O.C. Software Industry Sizzles : 300 Firms Arise Over Past Decade, Expand Amid Recession
Shannon Jenkins makes her annual pilgrimage from Orange County to the Comdex computer show in Las Vegas this week. She is optimistic about the trip, in part because her company doesn’t actually make computers.
Jenkins, chief executive of Touchstone Software Corp., is in the business of publishing the programs, or software, that permit computers to operate. She hopes a new line of software will turn around her 10-year-old Huntington Beach company, a publisher of programs that diagnose PC problems.
“Software is still an exciting side of the computer business because it is still possible to strike it rich and turn around your business overnight,” Jenkins said.
During a period when a change in health care costs or higher taxes could push her 28-person company over the edge, the added revenue boost from a new generation of software could make a dramatic difference in the company’s fortunes.
Whether Jenkins’ firm will have a hit at the annual computer products trade show is unknown. But in the midst of recession, one thing is clear. In Orange County, better known for Fortune 500 computer hardware companies such as AST Research Inc. and Western Digital Corp., software companies are gaining attention as producers of innovative products, profits and jobs.
More than 300 software companies have quietly sprouted in Orange County in the past 10 years, according to the Software Council of Southern California, a trade group formed last year to provide a professional network for the industry. Mirroring a national trend, software jobs in Orange County are growing faster than any other category in the computer business.
Orange County software firms expanded their payrolls by 6.5% in the past year, while overall, county high-tech employment at firms under 1,000 employees dropped 5%, according to CorpTech, a market research firm in Woburn, Mass.
The growth of the software industry is sort of a natural evolution.
In the early 1980s, companies focused on designing and manufacturing the computers themselves, or hardware. Once computer designs became fairly standardized, the market for software applications grew in importance. Now, with the price of hardware falling--a personal computer system that cost $4,900 just two years ago now sells for less than a third that amount--the software is where companies can still set themselves apart from competitors--and make money, says Melanie McCaffery, a Coopers & Lybrand partner in Newport Beach who specializes in providing accounting services to software firms.
Unlike hardware manufacturers, software companies often are small operations run mostly on ideas alone during the development phase. They require talented programmers, but they don’t need a large production staff to get merchandise out the door. Consequently, such companies require little capital and can be self-financed up to the point where they need marketing and distribution muscle to sell their finished products, said James Forrester, senior vice president at Silicon Valley Bank’s Newport Beach office.
Such characteristics make beginning a software company easy, but they result in a constant creation of new companies and a churn of jobs, enabling savvy engineers to hop from one growing company to the next.
The national trends are clear. For the year ended June 30, jobs linked to the production of pre-packaged software, for example, were up 7.6% to 135,500, compared to a 5.8% drop to 397,500 for hardware jobs during the year ended June 30, according to the American Electronics Assn., a trade group in San Jose.
In Orange County, the software industry began with a handful of small firms, some of which were spun off from the defense industry. Companies here can tap into the talent pool of other high-tech industries or local universities and offer a comfortable lifestyle for white-collar employees. And because of their small size, they are somewhat sheltered from the bureaucracies of environmental regulation and workers’ compensation claims that have driven large manufacturers out of the region.
“Our software industry is home-grown,” said Peter Craig, senior vice president at Rainbow Technologies Corp., a 125-employee company that makes software protection devices in Irvine. “Hardware companies grew in the 1980s, but we think we’re the industry of the 1990s.”
In the past year, software companies have narrowed a perception gap about their size. The American Electronics Assn. formed a chapter for software vendors in Orange County a year ago to provide a professional network for the software work force. The Software Council formed a similar group for software companies in the Southern California region.
Software sales have grown despite the recession. For instance, as hardware companies slash prices on PCs, many buyers have poured the savings into new software packages.
Software sales are expected to grow 10.4% to $7.4 billion worldwide in 1993 from $6.7 billion in 1992, according to market researcher Dataquest Inc. in San Jose. PC sales are expected to grow at a slower 6.7% rate, to $49 billion.
“These days, consumers will spend more money on software than on hardware over the life of their computer,” Jenkins said, similar to the idea of a music lover spending more for compact discs than for the compact disc player.
Veteran hardware companies, unwilling to give up their reputation for driving the state of the art in the computer industry, have reacted by introducing their own blends of software advances.
Western Digital last week announced that it had developed a computer chip technology that performs the functions of anti-virus software. The hardware, in the form of a set of computer chips, detects computer coding that acts like a virus and protects a hard disk drive’s data from damage.
The anti-virus technology represents a hybrid of hardware and software functions that will become more popular in the future, said Charles Haggerty, Western Digital president.
During the past several years, FileNet Corp., Archive Corp., Emulex Corp. and Micro Technology Inc. have also begun making transitions from hardware-only products to those that also include software. Emulex in Costa Mesa began a transition to software two years ago when Robert N. Stephens, a former executive at Western Digital, took over as chief executive.
The company shed hundreds of its production workers, moved much of its manufacturing to Puerto Rico and acquired a 35-employee software company in Bellevue, Wash., to break into the network software market.
