Internet Software Market example essay topic

1.0 Through this report I am aiming to examine the software industry on an international scale. It is an in depth analysis of an industry strongly dominated and influenced by a powerful monopoly, examining the following; a) The market structure, its history, potential competition and its trends. b) The industry's conduct in terms of advertising, pricing policies, branding, merger activity, with particular focus on the main player. c) The industry's performance in terms of innovation due to new technology and the changing environment as well as profitability and efficiency. 2.0 I have taken information from various sources, these include extracts from the Independent, Economist, Computer Business Review and the MINTEL reports for 1996 and also from various sites on the Internet. 3.0 Software is an extremely Labour intensive activity and therefore it is essentially a 100% value adding process. It could possibly be labelled as a unique commercial phenomenon, but it requires much maintenance and a continual need for improvement and enhancement. The software industry can be split into three broad sectors: ?

Small Office, Home Office (SO-HO)? Games? Industrial Use Because of the difficulty in separating consumer software purchased by individuals, into applications destined for use by businesses and the home user. I am going to primarily focus on So-ho, home user market, and takes account of the software packages bought, mainly through out the retail market for the small or home office and which may be used for business, education or simply leisure purposes. The most common software packages sold to the So-ho user market are the following: ? Business application software - word-processors, spreadsheet, databases, desktop publishing programs, programming languages, utilities etc.?

Operating systems - MS-DOS, DADOS, Windows 3. x, Windows 95, 98, Macintosh System 7? Educational software - e.g. Encarta '98? Entertainment software - e.g. games The definition does not include software written for the traditional 8-bit home computer hardware including the Commodore Amiga & Atari, Sinclair, Acorn, BBC or Amstrad machines. These machines went into sharp decline due to the capabilities and enhancement of the P. C, and have subsequently been withdrawn from the UK market. Within the computer market today, pre-loading or bending of software with hardware have been used as an incentive to buyers and is an important channel for obtaining software for the home user. However within this report only single purchases of software are taken into consideration and bundled software is considered to be part of the hardware package.

3.1 Software has become an International commodity with large world wide businesses, domestic and industrial markets for general purpose software and world markets are also open for specialised software. In 1985, the U.S. A's Department of commerce put the world market for software at $40 billion and annual growth was estimated to be about 40%, The diagram below illustrates this: 4.0? The Microsoft corporation, the worlds largest specialist software developer was founded in 1975. The company was created on the success of its programming languages - BASIC, FORTRAN, and COBOL - and the MS-DOS operating system for the IBM PC which was then collated by the Windows 3. X GUI (60 million copies shipped)? and more recent packages Windows 95 and 98.

Microsoft commands virtually all of the market for P. C operating systems for the home user. The companies O. S systems are installed in 85% of P. C's with the exception of the remaining 15% which are sold with the Apple Macintosh operating system. In the retail software market, practically all of the products sold are Microsoft owned. 4.1 The top five software firms and their annual revenue are as follows (see appendix A)? 1) Microsoft $14.484 bn 2) Oracle $7.143 bn 3) Computer Associates International $4.719 bn 4) SAP AG $3.472 bn 5) Compuware Corp. $1.139 bn Total $30.953 bn The total revenue of the software industry for 1997 was $122.0 Billion? The Concentration ration proves that although Microsoft has annual revenue equates to about 10% of the $122 billion of software products sold worldwide.

They share the podium with Oracle, Computer Associates, SAP and Compuware to control 25% of the total revenue for the whole industry and a massive 55% of the entire top 50. Applications software sales, to the home user is also an important market for Microsoft and one in which it also leads. MS Office and works dominate the suites / integrated market with 80% of sales. 'Word" possess 78% of the word processing sector. Microsoft is also the leading player in the education and leisure software market (excluding games software) The company sells around 60 CD-ROM software titles to the consumer / So-ho market which accounts for 15% of its sales. During 1997, Windows 98 also seeks to enhance Microsoft's market share.?

Oracle, are the market leaders in "automated software engineering products", they also produce "distributed integration products" and "End user accounting products"? Computer Associates International produce a variety of packages and solutions from Business management packages to? SAP is a market leader in client / server enterprise application software and specialists linking disparate systems to provide flexibility amongst opposing systems.? The Compuware Corporation are the market leaders in programmer tools, they also develop systems. 4.1. 1 When examining the managerial models these firms in the market follow, it is impossible to say that every firm follows the same model as they may differ in terms of their objectives. The smaller new firms that find it difficult to keep up with the larger opposition such as Microsoft or Oracle whose low prices cannot be beaten by smaller firms may only be interested in long - run profit maximization and would do so by focusing on objectives such as future investment and increasing market share in order to gain greater economic power.

