There's better-than-even chance that the software-only companies will survive as an independent industry, particularly if IBM's actions mean as much as most people think they do. Before the computer giant moved into the personal computer market this fall, it had never gone to outside suppliers for software products. When it announced its new machine in August, however, the company revealed that it had signed software-development agreements with at least five of these tiny companies, including Microsoft, Personal Software, Digital Research, Peachtree Software of Atlanta, Ga., and Information Unlimited Software of Berkeley, Calif.
"The software business is growing so fast," says Mike Belling of Stoneware Inc., "that all you've got to do to stay in business is hang on to your tail. Other people are making mistakes, too, so you can afford to run a company by the seat of your pants."
The fact that the companies are trying to face up to the central defining question of their existence amidst the explosive growth and the mundane, day-to-day chores of running a business makes it a very challenging business indeed. New concepts are articulated almost weekly and discarded nearly as quickly. And the money is pouring in as fast as the entrepreneurs will allow it. "There's not one week that goes by," says Belling, "that at least one venture capitalist doesn't talk to us. We haven't gotten a good enough offer yet."
"We turned down an offer of $1 million in venture capital," says A. Richard Miller, who with his wife, Jill, runs Miller Microsystems Inc. out of their suburban Natick, Mass., home. "If you have to work, working at home is the most pleasant way to do it."
Not all of the software companies have been able to resist such temptation. Microsoft, Personal Software, Software Publishing, and Digital Research have all taken in venture money. Gary Kildall saw giving up a small piece of Digital Research as the price he had to pay to get access to the venture capitalists' advice and management expertise. Fred Gibbons gave up only 25% of Software Publishing to get the money he needed to develop programs subsequent to PFS.
The money is important. Although most of the software companies have been successful so far at financing their hypergrowth out of earnings, they are beginning to face some very heavy competition. The toughest competition may come from the very hardware vendors for whose equipment the software companies have been providing programs. While VisiCalc, for instance, may have been responsible for the sale of as many as 20,000 Apple II computers, Apple Computer Inc. is devoting considerable resources to developing its own software line. "We're very much in the software business ourselves," says Rob Campbell, Apple's product manager for software. "Four or five years ago, the question was, 'Does the hardware work?' Now everyone's making computers that work, so it's become much more of a software solution."
Radio Shack also develops software for its own machines, particularly because the $1-billion giant doesn't like to sell independently published programs through its own stores. "In the next few years, we'll be producing more of the sophisticated business software in-house, and the lower-end products will come from outside," says Jon Shirley, vicepresident of merchandising of computer products at Radio Shack.
Most of the independents say the hardware companies are "too fixed on the iron" to represent a serious threat to the software companies. But some major book publishers are also becoming very active in the field. Addison-Wesley's Business and Professional Division, for instance, has come out with a financial modeling program, the first of the publisher's Practical Computing Series. "The publishing companies have to get into this area if they want to stay competitive," says a spokesperson for Hayden Book Co., which bought out Programma International, publisher of the Apple Pie word-processing program. "We plan to be very aggressive."
"Things are definitely getting much more competitive," says Bill Gates of Microsoft. "There are the small software companies that won't prosper, the larger independent software companies that will do well, and the hardware companies that still consider hardware and software one industry."
Another major trend in the business is toward conglomeration. In the last few months, a number of the industry's leading companies have been acquired by or have made acquisitions of smaller companies. This summer, for example, Management Science America Inc., a supplier of software for larger computer systems, acquired Peachtree Software of Atlanta, Ga., a major publisher of accounting programs for personal computers. "Financially, the acquisition raises our level of ambition and allows us to make long-term plans," says Peachtree's president, Ben Dyer. "We have the resources now to explore new areas."
"When you're large enough to makret products effectively," says Dan Fylstra, "you can really increase the value of a company by acquiring it and then using your distribution system and financial resources to market their products. I would expect that trend to continue in this industry."
As a rule, participants in the microsoftware industry tend to be sanguine. Clouds on the economic horizon, for example, are regarded with equanimity: "Recession?" asks Bruce Van Natta, vice-president of operations at MicroPro International Corp., publisher of the WordStar word-processing program. "What recession? Our industry won't notice any general downturn in the economy, because when times are hard the first thing businesses do is try to improve their productivity. Owners of microcomputers will just add more software to an existing system."
The increased demand for product does not mean, however, that all will be rosy in the future for micro-software producers. "We won't see anything different from other high-tech industries," says Van Natta. "We've already had a number of firms sell out or merge in this field. I don't see how the industry can avoid acquisitions by conglomerates. But I think independent software houses that are innovative and growthoriented will thrive and continue to be on top in the long run."
