The Software Hard Sell

By Alexander L. Taylor III

Packaging and promotion mean big profits in programs

The software industry, the essential but sometimes overlooked child of the personal-computer revolution, is growing up fast. Sales are increasing at a rate of 50% a year. New companies are springing up almost every week. Big corporations are beginning to move into the market. New programs are being launched with heavy promotion and large advertising budgets. Software-only specialty stores are multiplying. In short, a business explosion is occurring.

Last week Commodore International Ltd. announced that it was introducing about 70 new software titles this summer, more than its total catalogue just four years ago. Schuchardt Software Systems, which makes office automation programs for the IBM personal computer and others, saw its first public stock offering of $1.6 million sell out at $5,000 per share only a month ago. Last week the price skyrocketed to $8,000 per share.

From a starting point of virtually zero in 1976, sales of software for personal computers have been on a vector that seems to be pointed straight up. Revenues reached $600 million in 1981, $1 billion last year, and are expected to hit $1.5 billion in 1983, according to SRI International, a West Coast research firm. Prospects of dizzying profits have lured at least 230 companies into the business of creating software. Venture capitalists with bulging bank accounts are showered with proposals from novice entrepreneurs looking for start-up financing. By 1990, industry revenues could reach $12 billion. That will make software almost equal in size to today's household-appliance industry.

Software is to computers what gasoline is to automobiles or records are to stereo sets. Without software, a computer is only an inarticulate mass of electronic parts. Says David Sturtevant of the Association of Data Processing Service Organizations: "The computer alone is as dumb as a stump. It won't even keep beer cold." Software, the programs that come in cartridges or on floppy vinyl discs, instructs the machine to carry out the commands given to it. Customers are willing to spend heavily to get the right software. Industry experts estimate that for every $1,000 consumers invest in computer hardware, they pay out another $300 on software during the first year after they buy a machine.

In the late '70s, when the personal-computer industry was just getting started, a host of small software companies grew up. Many firms were started by one or two people with one computer, a good idea and some knowledge of computer programming. But as the market has expanded beyond the electronics hobbyist to the businessman, homeowner and student, software companies have discovered that they cannot survive on technology alone. They must develop skills in marketing, distribution and advertising. Says Edward Currie, president of Lifeboat Associates, a leading software publisher: "The software industry is turning into a cosmetics industry. In cosmetics, you worry about the box first, then the bottle inside it and, finally, the contents of the bottle. The same thing is happening in software."

Indeed, when Microsoft (1982 sales: $34 million), the Bellevue, Wash., company that developed the operating system used on the IBM personal computer, wanted someone to run its marketing program, it looked to the cosmetics industry. Last month Microsoft hired Rowland Hanson, vice president of Neutrogena, a maker of skin-care products, as head of marketing and public relations. Admits Hanson: "When I came here I didn't even know how to turn a computer on." But he does know how to sell packaged goods. Says company President Bill Gates, who founded Microsoft at age 18 and is one of the industry's veterans at 27: "We're past the point where technology is all important. It's the marketing, the reputations that are important now."

The demand for that type of skill has made the growing industry even more attractive to giant corporations, since they already have valuable experience in those fields. CBS, Walt Disney Productions, 20th Century-Fox Film Corp. and Dow Jones & Co. have all entered the software business within the past year. CBS and 20th Century-Fox are producing software for games, while Walt Disney makes educational programs. Dow Jones is turning out packages for stock-market analysis.

The presence of big companies raises the level of competition and also makes life tougher on smaller firms. The single brilliant programmer working on his home machine who packages his product in a Baggie may not survive any more. Says Daniel Fylstra, chairman of Visi-Corp. (1982 sales: more than $35 million), which markets VisiCalc, a financial forecasting program for businesses that is the most popular ever written: "Before, anyone with a reasonable product could make a go of it. Now you're seeing larger and larger sums directed toward marketing. Brand names are becoming more and more important."

In addition to its rapid growth, the personal-computer software industry lures both big and small companies because of its huge profit margins. Programs that cost only $5 or $10 to make can sell at retail for up to $700 or more. The most expensive is believed to be Micro-scan II, a stock-analysis program that costs $6,250 for a year's subscription, which includes periodic market updating.

