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Is the boom (almost) over?

Over the past few months, Wall Street has hammered down the stock prices of virtually every software company (except Microsoft) that has a major stake in the Windows market. Aldus, Symantec, Lotus, Software Publishing Corp., Borland, and Wordstar have all lost anywhere from 25% to 75% of their year-end 1991 value. Egghead and Corporate Software, the two software resellers that made the most conspicuous commitment to Windows, have suffered similar meltdowns.

What's going on here? For once, the analysts and top management agree with each other: Sales of Windows applications haven't lived up to expectations. "It's too early to call this an alarming trend," says Windows Watcher publisher Jesse Berst, "but it does send up a warning signal that the Windows juggernaut may be slowing down."

To be sure, other factors--sluggish sales in Europe and Japan, price wars, and declining direct mail response rates--have also contributed to an industry-wide summer slump. But it's clear that the biggest single area of softness in the market lately has been Windows--and that the biggest victims were companies (and shareholders) who believed all those stratospheric sales projections the market researchers were peddling.

Which raises a more important question about the future: Is the current slowdown just a temporary blip, or is the growth curve already beginning to level off? The truth is, nobody really knows, though the debate between Windows Pessimists and Windows Optimists is nevertheless full of passion, theory, and the usual carefully-selected facts.

The Windows Optimists (who are probably in the majority these days) argue that the recent softness is just a pothole; there's still plenty of demand left in the market to fuel renewed hypergrowth. The Optimists point out that Windows has penetrated less than a tenth of the total worldwide installed base of PCs, and that 486-based machines (which now account for 80% of Intel's microprocessor revenues) are flushing out older, non-Windows machines at a phenomenal rate. Since new machines usually inspire new software purchases, the Optimists argue, this turnover in the hardware base should lead to sales of many millions of new software units, the majority-of which will be Windows applications.

At the same time, the Windows Optimists also talk about the potential for a huge trickle-down market in large corporations. The typical Windows user today is a classic "early adopter," the Optimists argue, who has great influence over mass adoption trends throughout an organization.

Not so quick, say the Windows Pessimists. In fact, relatively few "active buyers"--about 15 million in the U.S.--are responsible for the bulk of all software sales (Soft.letter, 9/26/92). Perhaps a quarter to a third of these active buyers have already made the transition to Windows; the remainder certainly know about Windows, but aren't yet convinced that there's a compelling reason to switch. (The Pessimists also point out that less than four million Windows 3.0 users--out of more than ten million users that Microsoft claimed--took the trouble to upgrade to Windows 3.1.) Even if these remaining active buyers eventually do migrate to Windows, the Pessimists argue, the rate of future adoption will be much slower and the cost of sales will escalate dramatically.

(It's intriguing to note that Microsoft, which grew 53% in its most recent fiscal year, now seems to be aligning itself with the Pessimist camp. "Don't expect the current level of profitability and don't expect the current level of growth," Bill Gates told a Wall Street Journal reporter in July. "We'll be very happy to grow 25%.")

These two scenarios aren't just part of an academic debate, of course; they represent sets of assumptions that have a major impact on future marketing and product development decisions. In high-growth industries, market shares are volatile, there are often niches with little competition or price sensitivity, and it usually makes sense to spend aggressively to buy future customers. In a low-growth, steady-state market (like the auto industry), the rules are very different: Everybody competes for the same customers and market shares are relatively rigid; the winners are generally the companies with the greatest internal efficiencies and lowest prices.

What complicates the picture further is the fact that the software marketplace is in transition. There are niches that are mature and near saturation; there are others where explosive growth and dramatic shifts in market share are still likely. But the underlying issue for almost everyone these days is the market's potential for growth over the next few years. And, unfortunately, there don't seem to be any clear answers.
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Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:indications that the market for Windows-based applications is slowing down
Date:Oct 20, 1992
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