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<img src="soft-in.jpg" ALT="The Software Industry"><BR>
<i>An overall analysis.</i>
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<a href="index1.html#intro">Introduction</a> |
<a href="index1.html#econo">Economics</a> |
<a href="index1.html#compe">Competition</a> |
<a href="index1.html#intern">International</a> |
<a href="index1.html#leade">Leaders</a> |
<a href="index1.html#regul">Regulation</a> |
<a href="index1.html#caree">Careers</a> |
<a href="references.html">References</a> |
<a href="links.html">More Links</a> |
<a href="about.html">About these pages</a><BR>
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<P>
<center><h3>Introduction</h3></center>
<P>
In the computer industry, there are various markets where entirely different economic
strategies and conditions exist. A distinction should be made between the
basic types of businesses: hardware and software companies.
<P>
Hardware companies are those such as <a href="http://www.3com.com">3Com</a>,
<a href="http://www.digital.com">Digital</a>, and <a href="http://www.hp.com">HP</a>
that specialize in creating physical components that inter-operate either with or as a computer. Software is then the interface and actual program that operates on the hardware. Examples of Software include the Windows environment you run on
your computer, and the Web Browser you are using to read this document. Software and Hardware are
inseparable as far as functioning goes, but the industries themselves are quite different.
This paper is a look into the various aspects of the Software Industry. Focus will be put
on the U.S. industry since it is the most dominant, with some focus on International
competition and other key issues.
<P>
Even within the Software Industry lie divisions. These divisions are most often between
function rather than any form. Software can vary from operating system software, which
is the basic foundation that program run on, to desktop application software
<P>
<HR>
<a name="econo"></a>
<center><h3>Economics</h3></center>
<P>
Worldwide sales and revenues in packaged software alone totaled over $90 Billion in
1995 while forecasters expect to see over $130 Billion in sales by 1998. <font
size=1><a href="references.html#1">1</a></font>. The entire software market
is estimated to have revenues of over $200 Billion, with a growth rate of some 13% a
year. <font size=1><a href="references.html#2">2</a></font>. The Internet alone is
expected
to push the market out further. Current sales related to the Internet stand in the low
hundred millions, but forecasters are betting on over $8 Billion by 1999. <font size=1><a
href="references.html#3">3</a></font>. The US software market as a whole grew by
some 23% in 1995 (ahead of worldwide growth of 21%).
<P>
<img src="revenue.jpg" align=left hspace=2 vspace=2> A key factor to the success of the software industry is their high returns on sales. While
companies dealing in hardware enjoy gross margins of 15% - 25%, some companies have been reported as attaining gross margins of as high as 80% (although most of the successful
software companies maintain closer to a 20% gross margin). <font size=1><a
href="references.html#4">4</a></font>. With higher returns on sales they are able to
increase marketing budgets, research and development, and investments in other industries.
<P>
Overall outlook for software is very bright. Investors are very optimistic about
the state of the industry, and stock capitalization is at such a high rate (in the
stock industry as a whole, but especially in high-tech) that is considered
by many as a sign of eminent disaster. <font size=1><a
href="references.html#5">5</a></font>.
<BR clear=all>
<P>
<a name="supply"></a>
<b>Supply</b><BR>
<dd>The suppliers in the computer industry continue to expand in total size and in
numbers. There is a trend, however, for the many smaller companies to become
devoured by the large billion dollar corporations. 1994 had a record 6.6 billion in
mergers and acquisitions for software companies. <font size=1><a
href="references.html#7">7</a></font>. Large mergers such as the recent ones
between Lotus Corporation and IBM, Novell and WordPerfect, and Cheyenne Software
and Computer Associates prove that this trend is continuing.
<P>
Having a smaller number of suppliers in the market tends to play in the favor of
the producers as well as the consumers. Economies of scale allow companies to
focus on lower prices and improving product stability. In addition, it allows suppliers
to create a wide variety of complementary products. On the other hand, it stifles
the innovation and competition which ultimately lead to superior products and services.
In certain markets, such as the PC operating systems market, there is a constant
battle between Microsoft and their dominance, and others who feel that they are
being pushed out by predatory pricing, discriminatory practices, and basically a
monopolistic market. <font size=1><a href="references.html#11">11</a></font>.
<P>
The traditional supply chain of software has changed over the last 10 years and even moreso in
the past two years. Associations with dealers and software stores remains strong, but
there is a tremendous growth is discount and specialty stores such as Wal-Mart. An
industry poll marked computer software and accessories as potentially the highest
potential growth sector in these discount marts.<font size=1><a
href="references.html#8">8</a></font>. Another new supply chain that was unrealized
until recently was direct sales off the Internet. Id Software, makers of the popular game
Wolfenstein 3D, Doom, and Quake sell their software on-line. Others use an on-line
shopping network to distribute and sell software. The traditional chains of retailers and
publishers selling new products and upgrades has changed dramatically. <font
size=1><a href="references.html#9">9</a></font>.<font size=1><a
href="references.html#10">10</a></font>.
