Like June in the old Rodgers and Hammerstein show tune, personal computers are bustin' out all over. An estimated 6.5 million units -- what the industry calls the installed base -- are now in use in offices and factories, along with another 12.5 million in American households. Sales of the machines are growing at about 22% a year, with roughly 8.2 million sold in 1984 alone.
If people were buying record players for the first time at this rate, investors would be burning up their brokers' telephone lines looking for record companies to buy into. Since it is computers, they should be looking for software companies. We have all heard the analogy between the two, and it is more or less accurate.
At first glance, the microcomputer-software industry's numbers look appealing. The business has expanded from virtually nothing five years ago to an estimated $12 billion to $13 billion this year, and it is certain to keep growing. The biggest company in the industry, Lotus Development Corp., recently topped $100 million in sales over a 12-month period. Ashton-Tate, publisher of dBASE II, Framework, and other big-selling programs, is in the $50-million to $60-million range.
At second glance, however, the numbers are appalling. Where have any outside investors made money? A few lucky speculators bought Lotus near its initial public offering price of 18 and sold it near its peak of 40. But at press time, it was selling at 20, and return to investors over the past 12 months has been -27.2%. Ashton-Tate's stock has hit similar skids, as has the stock of companies like Micro-Pro International Corp. (developers of WordStar, the popular word-processing program) and BPI Systems Inc. (a leader in accounting software).
And the rest? Well, most of the other companies in the business are still privately themselves available to investors in the immediate future. "The market is so sour on public offerings," says John Gantz, editor of Tech Street Journal, a technology-oriented market newsletter, "that it's unlikely anyone [in the industry] will go public soon." That leaves potential comers like Microsoft Inc. (#80 on 1984's INC. 500 ranking of the fastest-growing privately held companies in America) firmly out of reach for ordinary stock buyers.
How can such a fast-growing industry offer so few opportunities to investors? The answers seem to break down into three categories:
It's hard to grow flowers in a bed of weeds. "Bad companies can create a bad environment, even for good companies," points out Esther Dyson, editor of RELease 1.0, an industry newsletter. Dyson tactfully names no names. But another analyst notes dryly that both Micro-Pro and BPI have "undergone enduring problems for the last four or five quarters." And the experience of Ovation Technologies Inc., an aspiring software company that ran through several million dollars in venture capital in less than two years, is not calculated to breed confidence. All signs, in fact, point to a continuing and brutal shakeout in the industry. Early last fall, Management Science America Inc. told Business Week magazine of elaborate plans to back up its Peachtree Software subsidiary with a worldwide customer-service phone network. Not long after, the company announced that Peachtree and three other personal-computer software subsidiaries were for sale.
Success in software doesn't necessarily breed more success. For a while, two of the brightest blooms in the software garden were Software Arts Inc., of Wellesley, Mass., and VisiCorp, of San Jose, Calif. Both had helped propagate the popular and both were making money hand over fist. Then VisiCalc's sales began to peter out as more advanced programs elbowed it off computer stores' shelves.And the new hot sellers came not from the VisiCalc pair but from younger competitors like Lotus.
One-product companies, indeed, litter the software landscape. MicroPro was never able to match its sucess with WordStar. Digital Research Inc., the Monterey, Calif., company that developed oped the widely used, but pre-IBM, operating system CP/M, has seen its sales slump with IBM's domination of the computer marketplace. Even Lotus may have trouble following up on its wildly successful integrated program, 1-2-3. The program's heir apparent, symphony, has so far played to mized reviews. "It's not clear that Symphony will be a winner," says Bud Anderson, editor and publisher of High Technology Growth Stocks, another market letter. "Demand is less than expected, and dealers are piling up inventory."
No one, in short, seems to know how to ensure sales. Astute marketing helps, but it won't sell a program that users don't like. And what programs will users like? The answer to that question is buried in the heads of a few creative geniuses -- who may or may not stay with the same company they started with. And even when a new program proves successful, there is nothing to stop a well-heeled competitor from coming out with a metoo product.
When there's an elephant in the garden, don't put money on the pansies. Last September, IBM announced two new business-program packages with 31 different potential applications. In response, the investment managers of America spoke as one -- why take a chance? -- and dumped the stocks of most other public software companies, sending pries plunging. Similar declines took place in the prospective market value of the thousands of privately held companies struggling to make a place in the industry -- even those whose products run little risk of being duplicated by IBM.
All these answers, of course, may boil down to one: Who needs it? Investing in software is less like investing in record companies than it is like investing in individual records, with the vagaries of the public's taste and the identities of the next megastars both unknown. It is a product, moreover, that investors themselves are unlikely to understand. (Quick: what's the difference between Framework and Symphony?) And with IBM forever lurking on the horizon, where is the protection? "From an investment standpoint, I don't like any of [the software companies]," says Bud Anderson.
"There are plenty of [other] investment opportunities," adds one chagrined market-watcher, who bought Ashton-Tate at 9, held it to 11, and watched it plunge to 7 1/4 after IBM's announcement. "I won't do that again."