The Shooting War In SoftwareRichard Brandt
When Borland International Inc. announced a new version of its spreadsheet program, Quattro Pro, for the cut-rate price of $50 in August, competitors were not impressed. At a conference a few weeks later, an audience of industry executives was asked whether they thought the move was brilliant or desperate. The tally: 82% said desperate.
If so, much of the software industry seems to be approaching desperation. The price war that has infected the PC hardware business for the past few years is now solidly entrenched in software as well. Programs that used to sell for $300 are now available for $100. The Software Publishers Assn. estimates shipments grew by more than 25% in the second quarter, but revenues were up just 14%. That's worse than the previous quarter, when shipments grew 26% and revenue 20%.
SUITE SUCCESS. There are lots of reasons for the price plunge. One is the declining price of PC hardware--off 32% last year, according to International Data Corp. It's hard to sell a $500 word-processing program for a $1,000 computer. Then there are suites: groups of programs sold in bundles that list for 50% off the retail price of the individual packages--and retail for 45% to 70% off that. Finally, there are the price wars in various categories, often sparked by a competitor thirsting for market share or entering a new area. Microsoft Corp. dove into data bases by offering its $495 Access package for $99 during a three-month promotion--and sold an astounding 750,000 copies. Now, Computer Associates International Inc. has gone Microsoft one better: It's literally giving away more than a million packages to break into new markets.
It all adds up to a dismal spiral. Promotional prices tend to become permanent--or close to it. That's because they're followed by so-called competitive upgrades, discounts offered to owners of competing products. In stores, however, buyers rarely have to prove that they own the competing product. The $100 list price that Borland now stamps on its boxes, for example, was the special promotional price it offered to users of Lotus 1-2-3 a few years back. And even though the promotion for Access has expired, the price has only inched up, to $129. "I don't think software prices are going to go back up," says Susan L. Salay, senior director of marketing for Ingram Micro Inc., a computer wholesaler.
The effects of the price crunch can be seen in some of the latest earnings statements--even Microsoft's. In the September quarter, its revenues rose 20%, to $983 million, and earnings were up just 14%, to $239 million. Worse, revenues actually declined 5% from the previous quarter, and earnings were down 10%. Net margins dropped 1.2 points, to 24.3%--still a level of profitability rivals would kill for. Says Chairman William H. Gates III: "Profits will be fantastic, as opposed to wildly fantastic."
For many Microsoft rivals, profits are simply vanishing. Borland's sank 48%, to $2.8 million, on revenues down 16%, to $107 million. Earnings have also been dismal this year for Software Publishing and Micrografx. And analysts believe that an initial public offering by WordPerfect Corp. is being postponed because of depressed earnings.
LONG HAUL. Software retailers are also feeling the pinch: Egghead Software Inc. lost $1.7 million for the quarter ended July 24, as revenues rose 8%, to $218 million. The villain: price-cutting, says Peter A. Janssen, vice-president for merchandising and advertising. "I don't see that changing at all."
As with hardware, a commodity mentality is taking hold. "Feature-wise, all the different vendors are hitting 85% of our requirements," says Steven D. Birgfeld, who buys software for Booz, Allen & Hamilton Inc. As a result, buyers are shopping for price. And increasingly, that means buying suites, which means that more and more of the market is going to the two big suite sellers, Microsoft and Lotus Development Corp. "It's coming down to Coke and Pepsi," says Goldman, Sachs & Co. analyst Rick G. Sherlund.
Everybody else must scramble. No matter how feature-crammed their programs, software makers must sell them at prices that are attractive to suite shoppers. Take WordPerfect's latest program, a sophisticated word-processing package that requires 32 megabytes of disk storage and can do all sorts of desktop-publishing work. It debuted in August with a list price of $495. Now, just two months later, you can buy it for less than $100 in retail stores.
That trend could soon lead to a shakeout and consolidation. Software Publishing laid off 140 people last summer-- 21% of its work force. That follows layoffs of 120 workers last year. Almost everybody--including Microsoft--is cutting back on expenses or expansion plans.
And there are persistent rumors of pending mergers, including one between Borland and WordPerfect. Both companies deny such discussions. "I would expect the single-product companies to be acquired or merge over time, or else they'll lag and won't be players anymore," says Betty J. Lyter, an analyst with Montgomery Securities Inc.
Of course, there is a bright side to discount pricing. "There's a fundamental elasticity of demand," says Richard Rabins, chief executive of Alpha Software Corp., a maker of $50 and $60 data-base and graphics programs. "You should be able to sell more software to more people if the price is lower." And once they pare costs, if the volume materializes, software makers say profits will rebound. Software makers Aldus Corp. and Synmantec Inc., for example, both reported good results in the September quarter.
Indeed, Borland Chief Executive Philippe Kahn gloats that he sold 500,000 copies of Quattro Pro 5.0 in just 45 days, a goal he hadn't expected to reach for five months. "We've never seen anything like this," says Kahn. The higher volumes, he adds, reduce his cost of materials from about $13 per package to about $9.
And, he insists, the low price will lure buyers from the suites. After he explained this strategy at the Agenda conference, at least a few members of the audience were converted: A second poll cut the "desperate" votes to 48%. Not exactly a ringing endorsement, but perhaps a first small sign of hope.