Firms With Established Lines Appear in Best Shape : Software Shakeout Far From Over

Times Staff Writer

He's 28 years old, but Terry Garnett says he feels closer to 50. In less than three years, he nurtured an idea into a computer program, then into a company and finally into an acquisition plum. Along the way, Garnett picked up a load of executive-level pressures and headaches.

Garnett is one of those bright young entrepreneurs in Silicon Valley who seem to come along as regular as payday. Last year he sold his company--named Lightyear, after the software package he and two programmers created--to a Cocoa Beach, Fla.-based software developer and publisher. His riches, he said, are mostly of the unspendable specie: experience. Still, he's not complaining. He's lined up a short consulting stint and then will rejoin his peers at Stanford University to start his MBA.

In the software business these days, there are hundreds of bright young entrepreneurs just waiting for a chance to be as lucky as Terry Garnett. They're gussying up their companies and tramping along the courtin' circuit, looking for a merger mate so they, too, can get back to "the creative part of business and not have the pressure of these make-it-or-break-it situations," as Garnett puts it.

Analysts say 1986 will be a good year for software companies, but they mostly mean the kinds of companies that Garnett's was not: companies with established product lines, such as the big three: Lotus Development, Ashton-Tate and Microsoft. The others, they say, are up for sale.

That's because 1985 was a rough year, and the changes forced by the marketplace will be long-lasting. Developers that don't have the wherewithal to get their products on the software best-seller lists will be gobbled up or forced out by the stronger companies. The remaining companies will add to their shares of the market.

And, strangely, the average computer buyer who looks around for software programs will see little difference.

Trend to Continue

There may be fewer programs to choose from than there otherwise might have been, but who will miss what never was? The discount pricing trend sparked by mail-order houses will continue, but analysts are saying that prices on some of the more popular packages probably will go up.

To observers of the high-technology industry, this all has a familiar ring to it; the personal computer industry has been going through the DTs of withdrawal from years of what Adam Osborne, one of its victims, called "hypergrowth."

The shakeout of personal computer makers turned into the slump of 1985, when sales of PCs failed to keep up with past growth rates. Orders for semiconductors, the amazingly tiny circuits that are the brains of the computer, dropped. And computer makers and chip makers alike began reporting losses, laying off workers and closing plants--many of them the same companies that just a year before swaggered from a full stomach of record profits and expansion.

Like the third climber roped for a mountain trek, software companies also stalled. Venture capital for software developers dried up, leaving many enterprises like Garnett's Lightyear stuck halfway between success and failure.

But this year, most segments of the industry are expecting better times. Analysts predict 20% to 25% growth in business for companies that sell microcomputer software--the kinds of programs that a department head might use in a desk-top computer to put together a budget, or that enable a salesman to keep track of his customers' orders, or that make it easier for authors to write and secretaries to correspond.

That means revenues approaching $3.1 billion, just in this segment of the market, according to Robert Lefkowits, director of software research at InfoCorp. (The segment excludes the much more costly software used by mainframes, the big computers that cost $1 million or more apiece.) That's about 19% higher than last year's sales of $2.6 billion of applications software, including specialized niche programs, such as for lawyers or funeral parlors.

Fewer companies will be counting the profits from those sales: 1985 was a record year for mergers and acquisitions in the software business. According a survey by Broadview Associates and ADAPSO, an Arlington, Va., trade group for computer services and software companies, there were 203 mergers and acquisitions in 1985 among the businesses that the trade group tracks, which encompass software, data-processing services and consulting, training and education. That's a 43% increase from the year before. Of those mergers, 59% were in the software products category--with more than half of those among microcomputer software companies.

Four Acquisitions

Torrance-based Ashton-Tate snapped up the makers of the MultiMate word processing software. Lotus, the leading software company, made or announced four acquisitions last year. One of them is ISYS, a Pasadena company that makes "Hal," an artificial intelligence-based aide-de-camp for Lotus 1-2-3, still the best-selling spreadsheet software program. Software Publishing Corp., another of the major players, bought Harvard Software. And Borland International, the king of inexpensive software, bought a $495 program called Reflex and turned it into one of its $99 stars. In a deal consummated in 1985 but announced just last week, Integrated Automation of Alameda bought Paladin Software, the maker of the Crunch spreadsheet for the Apple Macintosh.

Lotus and Ashton-Tate both are developing strategies for future additions, according to the companies. Analysts say the big companies get merger and acquisition requests daily.

Meanwhile, two other forces are combining to separate the software companies: pricing tactics and market targets.

A two-tiered price structure seems to be settling over the market. Prices remain high for the most popular titles in word processing, spreadsheets and database management. Challengers have found products such as WordStar and MultiMate, Lotus 1-2-3 and dBase III difficult to oust from the corporate office, regardless of price.

But a new crop of inexpensive (less than $100 a package) software has been winning over customers from the ranks of students, home users and small, one-computer businesses.

There is a mentality among large corporations to think "if it's a bargain, there's got to be something wrong with it," said Jon Holtzman, a research analyst with the Gartner Group in Stamford, Conn. "But that's not necessarily true," he said.

"Some companies that have geared to the low end of the market are low-end companies. But some go the whole gamut" and have high-quality products and low prices, Holtzman said.

Nonetheless, analysts say that for now the big money is in selling software to Fortune 1000 companies, which buy computers and software in quantity. They're the ones that, for the most part, put price way down on the list of factors considered in a software purchase.

Sales of software to the Fortune 1000 crowd will grow 24%, to $409 million this year, according to Mike Orsak, manager of microcomputer software research at Input, a market research company in Mountain View, Calif.

"At this point," Orsak said, "the Fortune 1000 companies are in a much better position to buy more software. But looking long-term, there is vast potential in the small-business market. But to get good penetration there, it's going to take about five years."

Although those small businesses--firms with annual revenues of less than $500,000--are slower to join the market, they will expand it immeasurably, analysts say. David Wagman, co-chairman of Inglewood-based Softsel, the largest distributor of microcomputer software, agrees with that assessment.

Referring to firms that need only one computer, Wagman said: "There's an enormous number of single installations. . . . The small-business market is about to blossom. It's maybe one year away, maybe three years away. But I'm reluctant to say it's as far as five years away."

Trying to Hold On

Many companies will be trying to hold on until then--or later. They're entranced by the promise of the appliance-type home computer--the same carrot that the investment community has been chasing for nearly a decade now. That, say software companies, echoing their colleagues in the personal computer business, will bust the whole high-technology market wide open.

In the meantime, the winnowing process will go on. "There's still too much software and still too many companies," said Michael Murphy, editor of the San Francisco-based Technology Stock Letter.

No doubt there's a software program somewhere that has already calculated how much is too many.

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