Computers: The Action is in Software

By Andrew Pollack
The New York Times

November 8, 1981

IT can turn a scruffy youngster with a bright idea into a millionaire, and a gigantic scientific project like the space shuttle into a failure. People working at home can produce it, as can highpaid employees of giant corporations, providing they can bring both artistic creativity and detailed, logical drudgery to the task. It is part product, part service - an unusual enough combination that governments haven't figured out how to tax it.

It is computer software, the programs that make a computer do what it's told. Once an incidental business for the booming computer industry, software and related computer services are becoming as big a business as computers themselves.

According to the International Data Corporation, a computer company based in Framingham, Mass., Sales of software and other such services by American companies totaled $13.14 billion last year, half as large as sales of all types computer hardware, from big mainframe computers to printers and terminals. By 1985, the company estimates, it will be a $33.8 billion business, 60 percent as large as the hardware business.

While those figures indicate it will be some time before software eclipses hardware in terms of dollar sales, software expenditures are actually already exceeding sales of all hardware because a lot of computer users do much of their own programming.

Software is a difficult product to put a finger on. If a stereo system is thought of as hardware, the music it plays is the software. It may come on a record, a cassette or over the radio. In any case, the value is not in the plastic or the tape, but in the music itself. Similarly, computer programs, which are long and detailed lists of instructions, at times in the form of equations, can be sold on a tape or a disk or written on a piece of paper or even sent over telephone lines. But the value and the price is in the program and what it does, not what it's written on.

As recently as 15 years ago, computer companies virtually gave away the software they sold with their machines, or it was written by the users of computers. That was when computers cost millions of dollars and were used only by large corporations and government agencies that could afford to hire programmers.

Since then, the economics of the computer industry have turned upside down. The price of hardware has plunged, so that some computers cost only a few hundred dollars. But the cost of programming, which is labor intensive, has risen, both relative to hardware and in absolute dollar levels, aided by a shortage of programmers.

At the same time, the shrinking price of computers has expanded their use to small businesses and consumers, who lack the specialized knowledge to write programs and can't hire programmers.

That has led to a demand for programs that can do such things as keep track of inventory in a hardware store, record hotel phone bills and other room charges, turn data into colorful charts and graphs and perform complex accounting and payroll computing for companies. And there are some computer programs whose purpose is to make it easier to write other programs. The key to selling computers is rapidly becoming the quality and availability of such programs. ''I think as you move into the 1980's and 1990's, you can take hardware for granted,'' said Arthur J. Schneider, staff vice president and general manager of the Sperry Corporation's research center in Sudbury, Mass.

Hardware vendors are scrambling to strengthen their position in software by buying software companies or by recruiting them to write programs to run on their machines - and not on those of their competitors.

Even the International Business Machines Corporation, the largest computer company by far, is appealing to outside software companies for aid in developing software. Less than two weeks ago, I.B.M. played host to representatives of 70 of those companies, exhorting them to write programs for I.B.M. machines, saying, ''We're ready to deal.'' The theme of the conference, according to attendees, was ''There's a new world coming.''

At Bell Laboratories, the research arm of the American Telephone and Telegraph Company, 40 to 50 percent of new hirees are for software-related work, more than twice the level of the early 1970's, while Western Electric, Bell's manufacturing arm, is building a special center for software in Illinois.

Despite all this, the software industry is still an infant. According to Input Inc., a market research firm, there were more than 4,300 companies in the computer services, or software, business. Yet, only 147 of them had revenues over $10 million in 1980.The seven largest software vendors were all hardware companies, led by I.B.M. with $595 million in United States software sales.

The next largest group were processing services companies, most of which have been around for more than 10 years. Those companies, like Automatic Data Processing, do computer tasks for clients or rent them time on their computers - a process known as timesharing. The next largest segment of the industry is for contract, or customized, software.

Sales of standard software packages totaled only $2.6 billion in 1980, and the largest company in that area - Management Science America Inc. of Atlanta - had overall revenues of $51.7 million.

Yet, that is the segment of the market that is growing the fastest - at 30 percent a year - because the costs of writing programs can be spread over many users.

But even as the software business grows, it is becoming increasingly perilous, especially for the smaller companies. Many of them have survived because software has been a customized product and companies could capture a local customer base. But with the emergence of standard products, national marketing can occur, bringing too many competitors offering similar products into collision.

''I will make a prediction that a year from today there will be 150 financial modeling packages available for microcomputers,'' said Richard L. Crandall, president of Comshare, Inc., a time-sharing company. ''There will be a shakeout. Competition is a client having 10 choices. One hundred choices is ridiculous.''

Already a consolidation is occurring in the new packaged-software industry. Just as the oil companies are finding that it is cheaper to buy other oil companies than to explore for new oil, so the larger computer services and hardware companies are finding it easier to buy other software companies than develop their own new products.

''New software gets developed by hungry entrepreneurs that develop it by self-exploitation,'' said Gilbert Mintz, a partner in Broadview Associates, consultant on computer service industry mergers, based in Fort Lee, N.J. The company says that in the first six months of this year, there were 57 acquisitions valued at $244 million, compared with 42 worth $164 million in the same period of 1980.

Other companies, particularly in the personal computer software market, are acquiring the rights to market products, in effect, becoming publishers of software. Some analysts think the software business for personal computers will evolve to look like the record or book industries, with a few large publishers acquiring products from outsiders, editing them and marketing them.

While many smaller companies in specialized areas are being bought, to give them marketing clout, others are going public to get the money to set up their own marketing staffs and to grow by acquisition. But not all software companies are sure bets, warns Esther Dyson, a computer-services analyst with Oppenheimer & Company.

