Cottage-Industry Software Firms Fill a Void Left by the Giants
While the giants of the computer software industry like Microsoft, Lotus Development and Borland International each year crank out millions of word-processing and spreadsheet programs, Marvin Mallon, 64, quietly tinkers away in his Canoga Park house on a computer program for comic-book collectors.
His wife, Reva, also 64, sits in an office that once was the family garage and answers calls on a toll-free customer-service line--which is about as close to big business as the Mallons get. Their business, called Compu-Quote, started out as a part-time pursuit in 1984, but now both Mallons have retired from their previous careers to run the venture full time.
In another small local software enterprise called Nova Development Corp., Roger S. Bloxberg and Todd Helfstein are struggling to find space in their Calabasas office for a recently arrived shipment of their hot-selling trio of computer programs for writers.
Bloxberg and Helfstein, both 26 and buddies since their school days, welcome the influx of inventory as a sign of the success of their 2-year-old company. Despite having only nine employees, a shoestring budget and hopelessly cramped quarters--staff meetings are conducted on bean bags--they have managed to get their software products into some of the biggest computer retail chains, including Software Etc. and Waldensoftware.
“We started out fooling around with computers in high school in a laid-back way and decided it was a good business,” said Helfstein, whose company sells computerized English style manuals, business-letter writing guides and quotation dictionaries.
The two businesses are part of a computer-age cottage industry that is churning out software for everything from cattle-feed recipes to tips on running political campaigns. Conservative estimates of this software subculture put its size at around 12,000 companies nationwide, with combined sales around $200 million a year, according to International Data Corp. of Framingham, Mass.
If IDC’s estimate is correct, the mom-and-pop companies make up less than 5% of the $4.6 billion in domestic sales last year by all U. S. software companies. This compares to the top four 1990 U. S. software companies--Microsoft, Computer Associates International, Oracle Systems Corp. and Lotus--which together accounted for about 10% of total worldwide software sales last year, according to IDC.
Nevertheless, many of these mom-and-pop operations have rushed to fill a void left by the big companies that focus on software programs with only broad appeal. Some software entrepreneurs, like the Mallons, work out of their homes, advertise in trade publications and sell only through the mail. Others, like Bloxberg and Helfstein, are working their way into the mainstream retail market with programs that have somewhat broader uses.
With so many small companies around and average sales reaching only $16,000 a year, this is an industry in constant flux as programmers drop out, start new companies or merge with bigger ones, analysts said.
“These people eke out as much of a living as they can,” said Steve McClure, a software analyst with IDC. “Some do it part time, and it’s additional income to them.
“It’s not that hard to get the floppy disks made, so they can break even depending on the sales,” he said. “They aren’t going to make a lot of money either.”
Still, Mallon said his business brings in about $300,000 a year, and after expenses and taxes, it’s more than he earned in his past careers as a computer consultant and electronic technician.
Mallon said he started the company as a way to “smooth out the hills and valleys” of his computer consulting business, which he started in 1977 after 10 years as an executive with a Van Nuys electronics concern. A longtime stamp collector and computer programmer, Mallon decided to combine his interests by developing a program that lets coin collectors determine the value of their collections. He advertised the program, called Coins/Plus, in various journals for coin collectors and soon orders started pouring in.
“I had guessed right,” Mallon recalled. “There was a real void in the marketplace.”
The program retails for $95 and tracks prices of more than 2,300 coins, including all half cents from 1793 to 1857 and all silver dollars from 1878 to 1981. For an additional $25, Mallon sends users a floppy disk every January to update the value of their collections.
Since the coin program was introduced, Mallon has developed other programs for collectors of stamps, baseball cards and comic books. The programs are similar to the coin collection software and serve to update the collections’ values.
A baseball-card collector using Mallon’s “Card/Fax” program, for example, could learn that a mint-condition card of Yogi Berra, issued in 1956, is worth $150 today. But the same card in less than mint shape would only fetch between $15 and $60, according to Mallon’s figures, which he compiles from a variety of trade publications.
Mallon declined to say exactly how many programs he sells per year, but he said the number is less than 10,000.
Bloxberg and Helfstein, meanwhile, have shipped more than 55,000 of their programs over the past year, mainly because they have started selling in retail chains. Both partners declined to discuss sales and profits except to say that annualized sales are more than $1 million.
With Nova’s American English Writing Guide, computer users can check their compositions for style based on the Chicago Manual of Style, the Associated Press Stylebook and the U. S. Government Printing Office manual. Nova’s business-letter guide has 270 sample letters for everything from congratulations to notices of past-due accounts, and the Instant Library of Quotations gives users access to 5,000 famous quotes on 600 topics.
How did the two get their programs into the big chains? According to Bloxberg, the company’s first big break came in early 1990 after its programs were featured in an article in a trade publication. Representatives from a bigger company, Reference Software, saw the article and arranged to include promotional copies of Nova’s style program for a limited time with Reference’s hot-selling grammar-checker, called Grammatik.
After that, Bloxberg said: “We could say to retailers, ‘You’ve been carrying our products even though you don’t know it.’ ” By January Nova had signed up a distributor and its programs began appearing on retailers’ shelves.
Now sales volume has ballooned from about 8,000 units last year, when the programs were marketed through direct mail to schools, colleges, businesses and owners of Apple Macintosh computers, Bloxberg said.
Bloxberg and Helfstein got into the computer business by developing a software program for a UCLA education professor. Soon thereafter they and a third partner chipped in $700 apiece to form a company selling educational testing and desk-top publishing software, but that company was bought in 1988 and Bloxberg and Helfstein decided to start a new firm in one of the hottest-growing software areas: writing tools for word-processing programs.
The two are trying to keep their success in perspective for the time being. Bloxberg is in his last quarter as a political science major at UCLA, and Helfstein graduated from UCLA only four months ago.
“I was talking to a girl after class recently and she said, ‘Do you know what you want to do?’ ” Bloxberg said. “I said ‘Yes. I’m doing it.’ ”
Most small companies don’t have to worry about competition from the industry giants because the small companies’ software is so specialized. But there are usually plenty of other small firms that sell similar programs. Nova, for example, competes with Microlytics Inc., a Pittsford, N.Y. firm that sells a software version of the popular Strunk & White Elements of Style. Even the Mallons face from three to 12 competitors for each of their stamp- and card-collector programs.
And when small companies strike gold, they often get gobbled up or are imitated by the bigger companies, analysts said.
“The little companies wind up doing stuff that nobody else would either think about or a niche market that the big companies feel they couldn’t make a killing in,” said Peter Francis, a senior software analyst with Dataquest Inc., a San Jose market research firm. “If the niche market is good, they end up being big themselves, or they wind up being eaten up by somebody else.”
