A feverish race in operating systems

Information Processing

Software

Business Week

February 21, 1983

Like the little fan that cools the electronic innards of a personal computer or other microcomputer, the machine's operating system has been a vital but unseen component. Although each of the 2.5 million microcomputers sold last year came with this software, few customers were even aware of it because it came automatically as part of the package.

Now, however, an intensifying market battle suddenly has thrust these operating systems for small computers into the limelight. "The industry is getting into an old-fashioned dogfight," says Michael Sabazian, senior vice-president at Computer-Land Inc., a 400-store retail chain. A half-dozen companies -- ranging in size from giant American Telephone & Telegraph Co. to tiny, privately held Digital Research Inc. and Microsoft Inc. -- are bombarding personal computer manufacturers, retailers, and buyers with high-powered promotional efforts in an attempt to make their product the industry's most popular operating system.

A babel

These operating systems perform much the same role in a computer as a conductor does in an orchestra: They control both the operation and timing of the various pieces so that they work in harmony. But unlike the world of music -- which has a standard notation so that any conductor and orchestra can follow the instructions of any piece of music -- the computer industry is fragmented. Instructions in a computer application program written for one operating system cannot be followed by another.

The manufacturers of microcomputers and the companies that write the application programs for these machines want to reduce that fragmentation because success in their price-competitive businesses depends increasingly on high-volume sales. So rather than write their own operating system, the hardware and software companies are now both turning to the leading operating systems written by independent companies. These operating systems can make a microcomputer far more popular because they can provide a customer with a wider range of application software, and they can supply a wider market for the company writing such software. "What the industry has really needed is dependable standards for operating systems that bring together hardware and software," says Gary A. Kildall, president of Digital Research.

Because the microcomputer market can accommodate only a few widely accepted operating systems, there is an urgent scramble under way among the suppliers of these systems. At stake is a market that last year reached $350 million and by 1987 could soar to $2.2 billion, estimates Jean L. Yates, president of Yates Ventures, a Los Altos (Calif.) firm specializing in software industry research. Over the next several years, "there will emerge a Big Two or a Big Three that will walk away with most of the goodies," predicts David E. Gold, a San Jose (Calif.) computer consultant.

Making it to the top of this market will not be easy, however, because the business is bedeviled by an odd set of buyer relations. The operating systems' suppliers sell primarily to microcomputer manufacturers, typically charging an initial license fee and a royalty for each machine shipped with their operating system. But to persuade the computer builders to buy their product, the software suppliers must gain recognition from the end-users and the programmers writing the application software. So, while product development is still being pushed by operating system suppliers, it is quickly being dwarfed by the growth of the sales efforts at these companies. "The systems software guys used to be just a bunch of whiz kids," says Neil Yellin, president of the Software Center, a San Francisco retailer. But now, he says, "they're all marketing types with MBAs."

Nowhere are these trends more evident than at Digital Research, a Pacific Grove (Calif.) company that pioneered the independent operating systems market by supplying its CP/M software to manufacturers of the first generation of microcomputers. More than 1.5 million copies of CP/M have been sold, and revenues that hit $15 million for the year ended May 31, 1982, are expected to top $30 million in fiscal 1983. Pretax profit margins have reached as high as 50%. But those margins, says John R. Rowley, chief operating officer, "told me we weren't reinvesting enough in the company."

Sales push

To remedy that, Rowley last year instituted what he calls a "Procter & Gamble style" marketing program -- one that is extremely aggressive. He added 36 people to what was then a sales staff of one. In the past year he also boosted the promotional budget from $64,000 to $3 million. In January, for instance, Digital Research staged the first convention for the users of its operating system and attracted a crowd of 50,000, overwhelming San Francisco's new Moscone Convention Center. The company also is seeking new distribution channels; instead of selling only to computer makers, Digital Research is encouraging computer dealers to carry its software product in an effort to increase its direct sales to 30% of total sales, up from 5% today.

What prompted Digital Research's new marketing orientation was the success that its archrival Microsoft had in persuading giant International Business Machines Corp. to use its MS/DOS system on IBM's new Personal Computer. "After the blessing from IBM, it wasn't hard to sell," says William H. Gates, Microsoft's 27-year-old founder and chairman. In quick succession, more than 50 other computer hardware manufacturers picked Microsoft's operating system. As a result, MS/DOS virtually shut CP/M out of the market for newer, more powerful microcomputers. The IBM coup helped double the Bellevue (Wash.) company's revenues to $32 million in 1982.

Dark horses

Surprisingly, the distant third in the systems software race is giant AT&T with its UNIX operating system, first developed at Bell Laboratories in 1969 for mainframe computers. In the past few years several independent companies licensed this software from AT&T and adapted it for microcomputers.

But AT&T could still give Microsoft and Digital Research a real run for their money. UNIX is popular among makers of the new generation of more powerful microcomputers. The telephone giant has slashed the license fee for UNIX from $750 to as little as $100, and for the first time is offering technical assistance to companies using the UNIX system. "Up until now we've just offered UNIX as is," concedes Otis L. Wilson, division manager of technology licensing at AT&T. But now, he says, "we're going to push it and make people want it."

In the running, too, are several dark horses, including the UCSD p-System invented at the University of California at San Diego and marketed by SofTech Microsystems Inc.; the Pick Operating System (box); and the Oasis system from Phase One Systems. These companies, among others, may be fighting for only the scraps remaining after Digital Research, Microsoft, and AT&T carve up the market. But with operating systems selling at an average of $200 a copy, even a small share of this market can produce a handsome return for an operating system writer. "We're trying to build an empire," quips one. "If we fail, we'll just be very rich."

GRAPHIC: Picture, Rowley and Kildall are counting on aggressive marketing to make Digital Research's control software the industry standard. Rick Browne