Other firms, however, may be interested in growth maximization such as the capital value of the firm or the turnover by merger or internal expansion. 4.2 The Threat Microsoft and its empire is under threat. The two major threats being: 1. Netscape Communication - with the Internet revolution.

2. Sun Microsystems - the inventor of the new programming language for the Internet called Java. 4.2. 1 The Internet is basically a way of linking multimedia documents around the world over a massive network of computers, and the revolution is expected to alter the software industry radically. The Internet can be seen as a completely different market which, by nature is far more contestable and completely separate from the market dominated by Microsoft (see appendix B). It is a market which Netscape communications predominates having captured an enormous 90% of the browser market, and Microsoft a mere 2% as well as being 6 months behind Netscape Communications in terms of progress.

As the giant Microsoft was busy researching into CD-ROM technology it did not for see the potential of Internet development and now, with the growth of the Internet, CD-ROM software is now looking primitive. Microsoft may have unusually lost out when it came to the original Internet operating system, however, when Microsoft managed to 'bundle' their windows NT onto their Windows operating system Novell lost a massive 27% as Microsoft steamrollered across the Internet software market. 4.3 The Barriers to Entry As the market is dominated by Microsoft, small firms find that the barriers to entry are far too high. Microsoft and the other large firms prevent smaller companies from entering the market because: 1. Smaller firms can not afford to employ the huge and expensive teams and expertise needed to write massive programs. As the industry is largely labour intensive, it is not the expense of the initial capital that deters the smaller firms, but rather the high cost of professional Labour and the reputation needed to attract them.

2. Smaller firms don't have the money to invest in strong marketing campaigns in order to compete with Microsoft's brand. No matter how innovative, smaller firms do not have the facility to make their product conscious to the consumer on the same level that Microsoft can. They will not have the ability to compete with the brand loyalty that Microsoft has managed to acquire from consumers over the past ten to fifteen years. 3. If smaller firms did want to join the software market, there only chance would be to offer something different to avoid meeting head on with Microsoft, however it is likely that they would find themselves in a small ever sinking market.

If these smaller firms did find a market the would find it difficult, because although they would have a different product, they would still have to spend time and money endlessly upgrading to continue to still have a worthwhile product, and continue making money. The Internet and the Java language has been a breath of fresh air to new companies by lowering the quite substantially high barriers to entry, This has made the market far more contestable and recently Microsoft has become increasingly worried about the likes of a software system called Linux which is now available for free over the Internet from a tiny North Carolina outfit named Red Hat?? Because Java is designed for small programs, a single person can develop a program in a few weeks because there is no need for huge teams of programmers? As the Java programs (applets) live in the network of the Internet they can be downloaded instead of being distributed in shops where shelf space is scarce or they could possibly be operated on a pay-per-use basis and so the Internet opens up a whole new way of selling software.

These will reduce the costs of entering the market, innovation and technological originality will become more important than marketing, work force and other expensive resources. Microsoft obviously fear what the Java language will do to them and they have recently been involved in a law suit with competitors Sun Microsystems, accused of taking, under a licensing agreement, the Java software language, which was invented by Sun alliance and altering its code slightly, according to Sun Alliance, this has undone the central characteristic of Java. The ruling has been that Microsoft should correct its code on the Windows 98 software within 90 days, of which it has agreed. This seems to highlight Microsoft's paranoia towards its competitors during its trial for monopoly abuse, but the fact still remains that Microsoft still capitalized at $280 bn and has windows systems on no less that 90% of the worlds P. C's, on the other hand Java has made a market which was a few years ago so hard to get into, rather more accessible. 4.4 Economies of Scale The law of diminishing returns says that: when increasing amounts of a variable factor are used with a given amount of a fixed factor, there will come a point when each unit of the variable factor will produce less extra output than the previous unit. Because once a software program has been written, it can be produced and marketed very cheaply, it is very difficult to apply this law, and because of this software companies can choose to sell cheaply or even give products away in order to gain market share and therefore sell future products at a higher price.

As each copy Microsoft produces will only cost a minute fraction of even the discounted price, each sale will generate revenue it would not have otherwise had and produces a new customer who may buy the upgrade at the full price. The stretching of the law of diminishing returns can have several repercussions. In 1985, Brian Arthur, an economist realised three important factors, which were: 1. Software like other high technology products such as pharmaceuticals has high development costs and very low production costs. 2. Users of networks want compatible software.

