Market trends: a mixed message.

The Software Publishers Association just released its latest quarterly survey of North American applications sales and--no surprise--the numbers are as upbeat as ever. According to the SPA, total domestic software sales grew 11.6% over the third quarter of 1991, international sales were up 27.4%, and the Windows market showed a hefty 91% jump over last year's third quarter revenues.

But when we drill down a level or two, the SPA's numbers show that the rising tide isn't lifting all the boats. Drawing on SPA data, we put together a chart that summarizes revenue and growth data for the first nine months of 1992, grouped by market segment and platform. (One caveat: Although the SPA collects some of the industry's most reliable publisher-level sales data, the association has always inflated its totals to reflect retail sales activity. So these numbers only suggest relative market sizes, not actual revenues for specific categories.)

Clearly, this is a landscape filled with lots of peaks and valleys. Some market segments have experienced remarkable growth this year, while others--even in presumably hot markets--have been moribund. In fact, it's probably pointless to look for overall industry growth trends in these numbers, because software is essentially a niche-oriented business. What happens in spreadsheets has little impact on desktop publishing or languages; the dynamics of the accounting market are very different from the utilities or entertainment segments.

So what do the SPA numbers really tell us? A few observations:

* Price erosion: The SPA reports growth based on revenue increases, and by that standard the industry is doing well (though this year's 17.5% growth rate is rather modest, compared to previous years). What these numbers don't show is that revenues haven't kept pace with the growth in unit sales. In this year's third quarter, for example, total revenues increased by 11.6%--but, according to the SPA, "unit sales were over 30% higher than in the third quarter of 1991." Almost certainly, this trend reflects across-the-board price-cutting in the retail channel as well as a broad shift to more direct marketing activity, both of which put new pressure on operating margins.

* The persistence of DOS: The DOS market as a whole showed an 11.2% decline in revenues for the first nine months of this year, while graphical environments fared much better: Windows revenues grew by 118.5%, the Macintosh, by 26.9%. But DOS is far from dead. It remains the industry's single most important platform, generating $1.9 billion in SPA revenues, while Windows applications produced $1.3 billion, and the Mac $0.7 billion. More importantly, DOS retains an overwhelming lead in four of the SPA's six largest categories: "Other Productivity" (48% of category revenues, compared to 27% for Windows), Databases (85% of revenues, compared to 1% for Windows), Utilities (46% of revenues, compared to 33% for Windows), and Entertainment (81% of revenues, compared to 8% for Windows). Finally, not all DOS categories are in retreat: Six showed positive growth this year, against eight that declined.

* Heavy concentration in the Windows category: Market observers have pointed out that only a handful of companies have actually generated significant revenue from Windows applications. The SPA's numbers suggest a variation on this theme: 40% of Windows revenues this year derive from just two categories, word processors and spreadsheets, and in each of these categories almost all of the revenues come from two products each--Excel and 1-2-3/W in spreadsheets, Word and WordPerfect in word processors. (By comparison, these two categories account for only 24% of total DOS revenues and 23% of Mac revenues.) The SPA's four graphics categories--Presentation Graphics, Drawing & Painting, Desktop Publishing, and "Other Graphics"--account for another 24% of Windows revenues; Windows penetration in most other SPA categories is fairly modest. We expect more migration to Windows in these categories over the next few years, but for the moment much of the hypergrowth in the Windows "market" really reflects the sales of four aggressively-promoted titles that are experiencing intense upgrade activity. (Similarly, the explosive growth of the Windows Finance category this year largely reflects sales of a single new title, Quicken for Windows, rather than a multi-product trend.)

* Evidence of saturation? Though Windows continues to be a potent force for growth, the SPA offers more evidence that the market is losing its zip (Soft.letter, 10/20/92). In the first quarter of 1992, the Windows market grew 98% over the first quarter of 1991; in the second quarter, the rate jumped to 178%; in the third quarter, growth is down to 91%. These rates are influenced considerably by the release dates of major products and upgrades, so it's not always clear what the numbers mean. But if there's a trend, it's not moving in the right direction.

* Hot spots: So where are the true opportunities? Judging from the SPA's data, most mainstream product categories--spreadsheets, word processors, databases, DOS utilities and languages, and desktop publishing--are showing below-average growth, even with the extra boost that new Windows versions have provided. By contrast, the highest growth rates seem to show up in categories that aren't yet well-'defined (notably the SPA's "Other Productivity" and "Other Graphics"), new Windows utilities, and categories that appeal primarily to consumers (Entertainment,

Integrated, Home Education). It won't be easy to build major companies in these categories, because market share is usually divided among dozens of lower-volume titles. But at the same time, these categories are likely to be relatively safe havens from bigger competitors, who have never had much success in narrow, poorly-defined niches.

David Tremblay, research director, Software Publishers Association, 1730 M St., NW, Washington, D.C. 20036; 202/452-1600.