[Software] Sizing the AI software market: Not as big as investors expect but still $37 billion by 2025

[_Happy boy]

How big is the market for artificial intelligence software? In new research, Forrester forecasts that the size of the AI software market will approach $37 billion by 2025. That's a large number but still smaller than many investors and other analysts have projected. We believe our projection is more realistic, however, for two reasons. 

 

First, most business applications are adding AI functions without monetizing them. Second, the custom-built AI applications that businesses create for their own use don't generate market revenues. Investors, vendors, and buyers who wish to understand and/or invest in the AI software market must understand Forrester's four segments: AI maker platforms, AI facilitator platforms, AI-centric applications, and AI-infused applications. 

Key Takeaways 

Forrester has defined four AI software segments: 1) AI maker platforms for general-purpose AI algorithms and data sets; 2) AI facilitator platforms for specific AI functions like computer vision; 3) AI-centric applications and middleware tools built around AI for specialized tasks like medical diagnosis; and 4) AI-infused applications and middleware tools that differentiate through advanced use of AI in an existing app or tool category. The largest segment will be AI maker platforms, which will grow to $13 billion by 2025. New AI-centric apps built on AI functions such as medical diagnosis and risk detection solutions will be the second-largest, at almost $10 billion by 2025. 

Growth in AI software slowed in 2020 due to the pandemic recession and will slow again after 2023. Like the software market overall, demand for AI platforms, applications, and tools slowed in 2020. Growth in demand will resume in 2021 and remain high until 2023. But revenue growth will flatten out in 2024 as AI gets absorbed into all software products and can no longer be a differentiator between vendors or command a premium. Indeed, we project that revenues for premium-priced AI-infused apps and tools will start shrinking after 2023. 

AI will continue to get embedded within software. AI is fast becoming as fundamental to software as software has become to business. As a result, AI software will increasingly be embedded into existing software products by existing software vendors. Companies will find that it makes the most sense to acquire AI functions through these software vendors, rather than custom-build their own AI functions using AI platforms and facilitator tools. As a result, application software vendors will represent rising shares of the revenues of AI platform and AI facilitator revenues. At the end of the day, AI will be everywhere in software products, just as analytics, workflow, and data are part of those same software products. 

To understand the business and technology trends critical to 2021, download Forrester's complimentary 2021 Predictions Guide here.      

This post was written by Forrester VPs & Principal Analysts Andrew Bartels and Mike Gualtieri, and it originally appeared here.