endeavor fared less well. Endeavor had already dropped its commitment to LinkFinderPlus and the ENCompass family of products, substituting products from TDNet. Ex Libris will likely entice these libraries to adopt SFX and MetaLib. Meridian, Endeavor's electronic resource management (ERM) module is being phased out in favor of the Ex Libris Verde ERM product.
Acquisitions inevitably induce anxiety in library customers. Endeavor's sale was long expected, though its new ownership by a private equity firm with a strong focus on technology and a forced alliance with another company holding similar interests in academic libraries offers some reassurance to Endeavor's customers. Given that the number of libraries running Voyager (1,175) is on a par with those using ALEPH 500 (1,941), the company is highly motivated to prove itself to the Voyager libraries by accelerating development and customer support beyond previous levels.
Managing electronic content
Pressure continues to develop for developing academic library products that assist libraries in managing and providing access to electronic content--both in the form of electronic content accessed through subscriptions and that created locally. As libraries expend funds for electronic content at levels approaching or exceeding that for print, many find themselves in urgent need of appropriate automation tools.
OpenURL-based link resolvers have become standard fare in academic libraries. Ex Libris continues to lead the market, with 1,496 installed to date and 102 new sales in 2006. Serials Solutions Article Linker has also become a very popular choice in the linking arena with 183 sales in 2006. Serials Solutions' linking position was strengthened with the partnership with SirsiDynix to distribute Article Linker. In March 2006, long before the acquisition by Ex Libris, Endeavor announced it would drop development of LinkFinderPlus and would instead offer a comparable product from TDNet. The company had licensed LinkFinderPlus to about 75 libraries since its initial launch in early 2002. In light of the acquisition of Endeavor by Ex Libris, many libraries that licensed LinkFinderPlus will likely migrate to SFX.
While academic libraries tend to be the primary consumers of OpenURL linking products, a diverse group of libraries are acquiring federated search products. MetaLib from Ex Libris stands as one of the few federated search products developed by an ILS company. In June 2006, the company announced a partnership with Vivisimo to integrate the Velocity Clustering Engine in MetaLib 4 to organize results into groupings automatically according to concepts found in the results.
Many ILS companies offer federated search products based on technology from companies such as MuseGlobal and WebFeat. These partnerships for providing federated search seem to be in a continual state of flux. SirsiDynix has based its Single Search product on technology from Muse. While continuing to sell and support Single Search, SirsiDynix formed a partnership with Serials Solutions in April 2006 to offer that company's Central Search as its primary federated search offering. Innovative based its initial federated search product, MetaFind, on components licensed from MuseGlobal, but its newest offering, Research Pro, is based on Innovative's own technology. In January 2004, VTLS announced a partnership with MuseGlobal; in January 2007, VTLS announced it would integrate WebFeat into its Virtua ILS. The Mandarin PAC Portal and Softlink's Quest also rely on technology from MuseGlobal as well as products from ILS vendors that sell exclusively in Mexico, Latin America, Greece, Taiwan, and China that are not covered in this report.
WebFeat offers its federated search products directly to libraries and through partnerships with ILS companies, including TLC, SirsiDynix, and VTLS and non-ILS companies including Serials Solutions and EBSCO. In 2006, WebFeat launched new versions of its product family to expand its appeal. WebFeat Express is a more streamlined version of the product and more affordable for smaller libraries; WebFeat Enterprise Edition was developed with customization and separate library profiling needed for use in multilibrary networks and consortia. With products in over 5000 libraries, WebFeat stands as the leader in the federated search sector.
ERM products have reached a higher level of maturity and are seeing brisk sales. Innovative Interfaces continues to have the largest number of libraries running its ERM product with 201 installed and 35 sold in 2006. Ex Libris inherited Meridian through the Endeavor acquisition and will phase it out in favor of its own Verde product. The two products have combined installations of 103 libraries, with 80 new sales in 2006. Serials Solutions made 76 new sales of its ERM service.
