Overload System: As Software Products And Firms Proliferate, A Shakeout Is Forecast

Big Developers of Programs For Personal Computers Seek to Lift Market Share

Everybody in the Pool Now

By Dennis Kneale, Staff Reporter
The Wall Street Journal

February 23, 1984

New Orleans -- As software companies crowd into the Superdome here this week for what is being billed as the biggest show ever dedicated mainly to personal-computer software, the mood isn't exactly exhilarating.

Many of the more than 500 companies setting up display booths beneath the bright, domed ceiling realize that they may not be around by next year. For their industry is getting more crowded than the Superdome.

"In the old days," around 1980, says Fred Gibbons, the president of Software Publishing Corp., "we used the expression that all of us were sitting around a swimming pool sipping from a straw, the market was that big. Today we're all in the pool, and there isn't room for mistakes. There are too many guys waiting to jump on top of you."

Many software executives and consultants agree. Some say software faces a shakeout in 1984 and 1985. "There are going to be some major nose dives, some will pull out, some will crash and burn," says Mitchell Kapor, the president of Lotus Development Corp., which went public a few months ago and posted first-year sales of $53 million.

Signs of the coming consolidation already are surfacing. Quarterly growth has slowed at some larger companies, including MicroPro International Corp. and VisiCorp. Others haven't yet proved they can sell new programs outside their original niche. Seeing a soft spot, some large companies are offering to market the products of fledgling start-ups for a 50% cut of sales, and a growing number of small companies are quietly asking to be acquired.

"We're used to having a lot of second-tier companies asking us to market their products. Now they're asking us to buy them," says David C. Cole, the president and chief executive of Ashton-Tate, which just went public and has received queries from more than a dozen companies in the past few months. "They don't feel prepared to move forward alone," Mr. Cole says.

That rather gloomy outlook seems ironic in a business that barely blinks at 100%-plus annual growth rates among individual companies. Makers of software for personal computers more than doubled sales last year, to $1.3 billion ($2.2 billion at retail), and sales could rise at a 34% to 39% compounded yearly rate in the next six years, to about $8.4 billion ($13.9 billion at retail) by 1989, estimates Future Computing Inc., a forecaster.

But the software war shaping up is due to other numbers. By most counts, there are more than 5,000 active software companies, and scores more are forming each month. Yet the vast majority of these must share about 28% of the industry's sales.

About 38% of software sales last year were accounted for by a half-dozen big hardware producers, led by International Business Machines Corp. and Tandy Corp. Seventeen leading independent software companies chalked up 34% of sales.

As the largest companies now move to expand their shares of the business, the risks to the smaller companies increase. Meantime, the costs of getting started are soaring, while the available venture capital gets spread more thinly.

Big companies like CBS Inc. and Reader's Digest are moving in at the same time. So are software companies that previously marketed only for the big mainframe computers. Among other recent consolidations: Computer Associates International Inc. acquired cash-strapped Information Unlimited Software, and Management Science America Inc. added Edu-ware Inc., a small educational-program company, to its Peachtree Software Inc. subsidiary.

For the first time in the office software business, pricing is coming under pressure. VisiCorp recently cut the price of its introductory VisiOn program to $95 from $495 (the company says this reflects a "more aggressive" policy by VisiCorp, but competitors and some dealers say the product isn't selling well). Start-up companies increasingly will use low prices to break into the crowded market, and older companies, such as Lotus Development, marketer of the 1-2-3 program, are considering cutting the prices of first-generation products.

Many software companies in the next two years thus will go through quiet failures or seek to be rescued. Companies that flood broad markets with the same kinds of products are most apt to falter or fail to fully bloom.

Some companies -- Sierra On-Line Inc., Human Engineered Software Inc. and Fastware Inc., for example -- expect to face a tight market as they look for new financing. "We'll have to go to second-round financing, probably by July. We'll need $5 million to $7 million, but there are a lot of disillusioned investors out there," says Theodore Morgan, the president of Human Engineered Software, which sells an education program called Turtle Graphics.

"You aren't going to have spectacular troubles like Osborne and Victor Technologies, because there isn't all that debt," says Rosen Research's president, Esther Dyson, in a reference to the hardware manufacturers' problems last year. "But the little guys are going to get shook up big," she says. "The only people who get shook are the ones who deserve to be."

Chances are that any shakeout will affect Wall Street and venture capitalists more than "end-users." The stock market could turn away from software companies wanting to go public if the industry has a tough year. Venture capitalists could be disenchanted if their investments fail to meet their high hopes.

"Venture money already is drying up," says Robin Grossman, a partner with the venture-capital firm of Sevin-Rosen Management. "Any time venture capitalists fund a company, it's with the expectation that it's going to be real big. In that sense, lots of investors will be disappointed."

But the people using the seven million computers in U.S. homes (expected to double this year) and a similar number of personal computers in offices could feel some effects. Competition drives innovation, optimists say, suggesting that better programs will surface. Others worry about praiseworthy products that might never make it. Newcomer Quarterdeck Software Inc.'s "windowing" program, DesQ, allows many financial-analysis, writing and other programs to run at the same time in several different frames on the screen. Though widely praised, it must compete with similar programs from many larger rivals, such as VisiCorp and Microsoft, and expected products from Peachtree and IBM.

The start-up companies that became the biggest or most promising competitors today did so without enduring much head-on competition. Each sold a single product that generally didn't compete directly with the programs sold by others, and most are still precariously dependent on a single product. To diversify, these companies increasingly are going after one another's already-crowded markets.

