Why Software Firms Get Gobbled Up
SOMEWHERE in the late 1980s, the software industry grew up. It stopped being the playground for entrepreneurs who could turn a bright idea into a major company. Instead, it has started looking awfully mature.
"Software is the oil industry," says Jim Manzi, chairman and president of Lotus Development Corporation. Just as big oil companies - the so-called Seven Sisters - dominated the oil industry, so too the software industry is seeing big players exercise their marketing clout, he says. The big oil companies didn't dominate ownership of oil reserves. They dominated the servicing, marketing, and distribution channels.
"The fact is that like the days of the Seven Sisters, a [software] company can come along and have the greatest product in the world, the greatest idea, but it can't make any noise" in the market, says Paul Gillin, executive editor of Computerworld. The small entrepreneur usually has only one option: to sell his innovative product to a larger company that can promote and distribute the software, he says. "It's kind of sad, really."
A big reason is money. With so many products out on the market, it's hard for a new company to attract attention - to get through the "noise," as Mr. Gillin puts it. That makes venture capitalists leery to begin with. They are doubly cautious as the price of launching a new software product goes up.
If it took $500,000 to launch a software product in 1984, it now takes $2 million to do a good job worldwide, estimates Ron Posner, chief executive officer of WordStar International Inc.
Mr. Posner has been in the thick of the industry's consolidation since he started with Ashton-Tate in the 1980s. Ashton-Tate was a symbol of the old-style software company: a small start-up firm that created an award-winning database program, called dBase, which took the industry by storm. It became an industry leader but stumbled with later versions of its program and (long after Posner left) sold out to Borland International.
Since then, Posner has headed Ansa Software (whose much heralded program, Paradox, wouldn't sell until the company merged with Borland) and Peter Norton Computing (which merged with Symantec Corporation).
Posner is now trying to revive WordStar, which created the industry's leading word-processing software but lost market share to fleeter companies, such as Microsoft Corporation and WordPerfect Corporation.
'I SEE consolidation and mergers increasing," Posner says. But "it's not going to be seven big ones [companies] and then a lot of little entities. I think there's going to be a lot of room in the middle."
The trends of consolidation and domination are most pronounced in business-application software. Three companies occupy the top tier: Microsoft, Borland, and Lotus. All of them have multiple products and the wherewithal to buy smaller companies.
After the Big Three come middle-tier firms: WordStar, WordPerfect, Symantec, Aldus Corporation, Claris, and Computer Associates. They face growing pressure from the top.
Microsoft is causing the most fear among smaller software companies, says Phil Lemmons, editor in chief of PC World, a computer monthly. "The concern of all these people is that Microsoft is so big and has such enormous resources that it can just take the market," he says. m not saying that that's what Microsoft is doing. But that's definitely the fear."
Curiously, none of these industry executives and observers believes that the industry's consolidation will dampen its innovative drive.
"I don't think it slows innovation," says John White, president of the Association of Computing Machinery. "It just complicates things a bit."
Indeed, some observers believe the era of consolidation will pass as new kinds of computers come along.
"I don't see the opportunities for creative companies going away," says Sorel Reisman, professor of information systems at the business school of California State University at Fullerton. "I see [the opportunities] even becoming bigger."