SaaS firms could be particularly vulnerable because they tend to be less efficient than established packaged software companies like Oracle and Microsoft, according to MGI.

Research firm IDC predicted last week that IT spending will grow at a slower rate in 2008, expanding worldwide by from 5.5% to 6% compared to a 7% rise in 2007. U.S. spending will increase at between 3% and 4%, down dramatically from 6.6% growth this year.

"Whether a real recession hits the US and spreads to the global economy or the US economy simply slows down in 2008, all software companies - enterprise-license oriented and software-as-a-service (SaaS) on-demand vendors alike will see a meaningful impact in terms of license revenue growth and maintenance renewals," wrote MGI Research analysts.

A quick reduction in seat licenses is unlikely because most SaaS contracts run for 12 to 24 months. But with a slowing economy, on-demand software vendors face a "triple hit," said MGI: initial contract sizes could be reduced, "upsell" opportunities could dwindle, and, if the downturn lasts long enough, "there is a possibility that users will aim to reduce the number of subscribed seats."

While the SaaS vendors generally face larger infrastructure and support requirements than their more traditional counterparts, the early entrants in the field, such as Salesforce.com, entered the market in the tech crash of 2001-2002 and have been baptized by fire, write the analysts from MGI Research. Untested in a slowing market, later arrivals could face more severe tests.

So far the prospects look mixed. Salesforce.com's share price has continued on a year-long climb, while competitor Intuit has had a much rockier ride. On-demand software provider NetSuite which is controlled by Oracle CEO Larry Ellison, last week announced the terms of its upcoming IPO, saying it will conduct an auction to determine the offering price and the allocation of shares. Analysts estimate that NetSuite will have a raise between $770 million and $952 million in the IPO.

Oracle stock is up more than 2% Monday after analyst Peter Goldmacher, with Cowen & Co., said the database software giant is growing faster than the overall enterprise software market, and will grow its margins in coming months. Oracle should grow at a rate of 8%-10%, compared to an overall industry rate of 5%-7%, Goldmacher predicts.

"By definition, we think Oracle is taking market share and would not necessarily interpret strong Oracle results as a far reaching positive for [the] overall software market," Goldmacher wrote.