Now, software and hardware are interlaced in much of the company’s products for both the computer chip markets and the networking industry, which has emerged to tie corporate PCs together in information networks.
“Today, you start with the solutions the customer wants and then decide how much of the product is in hardware and how much is in software,” Stephens said. “The types of things that change often you keep in software.”
Of 130 engineers working at Emulex today, 65 are software programmers. Stephens said he attempted some retraining, but without success. That meant some longtime Emulex workers had to be let go. It’s also nearly impossible to hire former defense industry workers to do the work, according to Stephens.
“The reality is competitive forces will not allow you to retrain workers as much as you would like,” he said. “We hire some college graduates, but we have to hire experienced people. The temptation is to say that hardware isn’t profitable, let’s go to software. It’s a lot more meaty than that.”
Isicad Inc. in Anaheim completed its transformation into a software publisher this year.
Originally a manufacturer of high-quality graphics computer workstations, the company revamped its strategy over the past five years and now produces software for computer-aided design.
The switch brought growth to Isicad. The company employs 300 people, including 100 in Irvine, or more than triple the number it had in 1987. Sales are about $40 million, compared to less than $20 million in 1987.
“We started the switch to software in 1987 and I’m damn glad we did it,” said John Arnold, president. “If you look at the erosion of prices in hardware, it was really a no-brainer to see that we had to get out.”
The company’s greatest gamble was choosing the best of several available operating environments, or basic software system necessary to run computer applications. In 1990, Arnold branched out from Unix and invested in developing software for Microsoft’s Windows platform for PCs. The transition was complete this April, and last week Isicad released its first Windows design software.
Despite the conversion to software product lines by hardware firms, the county’s software industry remains considerably smaller than the concentrations of such firms in Silicon Valley, or the San Jose area, which is home to hundreds of software firms. The Seattle area, which gave birth to industry giant Microsoft Corp., and the Boston area also outshine the county.
However, Orange County companies don’t have to worry about big software companies snapping up all the best job candidates, said David Samuels, chief executive of State of the Art Inc., the Irvine accounting software company. And the county has managed to attract additional software companies. Magic Software Enterprises Inc., a subsidiary of an Israeli company, moved to Irvine last year as part of an expansion into the U.S. market.
The company has 31 employees and plans to expand to 50 by the end of 1993. David Assia, chief executive of the parent company, said his firm chose Orange County over Silicon Valley and Boston because it found expenses would actually be lower here. Surprisingly, no local officials courted his company, Assia said.
“We were contacted by other communities, but not in California,” he said. “If there is a big jobless rate, it would be good for state officials to court companies like ours.”
Of course, not everyone believes that software is going to overtake hardware makers in producing jobs for Orange County. Some firms have faltered in making the transition.
Faced with obsolescence in the minicomputer industry, MAI Systems Corp. in Tustin shifted its focus from manufacturing centralized minicomputers to selling software geared to specific industries, such as accounting firms or industrial automation.
But, hampered by a heavy debt load, the company has not recovered its pre-recession sales volume. It shed hundreds of employees since 1990, and, in turn, it has spawned its own software spinoffs.
Larry Taylor, 37, decided to quit his fourth software-related job at MAI in 1990 to co-found PenUltimate Inc., an Irvine start-up company that now has 12 employees. The company expects to launch its software for pen-based computers at Comdex this week. Why did he leave MAI for a fresh start at a start-up?
“We’re definitely on the leading edge with pen computers, and that’s where you want to be,” said Taylor, senior vice president for research. “The software represents the culmination of a solution for a customer.”
Most software companies have no grand designs of creating more jobs than their hardware brethren. They start small and stay small, and they often struggle to avoid going belly up. They could in the future also face the same price wars that hardware manufacturers are facing now, said Tom Yuen, former chief operating officer of AST Research.
“In the context of offsetting losses of thousands of aerospace jobs, it’s terribly wishful thinking to hope that software can do that,” said Stephens at Emulex.
Yet the industry has its share of ambitious companies. State of the Art expects to expand its 175-person force to about 300 people in the next year, mostly by adding new sales, support and development jobs.
“We’re getting about 150 job applications a day,” Samuels said.
Software in Hard Times
The number of people employed to produce computer hardware has declined by more than 13% nationally in the past four years, while software employment has grown by about 33%. The drop in hardware jobs has continued this year: As of June 30, 707,900 people made computer hardware, while 293,600 produced software.
1988 1989 1990 1991 Computer hardware, components 828,092 814,600 767,700 718,300 Software, programming services 228,413 254,700 277,100 303,900
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Where the Jobs Are 1988 Hardware: 36.4% Consumer audio, video: 2.9% Telecommunications equipment: 12.1% Semiconductors: 11.7% Radar: 13.5% Testing instruments: 13.3% Software: 10.1% 1991 Hardware: 34.1% Consumer audio, video: 2.9% Telecommunications equipment: 11.6% Semiconductors: 10.7% Radar: 12.0% Testing instruments: 14.3% Software: 14.4% Source: American Electronics Assn.
Researched by DALLAS M. JACKSON / Los Angeles Times
