The European software industry is mostly clustered in the largest European countries such as Germany, UK and France, according to a new study by IDC.

The report highlighted that when taking into account country size, the largest European countries, as well as countries in the Nordic and Benelux regions, are clearly the most Independent software vendor (ISV) intensive.

A software industry requires a large home market in order to build scale, reduce unit costs, and thereby increase competitiveness.

Furthermore, countries with advanced domestic customer requirements and open, export-oriented cultures generally have a strong software industry.

The research firm said that another trait of the European software industry is its focus on applications as opposed to development tools, middleware, and system infrastructure software.

In core applications (ERM, SCM, and CRM) and industry applications, the European top 100 ISVs had market shares in excess of 20% of the global market in 2009.

In middleware, information management, and infrastructure software, the corresponding market shares were 5% or less.

The report revealed that the European SaaS vendors are interesting because the segment grows in excess of five times faster each year than software overall.

An analysis of a sample of 174 European SaaS vendors showed that the European SaaS vendor community is like its European peers in traditional software heavily focused on applications as opposed to system infrastructure software and application development and deployment (AD&D) software.

A large majority (90%) of the sample companies offered an SaaS application as opposed to SaaS-based middleware or infrastructure software.

IDC said that this application-centricity is due to existing domain knowledge in the European software industry and differentiation possibilities due to local European conditions, market structures, currencies, languages, business practices, legislation, and other local factors.

Among the 84 SaaS enterprise resource management (ERM) providers, IDC found a continuation of the traditional battle between the ERP suites and best-of-breed applications.

Nearly half (42%) of the SaaS ERM vendors offered ERP suites, and the remaining 58% offered more specialised, best-of-breed ERM offerings.

IDC research director Bo Lykkegaard said the majority of the SaaS vendors in their vendor sample had annual revenues of $3m or less, so they are essentially small ISVs.

"The upside of this majority of small vendors is that it reflects a significant level of start-up activity in Europe and that many of these small SaaS vendors are likely to see strong growth over the coming years," Lykkegaard said.

"However, it clearly will take in excess of our normal five-year horizon before the SaaS vendors will make up a significant proportion of the top 100 European ISVs."