The software industry continues to grow rapidly. The worldwide packaged software market is estimated at $86 billion in 1995, up some 12% from 1994’s $77 billion. Revenues are projected to keep growing at a compound annual rate of just more than 12% for the next several years, reaching about $153 billion by 2000. U.S. packaged software vendors remain the industry’s major players, accounting for approximately 75% of the worldwide software market.
Two factors have a great bearing on a software company’s performance: the underlying strength of the markets in which a company’s major products compete, and the position of a given product in its life cycle. Vendors of major products in the early stages of their life cycles and positioned in strong markets typically enjoy robust revenue and earning growth. The markets that appear most promising at present are those that stand to benefit from the two strongest fundamental industry trends: downsizing and networking. Companies that depend on products that have reached the midpoint or end of their life cycles, however, often encounter troubles.
The size of the computer system for which a particular software is designed is perhaps the single most important factor differentiating the economics of software companies. Software packages designed for high-end computer systems, for example, are generally characterized by low unit volume, long product life cycles, and very high maintenance costs. Such software packages generally range in price from a thousand dollars to a million dollars or more and are often licensed or leased, rather than sold, with separate maintenance fees. Software packages for low-end computer systems, on the other hand, are generally characterized by high unit volume, shorter product cycles, and essentially negligible maintenance costs. Prices typically range from $30 to $600.
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