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Traditional Tactics No Longer Compute : Rivalry: Software products are becoming like commodities, where competition is based on price rather than product differences.

April 26, 1993|From The Christian Science Monitor

BOSTON — The computer software industry is poised for continued strong growth, but the formula for success is no longer as simple as it once was, analysts say.

"It will be increasingly difficult to start a software company in your garage," says Stephen Hendrick, a software analyst with International Data Corp., a market research firm in Framingham, Mass. "The whole industry is evolving more and more rapidly."

At the forefront of that evolution is Microsoft Corp., which began as one of those fabled garage start-ups. Now, expanding from its dominance in the basic operating-system software on which personal computers run, the No. 1 software company is pushing for market share in numerous other areas.

The other big players in the industry are being forced to respond. Last week Borland International Inc. teamed up with WordPerfect Corp. to jointly offer a software package to compete with similar packages offered by Microsoft and Lotus Development Corp.

The set will combine Borland's database and spreadsheet programs with WordPerfect's program for word processing. The package will sell for $595, or about a third of the price of the three programs sold separately. Packages sold by Microsoft and Lotus do not include database programs.

"Borland and Microsoft already had a good price war going," Hendrick said.

Lotus, which grew rapidly in the 1980s with its 1-2-3 brand spreadsheet programs, has also been challenged by Microsoft. Lotus last week reported quarterly profits down 41% from a year before.

Software products are becoming similar to commodities, where competition takes place on price rather than product differences. That is similar to what has occurred in computer hardware, says Anthony Picardi, director of software research at International Data.

"Software is still a growing industry" despite stepped-up competition, he says. The market research firm projects industry sales to grow from $58 billion last year to $112 billion by 1997--a compound annual growth rate of 14%. Picardi predicts rapid evolution of new products.

"We haven't even started to scratch the surface yet," he said.

"There'll still be plenty of room for niche players," said Hendrick. A large majority of software companies now have 25 or fewer employees. But he sees several forces pushing the industry toward consolidation.

Bigger companies, he noted, have the distribution and marketing power to move in on markets pioneered by smaller firms. And they have the financial resources to take advantage of new software development technologies. This allows them to come out with upgraded versions of their software faster than ever.

In this technology race, Microsoft is a tough competitor because it has fingers in many pies. For example, although the company is known for its software that runs on IBM-compatible personal computers, it is also a major provider of software for Apple's Macintosh hardware.

"Microsoft makes more money when a Mac is sold than when a PC is sold," Microsoft Chairman Bill Gates told a group of Macintosh users recently.

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