The hefty returns software firms can make, however, invite price-cutting. Last week Commodore said it would introduce a less-than-$100 edition of Multiplan, a financial modeling program that sells in other versions for as much as $275. That could set off a price war as competitors try to match Commodore. Increasingly, software companies are discovering the advantages of bigness. In June 1981, Atlanta-based Peachtree Software sold out to Management Science America, a company that had previously concentrated on programs for mainframe computers, for $5.5 million. The new owners invested in television advertising, which was practically unheard of in the industry, and heavily promoted the Peachtree logo. Says John Imlay, 46, chairman of MSA: "The key thing is that we poured a great deal of money into brand recognition." Peachtree's sales took off, in part, because the software can run on the popular IBM personal computer. Revenues reached $9.4 million in 1982 and are expected to double this year.

As the software industry becomes more packaging-and marketing-oriented, it increasingly resembles the record business. Companies would rather make a monster hit that sells hundreds of thousands of copies than design specialized programs that appeal only to tiny segments of the market. Trade publications cater to the hit mentality by compiling bestseller lists in categories like education or home management. Imitation becomes a measure of success. Once a particular piece of software takes off, a slew of copycat programs, which promise to do the same thing for less money, often follow. VisiCalc imitations have become known in the industry as VisiClones and CalcAlikes.

One new company, Electronic Arts of San Mateo, Calif., is taking the record-industry model a few steps further. Founded by Trip Hawkins, 29, a Stanford M.B.A. and former executive with Apple Computer, it is packaging its line of entertainment software in cardboard slipcases that consciously resemble record jackets. The company is also trying to elevate its programmers to star status by referring to them as "software artists," prominently displaying their names on packages and photographing them in pop idol-like settings.

Lotus Development Corp. is another example of a company exploiting the hot market in software. The firm last year introduced a new program called 1-2-3 that combines several basic functions in one package. Someone, for example, can file information, do financial modeling and draw graphs with the same product. The one-year-old Cambridge, Mass., company has already gathered $5 million in venture capital, and it spent $1 million on a three-month advertising campaign. The investment paid off handsomely. Though it costs $495, 1-2-3 is now the bestselling business program.

Integrated software products like 1-2-3 that combine several functions are generally too complex for small companies to produce. They require the talents of dozens of programmers working in close coordination. Sometimes such projects even stretch the abilities of larger firms. Late last year Visi-Corp announced that it would soon introduce a new integrated product called VisiON. But original dead lines have slipped, and now the product is not expected to be on the market until October, or perhaps even later.

With so many companies pushing so many products so hard, a bottleneck is developing at the end of the distribution pipeline in stores. Dealers are running out of shelf space, and products are being introduced in such a flood that salespeople often do not even know how they work. Says Daniel Bricklin, co-author of VisiCalc: "It is hard getting marketed. The dealers have to be persuaded that a program will sell."

Softsel Computer Products, which is based in Inglewood, just outside Los Angeles, started business in 1980 as a soft ware distributor. In its first six months it had revenues of $700,000. This year it will gross $70 million. The firm distributes more than 3,000 products to 1,200 outlets. Each month it screens more than 400 new programs, but fewer than eight are selected for sale. Says President Robert Leff: "The acceptance rate is very low. Advertising is almost critical. A very good product needs advertising out there generating the interest."

The scramble for display space has led to the advent of stores that sell no computers, only software. Softwaire Centre International began franchising soft ware-only outlets in October 1982 and now has 26 stores, with 13 more under construction. Each one carries 3,300 items, including accessory equipment like printer ribbons and books. The company's revenues this year from franchising alone should exceed $2.5 million.

A couple of canny software sellers have now discovered a new way to ease the shelf-space squeeze. Tymshare, a California computer communications firm, is experimenting in four San Francisco-area stores with the electronic delivery of programs to customers. Once the buyer has selected the software he wants to buy, the salesman orders it up from a central computer and electronic impulses in scribe it on a disc in the store. Later this month Control Video Corp. of Vienna, Va., will begin sending video-game programs over telephone lines to game owners at home.

-- By Alexander L. Taylor IlL Reported by Dick Thompson/San Francisco with other bureaus

With reporting by Dick Thompson This file is automatically generated by a robot program, so viewer discretion is required.