3. People tend to familiaris e themselves with a product and then stick with it so switching programs can be painful. These factors show that the software industry seems to operate with a different economic model, one of increasing returns. This allows the leaders of the market to get further ahead because the development cost of a program is the same whether the company sells one copy or 10 million. So while the market leader and the other firms have the same costs the leader will always make the most money. It is this, that has bought about the claim that Microsoft has unfair monopoly powers.

5.0 Pricing? The price war for applications software started during 1991 following Computer Associates cut in the price of its Super Calc spreadsheet program to lb 79. Since then, prices for three popular business software packages have fallen and a number of low priced alternative applications have been released.? Discounting has also become very important, however the retail outlets have been encouraged to take care of this.

Top of the range products have also decreased in price and large discounts are given to users who transfer from a competitors product.? Package bundles, such as Microsoft Office which contains spreadsheet, word-processor, database, graphics and presentation software give a saving of around 130% if each was bought separately. 5.1 Product differentiation plays an important role in the software market, small firms can only try and compete against Microsoft if their product is unique and they don't have to come face to face with Microsoft. Larger firms such as Oracle and Novell offer similar products such as such as spreadsheets and word processors. 6.0 The choice of software products is now enormous, with an equally wide range of quality. The software industry now has a problem of oversupply, there is too many products for the market to absorb.

The overflow also creates a price war among producers and retailers. This behaviour indicates that the large number of take-overs and acquisitions which have occurred over the past decade is set to continue. This will mean that global markets and economies of scale will be accessible and as a result, products will be made available to the consumer at a lower price. Figure 1 Figure 2 The company "Quark incorporated" actually have the highest revenue to employees, however Fig 2 clearly illustrates how well Microsoft is able to use its resources and Microsoft's success is clear to see with a market value of $5314 million (Fig 1), Oracle is not even worth a quarter of the giant, with Novell, SAP AG and Computer associates not even figuring. 6.1 Company Asset Turnover (%) for 1995 Asset Turnover (%) for 1996 Asset Turnover (%) for 1997 Microsoft 85.91 78.95 64.78 Sage group P.L. C 248.87 257.58 234.80 Sun Microsystems 166.51 186.66 183.05 Oracle 125.8 122.92 122.77 Novell 84.46 67.08 52.72 Another way of analyzing profitability is by asset turnover, this measures the level of activity over how efficiently they have been used to generate sales.

A fall in percentage may indicate assets not being fully utilised.? Microsoft, Oracle and Novell appear to be lacking in efficiency, this may be due to their size 6.3 Company Net profit to sales (%) for 1995 Net profit to sales (%) for 1996 Net profit to sales (%) for 1997 Microsoft 38.98 46.74 49.17 Sage group P.L. C 21.87 22.05 24.74 Sun Microsystems 8.86 9.99 13.03 Oracle 21.77 11.58 18.59 Novell 24.92 1.30 -14.94 Net profit to sales, is probably the best way of explaining profitability. It focuses on profit after all expenses of the business, compared to sales.? Microsoft, as the market leader gets more profitable, from 1995 onwards, this may have been from the introduction of Windows 95. Novell is obviously suffering the backlash of Microsoft's success, this is not dis-similar to what is happening to many of the other firms as well.

The success of Java and the Internet may change this. 7.0 Through the development of alternative systems such as console's, and of downloading applications software from the Internet, due to the growing trend towards working at home and the demand for accessibility of information there is certainly a challenge to the software industry. Undoubtedly Microsoft will continue to crush many in its path, Microsoft's successes has rewarded them with a huge pay back, and fabulous efficiencies - especially when measured in revenue-per-employee ($530,161). but the diversity of the Internet has increased the breadth of the software industry hugely, With the average growth among the 50 elite vendors running at a healthy 28%? and only a handful of companies reporting operating losses, there is much scope for optimism in the software market. I. Hoover's Handbook of American Business, 1996 II. The Independent on Sunday 22.11.

98 Snipes and Sniggers at the House that Bill built David Usbourne. Computer Business Review CBR Software top 50 October 1998 IV. Investors Chronicle 21.02. 98 Investment Software Survey. Peter Temple. web Gates Acknowledges 'Java' Threat Ted BridisVI. web Microsoft, Industry get tough on Software Piracy Tony Munroe VII. Excel Database Financial and Company analysis 1998 V. Mintel reports Aug 98.