<P>
<a name="demand"></a>
<b>Demand</b><BR>
<dd>The key factors affecting, or controlling demand for products in the software
industry include complementary products, pricing and quality, and the need for
innovation. The key players in the demand segment include businesses
and more recently, the home consumer. The affordability of home computers has
spurred a huge demand for family software -- something for home financial planning,
education, and entertainment. Other areas of growing demand include applications
to manage growing computer networks in the businessplace, an area that <a
href="http://www.cai.com">Computer Associates</a> has a strong leadership in.
<P>
Complementary products in the software industry refer to compatibility. If a product
works well with another product, operating system, or computer platform, then it is a
complementary product. <a href="http://www.ibm.com">IBM</a> has had this problem
in eliciting strong demand for its OS/2 operating system because of compatibility
concerns with other software. <a href="http://www.microsoft.com">Microsoft</a> able
to enjoy a tremendous amount
of success in creating demand by dominating the markets for both operating systems
and desktop programs.
<P>
Pricing and quality are concerns of the consumers as well. It is something that
the large corporations such as Microsoft are able to adjust by means of economies of
scale. Software is an interesting product because unlike a car or a golf club, the
production cost is very low -- it is basically an intellectual piece of property you are
buying. Initial outlays in R&D and marketing are high, but as a product matures it
experiences the exact opposite of diminishing returns -- they in fact increase. As a
product gains popularity, support by other companies and software vendors grows,
and very soon you have a product whose demand curve is exploding past the
competition.<font size=1><a href="references.html#6">6</a></font>.
<P>
The technology industry tends to move so quickly that small innovative companies, or
groups of people, are able to create their own market and demand. Key examples of
this exist in the recent explosion of the Internet. Companies such as Netscape
grew with very little resources into a company with a market capitalization of
$2 billion in a few years. Netscape has proven that with an innovative product
and marketing strategy, an entirely new market with demand can be created.
<P>
<BR clear=all>
<HR>
<a name="compe"></a>
<center><h3>Competition</h3></center>
<P>
Competition exists in a variety of ways. There is competition between product
lines such as Microsoft Word vs. WordPerfect, competition between operating systems
such as OS/2 and Windows 95, and competition between what is standard and
what is new and different. Competitors range from the large Billion Dollar companies
like <a href="http://www.microsoft.com">Microsoft</a> and
<a href="http://www.oracle.com">Oracle</a> to a large number
of small independent companies that
find market niches in everything from virus, backup, and financial tools.
<P>
Between product lines competition is more of an oligopoly than anything else.
A few large companies tend to control product offerings within each segment.
Desktop applications are the biggest base, which is where Microsoft, Lotus,
WordPerfect, and other large companies promote and sell their products. The
level of Research and Development needed to create a marketable product is
high enough to create a natural barrier to entry by smaller companies.
<P>
In the market to control the operating system, even larger companies compete.
This area tends to be only for the largest companies. Microsoft, IBM, HP,
Sun, and others rely heavily on both an installed base and on the availability
of complementary software to run on their operating system.
<P>
What is interesting is that smaller companies can find niche markets with the
large players gobbling up areas of growth all the time. Entire segments
of the software industry have developed this way. 3 years ago, Internet
based sales were insignificant at best. Today they are in the hundreds of
millions of dollars. The market for network management tools, a specialty
product of Computer Associates, developed because of the changing face of
the computer industry towards networking. 10 years ago these tools had to
be developed in house or by a custom contractor.
<P>
What companies with dominance in the market today fear most is the change from
the desktop computer to what is coined the "Network Computer" by companies
leading the charge such as Oracle Corporation. This shift could mean hard
times for companies in the desktop applications business, while it could
mean very prosperous times for those involved in developing more Internet
and network based programs.
<P>
<HR>
<a name="intern"></a>
<center><h3>The International Industry</h3></center>
<P>
While the United States accounts for some 75% of the World's supply of software,
international competitors are quickly gaining ground and penetrating into this
lead. Countries such as India and China are bypassing the industrial age and
jumping directly into the high-technology age. Europe is another force that has
a higher level of maturity in the industry with a few key companies such as <a href="http://www.sag.com">Software AG</a> and <a href="http://www.sap.com">SAP</a> that have broken into the top 20 list of
software vendors. <font size=1><a href="references.html#16">16</a></font>.
