Software Giants Build Cooperative Ventures

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 Corporation, a market research firm in Framingham, Mass. "The whole industry is evolving more and more rapidly."

At the forefront of that evolution is Microsoft Corporation, 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 Corporation to jointly offer a software package to compete with similar packages offered by Microsoft and Lotus Development Corporation.

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 one-third 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," Mr. Hendrick notes.

Similarly Lotus, which grew rapidly in the 1980s with its 1-2-3 brand spreadsheet programs, has been challenged by Microsoft. Lotus last week reported quarterly profits down 41 percent 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 percent. Mr. Picardi pr edicts rapid evolution of new products.

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

"There'll still be plenty of room for niche players," Hendrick adds. 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 notes, 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, though the company is known for its software that runs on IBM-compatible personal computers, it also is 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 William Gates told a group of Macintosh users recently. He noted that, because Microsoft helped IBM develop its OS/2 operating system, Microsoft co llects royalties every time a copy of OS/2 is sold - even though OS/2 competes with Microsoft's Windows.

In the fast-growing networking area, Microsoft still lags. Novell dominates the market. Networking has become increasingly important as more and more businesses link PCs together so they can share document files in the workplace. Microsoft plans to go up against Novell later this year with Windows NT, a new advanced operating system designed to incorporate networking and other features.

Novell, meanwhile, is trying to expand from its networking stronghold into Microsoft's turf. In December the Provo, Utah, company bought an operating-system unit from AT&T.