Microsoft Corp., for example, originally sold programming languages and "operating systems," the internal instructions that run a desktop computer. Now it is pushing a writing program against Wordstar, the topseller that provides about 80% of sales for MicroPro International Corp. Microsoft also now sells Multiplan, a financial-analysis program that competes with VisiCalc.

Some competitors say Microsoft is trying to do too much. The company is backing away from the April introduction date planned for yet another program, Windows, and executives admit that the Microsoft Word program isn't meeting sales expectations. But Microsoft's president and chief operating officer, Jon Shirley, says Microsoft isn't taking on more than it can handle. "If that rule applied to IBM, where would they be now? We're much smaller, but we're not just one person, we have 500 employees." Ashton-Tate, which still hasn't succeeded in selling programs outside the filing or data-base field, has introduced a low-priced filing program that competes with Software Publishing's pfs:File. Ashton-Tate also is looking for acquisitions and licensing agreements in order to diversify. Peachtree Software, known best in the slower-growing market for accounting software, last year introduced a program called Peachtext 5000 at cut-rate prices to gain a wedge into the market for combined graph-making and financial-analysis programs.

"I am extremely nervous about the amount of competition out there," says Mr. Gibbons, the president of Software Publishing. "I want to go through this period of unsettledness in the industry," before going public, he says, "because I don't want to fall flat on my face afterward."

Publicly, few software executives will say who among them is vulnerable. But privately, most point to VisiCorp, whose only hot product, the VisiCalc financial program, sputtered last year after Lotus introduced 1-2-3, the first popular three-jobs-in-one program.

VisiCorp faces high expenses because it paid a 35% to 50% royalty on sales to VisiCalc's original designer, Software Arts Inc. The two are locked in bitter litigation over the royalty agreement. In addition, VisiCorp's $10 million-plus research gamble on the VisiOn line of programs hasn't yet paid off. VisiOn is a series of financial-analysis, writing, graph-making and a few other VisiCorp programs that run through a central system of several "windows" on the computer screen. "They've been unprofitable for six months, and VisiOn isn't selling worth spit," a competitor asserts.

Dan Fylstra, the chairman of VisiCorp, which has annual sales of about $45 million, concedes 1-2-3 hurt his first product. But he won't confirm whether VisiCorp has been unprofitable. "Apart from obvious things like growing by larger percentages in earlier years than in later years, I just don't have anything to comment on," he says.

MicroPro also faces critical competition this year. About to go public in over-the-counter trading, MicroPro faces an increasing number of big rivals in the writing-program field, which provided 83% of the company's $44.8 million in sales for the year ended Aug. 31, and hasn't fared well in selling financial-analysis and filing programs. Earnings for the quarter ended Nov. 30 were $2.9 million, or 25 cents a share, slightly below the previous quarter. A preliminary prospectus says the current quarter's "revenues and net income may be flat or lower than November quarter results."

"MicroPro always has good growth in revenues. Their problem is in making money" says Dennis Vohs, the president of Peachtree and an executive vice president with the parent, Management Science America. As for Peachtree? It "about broke even" last year, he says.

Other possible areas of fierce competition: the financial-analysis "spreadsheet" category, in which companies like Sorcim Corp. and Perfect Software Inc. compete with about 120 other program producers. Similarly, private companies such as Broderbund Software, Sierra On-Line Inc., Spinnaker Software and Human Engineered Software compete closely in the market for educational and home-computer programs. These companies concede that the market has room for only two or three big players.

Other companies may face difficulties because they compete for business in such broad categories as writing and graphics programs. At least 37 companies are marketing various job-performing programs integrated on one diskette. Another 15 companies are offering the programs that split the computer screen into "windows" for separate jobs.

Yet dealers and wholesale resellers have room for only a handful of brands. They are reluctant to provide sales support for too many competing programs because of the extensive effort required.

Lotus Development Corp., for example, has directly trained more than 1,000 independent sales people in nearly 500 stores. "Those shelves are already filled up, and those minds are already made up -- the dealer knows Lotus 1-2-3, why should he spend time learning something else?" says Rosen Research's Esther Dyson.

To survive, smaller companies hoping to become the next Lotus or the next Microsoft must make their products "different" through marketing, if not through technology. For example, Executec Corp.'s SeriesOnePlus program adds a total of 11 different products in "integrated" or combined form. But merely laying job upon job in integrated software "gets irrelevant after a while," says Mitch Kapor, whose Lotus 1-2-3 essentially created the integrated-programs market.

Instead, he believes small companies must find an ignored, specialized niche or undertake the riskier search for what will be the next multimillion-dollar product market. The retail bottleneck, however, discourages such efforts. And even the strongest, largest independent software companies aren't following the Lotus president's advice.

Nor is Lotus, which is showing off a new product at the New Orleans Softcon show. Called Symphony, it offers few new wrinkles. To 1-2-3's popular features, it adds writing and phone-line information capabilities that are already available elsewhere.

Personal-Computer

Software Sales

(Wholesale, 1983)

HARDWARE MAKERS

IBM $110,000,000

Tandy 110,000,000

Commodore 75,000,000

Apple 70,000,000

Atari 70,000,000

Texas Instruments 60,000,000

INDEPENDENTS

Microsoft 68,000,000

Lotus 53,000,000

Digital Research 48,000,000

MicroPro 45,000,000

VisiCorp 45,000,000

Ashton-Tate 40,000,000

Peachtree 22,000,000

Broderbund 12,000,000

Perfect Software 12,000,000

Sierra 12,000,000

Sorcim 12,000,000

Spinnaker 12,000,000

Synapse 12,000,000

Continental 11,000,000

Software Arts 11,000,000

State of Art 11,000,000

Software Publishing 10,000,000

Source: Future Computing Inc.