<P>
<img src="supply.jpg" align=left hspace=2 vspace=2> India, in particular, is an interesting case to note. It was not long ago that
India had less than a few thousand programmers. More recently it has an estimated
250,000 highly trained programmers that have US immigration officials wondering
about the wisdom of current level of immigration restrictions (or the lack). With
the progress of telecommunication, remote bases located in foreign countries
such as India has become an attractive prospect for many software companies since
labor rates for programmers can be up to 40% less than American counterparts. <font size=1><a href="references.html#16">16</a></font>.
<P>
Europe is probably the United State's closest competitor, but still suffered from
$18 billion in trade deficits in 1994 when it came to software sales. American firms
also account for 18 out of the top 30 money-makers in Europe, supplying 60% of
the region's demand for software in 1994. Europe as a whole suffers from
inherent problems of having a fragmented local market. There are factors
such as the need to support over a dozen languages for
the European market as well as the diversity of cultures, currencies, and legal systems to deal with. <font size=1><a href="references.html#17">17</a></font>.
<P>
China is a market that is estimated to be the world's largest emerging software market.
PC sales alone are expected to increase by five-fold over the next five years.
Companies such as Microsoft have seen this possibility and have positioned themselves
with bases inside China -- helping to train programmers and technicians in hopes
of sealing large contracts with the government and local businesses. Piracy has
always been a big issue in the software industry, causing estimated losses of over
$8 billion in 1994, with China leading the pack in piracy rates at 98% (National average estimated at 49%).<font size=1><a href="references.html#18">18</a></font>.
<P>
<img src="demand.jpg" align=left hspace=2 vspace=2> As a whole, the United States continues to dominate in the industry, with competitors
such as Europe and Asia being many years behind. Besides being the biggest
supplier of software, the US is also the largest buyer with demand at roughly 40%
of the entire market. The biggest threat may come from outsourcing programming
contracts to emerging nations such as India and China, something that is common
in more traditional manufacturing industries today.
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<P>
<HR>
<a name="leade"></a>
<center><h3>Market Leaders</h3></center>
<P>
The main leaders in the software industry (in terms of gross revenue) are
leaders because of their ability to niche themselves and create a strong
and dominant leadership in their niche. Microsoft, with over $8 billion in
gross revenues, has done this with the PC desktop software and operating
system market. Microsoft's main focus is on the home and business user
with word processing, spreadsheet and presentation tools. Oracle, the
second largest software corporation with over $4 billion in revenues has
based most of their business in the high-end database and 4GL tools (4GL
tools are expert programs that allow developers to easily create programs.
Basically a program that helps develop other useful programs)
market, up until now avoiding the desktop of most users. Computer Associates,
having recently been bumped down to third place with slightly less than
$4 billion in sales has a market focus on network management tools.
<P>
What is occurring with each segment is an application of economies of scale
and increasing returns (as mentioned earlier). As companies such as
Oracle gain a strong market base, smaller vendors team up to create
complementary products for them -- leading to an even stronger market
force for the company. And as software sales increase, returns increase
dramatically allowing for more Research and Development projects.
<P>
All this is fine, except that the market is becoming crowded of late, and
the big players are beginning to step into each other's markets. Where
Microsoft was traditionally on the Desktop PC, it has launched a huge
campaign to take over the Server -- going head to head with companies such
as Sun, Digital, and SGI in the Operating Systems market, and against
companies such Oracle, and Computer Associates in the database and network
management markets respectively. This trend exists not only for Microsoft
but for all the larger players grasping for more market share. Oracle
has stepped into the groupware market dominated by Lotus Notes, as has
Microsoft. Microsoft has also made a strong push into the Web Browser
market, currently dominated by Netscape.
<P>
Competition between the giants in this market of increasing returns and
endless economies of scale has only one feasible ending. One large
company controlling each large segment due to their ability to absorb
costs and acquire or crush anything that opposes them. We already see
this trend in various sectors of the industry, which leads to the next
topic of Regulation in the software industry.
<P>
<HR>
<a name="regul"></a>
<center><h3>Regulation</h3></center>
<P>
Regulation is a form of control that is intended to break down an unfair
advantage that a company is using, and to create a fairer competitive
framework for an industry. The software industry, with its characteristic
economies of scale, high profit margins, and ever increasing returns is
constantly the focus of regulatory agencies. Although regulatory
measures exist in attempts to save US jobs from foreign immigrants and
foreign based plants, the most significant regulatory pressures have been
against one company, Microsoft. The spotlight on Microsoft, who has always
been a target for regulation due to their dominance on the PC desktop,
has intensified severely
in the last few months with Microsoft's new focus on dominating (or
perhaps crushing) the newly formed Internet market.