Serials Solutions has emerged as a major supplier of automation products to libraries to help them manage electronic content. The company distinguishes itself by solely focusing on building a suite of products for managing and providing access to the ever-increasing collections of electronic content to which libraries subscribe. Serials Solutions offers its products through the SaaS model. In addition to Article Linker and Central Search mentioned above, the company offers an Electronic Resource Management Service and the Access and Management Suite. One of the company's key assets is its database of e-journal holdings. That database's comprehensiveness and accuracy drive the effectiveness of the company's products. In July 2004, ProQuest Information and Learning acquired Serials Solutions from its founders. The company changed hands again in December 2006 when Cambridge Information Group acquired ProQuest.
Reinventing K-12 automation
The K-12 school library automation arena saw dramatic change with the July 2006 acquisition of Sagebrush Corporation by arch rival Follett Software Company. Prior to the acquisition, Sagebrush and Follett represented the powerhouses of the K-12 library automation industry; afterward, Follett gains unprecedented dominance in a given sector of library automation with an estimated 60% market share. Remnants of Sagebrush Corporation survive as the Tandem Library Group, which is active in publishing and library services and was split off prior to the sale of the library automation division.
This transaction brings a large number of school library automation products under the same roof. Sagebrush, itself a conglomerate assembled through acquisitions, gained Athena in the January 1999 acquisition of Nichols Advanced Technologies and Winnebago Spectrum in August 1999. Sagebrush partnered with Sirsi Corporation in January 2001 to distribute Accent, a version of Unicorn tailored for K-12 schools, which has since been discontinued. Sagebrush developed InfoCenter as its next-generation offering, announced in June 2005. Follett's own Circulation Plus/Catalog Plus product ranks as the most popular PC-based automation product for school libraries. Follett launched its next-generation Destiny family of library automation products in June 2003.
The consolidation of Follett Software Company and Sagebrush Corporation resulted in a 16% reduction in staff. The combined company work force numbered 440 at the end of 2005 compared to 370 at year-end 2006.
In the last three years, we have seen a fundamental shift away from products installed in individual schools toward ones that follow a more centralized and web-based approach. New sales for PC-based systems, including Circulation Plus, Athena, and Winnebago Spectrum, have been in rapid decline since 2001 as are similar products from other companies like Concourse from Book Systems. Market saturation is a major factor in declining sales, since most K-12 schools in the United States now have an automation system of some sort.
The necessity for schools to transition to a more efficient centralized library automation model and the aging of the PC-based systems create tremendous opportunity for a new generation of systems designed for districtwide school library automation. The demand for centralized automation fuels a hot market for legacy migrations in the K-12 school library arena. This trend sets the stage for the product strategy for the freshly consolidated Follett Software Company.
The expiration of the marketing agreement with Sagebrush paves the way for SirsiDynix to ramp up its marketing to school libraries. The company has a strong interest in moving the large number of K-12 libraries that continue to use Dynix to one of its new products. SirsiDynix boasts of one of the largest school library automation efforts, that of the 2000 Ohio school libraries represented in INFOhio. This statewide automation project began in 1994 with the selection of DRA's MultiLIS and began migrating to Unicorn in 2003. SirsiDynix initiated a partnership with INFOhio toward the development of content for its SchoolRooms offering in October 2005 and the launch of the product in two INFOhio districts in December 2006.
The consolidation of Follett and Sagebrush forms a company about ten times the size of its nearest competitor of the companies focused on K-12 libraries. Smaller companies standing in the shadow of these giants remain viable and continue to grow, despite their existence on a smaller scale. These companies include COMPanion, offering Alexandria, Book Systems with Concourse and Atrium, LibraryWorld, Inc. (formerly known as CASPR) offering both hosted and desktop versions of its software in the United States.
Activities in 2006 point to strategic shifts in library automation. The dynamics of the business environment have changed rapidly in the last two years from a fragmented industry to a highly consolidated one. Though the ILS continues to represent the largest portion of revenue, products that deal with electronic content and deliver better web-based services to users are the focus of the current blitz of research and development and will increasingly define industry leaders. Finally, breakthroughs made by open source library automation systems may disrupt the business models of the industry. All these factors combined set the stage for a fundamentally redefined industry in 2007.