The big push into software

The computer industry's slow growth rate is masking one of the biggest renaissance movements in business - the rebirth of the hardware manufacturer as software developer. ``There is an ongoing, dramatic downsizing and cheapening of [computer] hardware,'' says John McCarthy, an analyst with Forrester Research, a Cambridge, Mass., research firm. ``But the company that bought a lot of computer power in '82 didn't always have the software to do much with it, he says.''

Thus Mr. McCarthy summarizes one of the forces that has pushed computer manufacturers to shift their emphasis in favor of software development because that's where future profits lie.

Digital Equipment Corporation president Kenneth Olsen (whose company bucked the slump by selling record number of computers last year) told stockholders at the company's annual meeting that DEC would be primarily a software company - not a hardware manufacturer - in the 1990s.

International Business Machines, whose software operations amounted to just 12 percent ($6.1 billion) of its business in 1985, says it is making software its keynote for 1987 and 1988.

The switch by manufacturers is a direct response to the market. The market is telling them:

Business has had enough of buying expensive, disparate chunks of computer hardware to solve individual problems. If hardware is to be bought, the machines must be part of an integrated total solution. Each machine must exchange data easily with another.

Computers must be made easier to use than they are now. Too much time is still required to get computer-illiterates up to speed.

More functions and uses must be found (software developed) to utilize the powerful machines already on-line.

``We need new levels of application and whole new applications that are going to get people excited again,'' Forrester's McCarthy says. He suggests, for example, that advanced software might continuously, automatically update spreadsheets as new information comes in, even while a user has the spreadsheet file open.

Megabit technology is breaking through the price/performance barrier that keeps computer power an expensive specialty product, and keeps manufacturers products markedly different in performance and price. As performance increases while price decreases, hardware will be much more uniform in both performance and price.

DEC, IBM, and the rest of industry have already seen that hardware is headed toward commodity status as prices for more powerful computers fall.

``The next few months will witness the birth of a new generation of general purpose computers offering price-to-performance advantages 10 times greater than those of currently popular minicomputers and superminicomputers,'' writes William B. Welty, an analyst for Hambrecht & Quist, a San Francisco-based investment banking firm that specializes in high tech. ``The effects of these products on both users and traditional computer manufacturers will be profound.''

That means software becomes the key to value and profits as computers get cheaper, more powerful, and more alike. Value and profits will come by developing software that enables hardware to do a variety of functions a competitor's machine doesn't offer because it doesn't have comparable software. The software side of the equation, analysts say, becomes the primary determinant of the value of the computer.

``Hardware is becoming a commodity,'' says Charles P. White, a program director with the Gartner Group, a Stamford, Conn., research firm. ``As hardware gets cheaper, you have to sell more of it to make the same amount of money.''

Mr. White says his firm expects the yearly expanding sales of software to rise from current annual growth rates. The rate of growth for software sales in 1990 will be 25 percent higher than 1985 levels. Even as software purchases continue their increase, the growth rates in hardware purchases will drop 21 percent during the same period.

Also encouraging manufacturers to shift is the fact that the hardware business has slipped from gross profit margins of 60 percent in the early '80s, with three- to five-year product cycles, to just 45 percent margins with 18- to 24-month product cycles.

``Yes, hardware will be cheap,'' White says. ``Feature and function will be used to validate the price of a computer, which creates a value-added market.''

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