Customizing personal computers

Information Processing

Computers

Business Week

December 1, 1980

Only two years ago, providing the programs to run personal computers was a cottage industry. Programmers developed the software packages at their kitchen tables, then sold them through advertisements in hobby magazines. Now, selling the programs for personal computers is becoming big business.

The companies that have sprung up to publish and distribute this software are growing fast--often as much as 100% to 200% annually. At least four expect to top $4 million in 1980 sales. And one, Personal Software Inc., raised $500,000 in the venture capital market this year. "The industry is coming of age," says Robert F. Wickham, president of Vantage Research Inc., a microcomputer consultancy in Mountain View, Calif.

For the most part, these companies act very much as book publishers do. Unlike the software houses of the mainframe and minicomputer industries, they hire very few of their own programmers to write software. The bulk of their business comes from contracting with software free-lancers for the distribution rights to their programs in return for royalty payments.

A winner

Personal Software is the infant industry's best known success story. The two-year-old company came up with a winner a year ago when it introduced VisiCalc, a business package that makes it easy for the nontechnical professional to do financial analysis and planning. Since then, the package, which sells for $100 to $200, has sold more than 25,000 copies, and it will account for more than 50% of the Sunnyvale (Calif.) company's projected sales of $4 million in 1980. "By late 1978, we recognized that games were a passing phase," says Daniel H. Fylstra, chairman of Personal Software. "We realized that the future was in producing practical tools for use in business."

Three other companies have also distinguished themselves. Instant Software Inc., a Peterborough (N. H.) company, expects to hit sales of $5 million this year--most of which will come from game and entertainment packages. Lifeboat Associates, a New York software company, estimates that its sales of programs for small businesses and schools will total $5 million this year. And Microsoft in Bellevue, Wash., anticipates revenues of $4.5 million from the sale of operating systems and such educational packages as mathematics and typing tutors for personal computers.

What is more, all of these privately held companies claim that they already are highly profitable. Although none will release figures, Fylstra hints that pretax margins are more than 20% at Personal Software. Says William H. Gates, president of Microsoft: "The software business is like the book or record business. If you capture what the public wants, the profits are absurd." The reason is simple: Although a typical program can cost $10,000 to $100,000 to develop, the cost of duplicating this software is very low.

Programs for personal computers are usually sold on a magnetic "floppy" disk or a tape cassette.

Exploding demand

The long-term future looks even brighter for these new companies. As personal computers find their way into more offices and homes, the demand for software is expected to explode. Personal Software's Fylstra estimates that total sales of personal software will hit $90 million this year. For the next three years at least he expects industry sales to grow by 75% to 100% annually hitting the $1 billion mark by the mid-decade. "This will be a huge business," agrees Microsoft's Gates. "In this industry, it's the software that justifies the computer."

With such dazzling prospects as an incentive, a flock of companies are moving into the personal software market. They range from such traditional publishers as McGraw-Hill lnc. to startup ventures such as Micro Data Base Systems lnc., a Lafayette (Ind.) company founded earlier this year by a group of Purdue University professors to provide development aids to software suppliers. This does not worry the current players, who fully expect to survive. They predict that several years of intense competition will result in an industry looking much like the book and record industries--a few large companies will dominate.

In such a business, the software publishers believe that there will be two basic types of companies. "There are hundreds of small companies with programs that don't have the money or expertise to market them," explains Richard R. Richmond, director of marketing for Instant Software. "Eventually, the small companies will end up writing programs and allowing larger companies with the resources to market them."

The race

The present industry leaders are already beginning to position themselves to be among those large marketing companies. Personal Software, for instance, has strengthened its management team with executives from minicomputer companies such as Digital Equipment Corp. and Tandem Computers Inc. "A year ago we were entrepreneurial with few pure managers," says Fylstra, who recently handed over his post as president to Terry L. Opdendyk, the former head of software development at Intel Corp., a leading producer of semiconductors. "Now we have top-level management to handle $30 million to $50 million in sales," Fylstra says.

For the moment, few problems other than learning how to manage this rapid growth seem to trouble the young industry. Even the question of piracy apparently does not concern these companies. Making unauthorized copies of the tapes and disks containing the programs, then selling the copies for next to nothing is common practice among user groups, and it is a "real irritant," acknowledges Microsoft's Gates.

But, he adds, "the opportunities and growth in this business are so great that the percentages taken away by ripoffs won't hurt us much." In fact, the most pressing difficulty for the personal software industry now seems to be finding enough good software to sell. "The supply of high-quality software is a continuing problem with no solution," laments Personal Software's Fylstra. "That is what limits the industry's growth."

GRAPHIC: Picture, Personal Software's Fylstra: Games were just a phase, and the future lies in practical tools for business use. Rick Browne