''It depends primarily on the quality of the management,'' she said. ''Because you have a lot of small companies you have a lot that have not developed their management.''

As an example of a lack of management control, she cited an incident this year at Tymshare Inc., considered one of the more innovative companies in the computer-services industry. The company thought one of its programs was being heavily used by its customers. But it was actually the company's own engineers trying to fix errors in the program. The company, however, said the mistake had little effect on its business.

As another example, American Management Systems, of Arlington, Va., jumped into the packaged software business with three products and became overextended. It has lost $3.9 million in packaged software in the first nine months of 1980, enough to pull the entire company into the red. ''We perhaps attempted to seize too many opportunities at the same time,'' Charles O. Rossotti, president, said.

It is reasonable to assume that as the value of software grows, I.B.M. will move more in that direction. Right now, as the recent meeting illustrated, even I.B.M. cannot possibly write enough programs for all applications and needs the independent software companies. Eventually though, the computer giant could develop its own programs in lucrative areas. I.B.M. has already moved into the area of computer-aided design and manufacturing, becoming the No. 2 player in the market and putting severe pressure on some smaller companies in that area.

''I.B.M. is like the Russians,'' John J. Cullinane, chairman and president of Cullinane Database Systems Inc., said. ''They're pragmatic and they'll do business with you when it's in their best interest. And when it suits them to kill you, they'll kill you.''

Other problems and pitfalls also loom. One is a shortage of programmers. That has helped propel the independent software companies into business, but also causes problems of high turnover and headhunting. John P. Imlay Jr., chairman of Management Science America of Atlanta, recalls when a competitor tried to recruit 150 of his employees, even offering a high-paying job to a mail clerk.

Another factor that is part-blessing and part-curse for the independent software companies is the lack of automation in writing software. To this day, programming remains a relatively man-intensive and primitive art. Some programming languages like Cobol that are widely used today first appeared in the 1950s.

One of the largest expenses is what is known as software maintenance. When a program has to be changed -such as an accounting program would have to be after a change in the tax laws - it is difficult to figure out what to do if the original programmer has left.

Other questions relate to the unusual nature of software and its newness as a product. Piracy of programs, particularly those that run on personal computers, is common. With programs for personal computers costing $100 or more, friends are sharing and copying each other's programs, rather than buying separate ones. Overseas, bootleg disks are a problem.

The software industry is also coping with issues of liability and its own image. Is programming a profession, like law or medicine or accounting. With computers used for so many important applications, ''bad programs can kill people'' notes Daniel D. McCracken, an author of books on programming who thinks programmers should be certified like professional engineers or accountants.

State governments vary in their opinions on whether software is a tangible product, like a car, that should be subject to a sales tax, or a service, like accounting, that is exempt.

Existing computer services companies are also fighting to keep A.T.&T., the banks and the accounting firms from invading their turf. But a far more serious threat is that the Japanese have made software development a high-priority goal.


There are two basic types of software - systems software and applications software. Systems software controls the inner workings of the computer, such as the transfer of data from one part of the computer to another. It is somewhat akin to the human nervous system and other systems in the body that control and coordinate movement.

Applications software directs the computer to perform specific tasks, such as processing pay checks, calculating the temperature inside a nuclear reactor or directing the movement of aliens in the electronic game ''Space Invaders.'' Applications software is analogous to instructions for repairing a car or baking a cake.

What makes writing software such a time-consuming and expensive task is that the computer must be told in painstaking detail what to do. Further, the only language the computer understands is that of zeros and ones, corresponding to the presence or absence of electronic impulses.

Similarly, it might be said that a human muscle only responds to nerve impulses. Imagine how difficult it would be to instruct someone to move his arm forward by communicating in the language of nerve impulses. Fortunately, that does not have to be done. One can merely say, ''Move your arm forward,'' and the person will translate the command into the proper nerve impulses.

That was what happened in computer programming. Writing in zeros and ones - called machine language - was quickly replaced with a language a bit closer to English, called assembly language. Instead of saying 000100000000000000000000 000001100101, an assembly language program could say ADD 101. The computer itself can translate the assembly language instruction into the machine language it understands.

But even assembly language was difficult to use. Imagine how long it would take to instruct a person to bake a cake using commands like ''Move arm forward. Grip measuring cup. Lift measuring cup. Rotate Wrist. Check if cup is empty.''

It would be much simpler to merely say, ''Pour what's in the measuring cup into the mixing bowl.'' In computer programming, such higher-level languages began appearing in the late 1950's. One command in a language such as Cobol, Fortran or Basic could take the place of many assembly language commands, making programming much easier.

A statement in Basic might read ''IF BAL - AMOUNT =0 THEN PRINT 'YOU HAVE NO MORE FUNDS'.'' Such an instruction, if used in the computer behind an automated teller machine, would print a message to the user if there was no more money in his account.

But even in such high-level languages, a complete computer program could require thousands of instructions and requires the user to know various symbols and formats that must be used in precise ways.

Far easier still would be to tell a person, ''I want a cake.'' That would allow anyone to order a cake, even if they couldn't tell the baker the precise steps to take. Such ''nonprocedural'' approaches are now being developed for computers to allow people with no programming experience to use the machines. But they are restricted to narrow applications, most commonly drawing data out of a data bank. A personnel manager might ask the computer, ''Give me the names of all employees over 60'' and the computer will figure out how to do it.

Yet, even simpler than telling a cook to bake a cake would be to merely say, ''I'm hungry,'' and let him figure out that the solution is to bake a cake. The ability of a computer to understand desires and act accordingly is still a bit away.

GRAPHIC: Illustrations: table of leaders in computer processing table of key players in software graph of software vs. hardware sales in billions of dollars

Copyright 1981 The New York Times Company