<P>
As for the job market, emerging nations such as India, with their
sudden growth in supply of programmers (estimated at over 250,000 in 1995)
has US Immigration looking very closely at this issue, while globally competitive
companies see foreign labor as the only way to remain competitive. If
immigration laws become more stringent, the results could mean a lack of
decent programmers to maintain the United States' software lead. <font size=1><a href="references.html#20">20</a></font>.
<P>
More recently, and in much more the public eye, is the Justice Department probe into
anti-trust allegations by Microsoft Corporation of anti-competitive behavior.
The focal point of the probes were concerning the built in limitations on Microsoft's
NT platform. The operating system comes in two flavors, <b>Workstation</b> and <b>Server</b>, products that are marketed differently, but proved to be basically
the same internally. By imposing a licensing limitation of users on the lower cost
workstation and packaging the higher priced server with an Internet Webserver,
Microsoft has put itself into a position of unfair domination of the NT based
Internet Server market. Microsoft has been the subject of other justice department
probes for anti-trust and unfair competitive practices in the past. <font size=1><a href="references.html#21">21</a></font>.
<P>
The solution may be break Microsoft up into separate companies, as were
the Baby Bells for the telephone industry. By forcing Microsoft to develop and
market their operating systems (Windows 95, Windows NT, etc) separately
from their applications (Microsoft Word, Internet Server, etc), an even ground
for competition could be created. As Microsoft moves forward and continues
to grow on their already massively dominant market share of the PC desktop,
Justice Department probes are bound to become more and more intense.
<P>
<HR>
<a name="caree"></a>
<center><h3>Career Prospects</h3></center>
<P>
The software industry in the last few years has seen such tremendous
growth that market demand is overwhelming the supply of programmers,
system and network managers, and project coordinators at rates of up
to 11.5% in 1996 (9.6% annually from 1987-1994). This has
resulted in top graduates out of strong Computer Science programs
negotiating very large salaries and bonuses to join up with a company.
Salaries of up to $45k a year for a new graduate, along with signing
bonuses, stock incentives and moving expenses are not uncommon. <font size=1><a href="references.html#14">14</a></font>.
<P>
Because of this lack of supply, software vendors have gone
Internationally go search for employment -- often building
development centers in host countries to accommodate those who
do not want to learn their native country. Programmers from
countries such as India, China, and Europe are often recruited
to fill the supply gap.
<P>
Hiring these graduates is one thing keeping them onboard long enough
is another. This is because once given a few years
of experience it seems that their ability to gain higher paying
employment (especially overseas on short term contracts) tends to grow
very quickly.
<P>
Depending on the area, pay rates for a systems professional with
a few years of experience can vary from $40k to $70k a year. A
few figures from recent ComputerWorld reports on salaries in localized
areas:
<P>
<B>Dallas:</b><BR>
<dd> The technology market has taken off of late in the Dallas, Texas area. Jobs
for individuals with varying degrees and areas of experience are being hired at an
increasing rate. "..the best people are only on the market for a week or two." says VP of Human Resources of a Dallas based consulting company who hired 1200 new
information systems people (meaning a mix of programmers, analysts, etc). Dallas is
a high tech market that has spawned some 67,900 jobs since 1993, with increases of
18% over the 1993 figures expected for programmer positions.
<P>
Salaries were not available for Dallas. <font size=1><a href="references.html#12">12</a></font>.
<P>
<B>Pittsburgh:</B><BR>
<dd> Pittsburgh has been a key center of concentration for Fortune 100 corporations
for the last 20 to 30 years which makes it a prime place for the information systems
marketplace. Local Universities such as Carnegie Mellon and University of Pittsburgh
help to keep the infrastructure on the cutting edge.
<P>
Salaries for beginning programmers average $33,600 (Programmer I), while
more experience programmers earn an average of $56,500 (Programmer II).
Systems programmers average $52,200. <i>(Distinctions such as Programmer I and II
tend to distinguish entry level from moderately experienced employees. System programmers are a specialized type of software engineer).</i> <font size=1><a href="references.html#13">13</a></font>.
<P>
<B>Pacific Northwest:</b><BR>
<dd> The northwestern states of Oregon and Washington are home to some
large corporate headquarters of companies such as Nike, Columbia Sportswear,
Boeing, and high tech companies such as Microsoft and Intel. These and other
large companies (as well as hospitals) are pushing the demand for experienced
programmers and analysts.
<P>
Salaries for programmers range from $37,000 to $55,000, with an average for experience programmers in the low $50k range.
<font size=1><a href="references.html#14">14</a></font>.
<P>
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<address><CENTER>© 1996 - DC<BR></address>
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