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The 1990 Soft-letter 100.

THE 1990 SOFT . LETTER 100 Is the software business about to run out of steam? Apparently not, judging from this year's Soft . letter 100, our annual ranking of the largest independent personal computer software companies in the U.S. For most of the past decade, the industry's leading companies have kept growing at annual rates that typically exceed 30%-40% a year. Last year was no exception: The hundred companies that make up the 1990 Soft . letter 100 achieved average sales increases of 56% during 1989, up from an average of 46% in 1988. (As a whole, the 100 companies on this year's list produced $4.053 billion in revenue during 1989.)

It's easy to explain away this kind of growth as little more than a symptom of a young and zestful industry. But the reality is that most of the companies in our rankings are relatively mature enterprises. Microsoft, which once again holds the #1 spot, saw sales expand from $719 million to $953 million--a 33% growth rate. (Microsoft grew another 57% the year before.) The top ten companies on our list--all of whom are more than five years old--averaged 32% growth. Clearly, it's possible for software companies to be both mature and fast-growing at the same time.

If this kind of growth keeps up for the next few years--and we believe it will, despite the usual predictions of stagnation we see elsewhere in the trade press--then the industry is likely to face some profound challenges. Many small, informally-managed "lifestyle" companies will eventually have to become more corporate and formal; a fair number of mid-sized companies will have to acquire management and marketing skills ordinarily found only in very large enterprises. Financial bean-counters and development czars will almost certainly play a larger role in shaping company policies; more chief executives will have to learn how to tweak sales and profits to satisfy Wall Street; and even the founders of small firms will spend a growing amount of time managing employee pension plans and evaluating shrink-wrapping machines.

This trend toward larger company size, it's important to note, is not the same as a trend toward consolidation. There's a persistent myth that small software companies are gobbled up by big companies at a ferocious rate. In fact, only 5% of last year's Soft . letter 100 companies dropped off this year's list as a result of acquisitions or mergers, and our other survey data suggests that the acquisition rate for smaller, less visible companies is even lower. Smaller companies aren't vanishing--instead, we see substantially more startups than failures, while companies in a wide variety of niches continue to get larger.

One way to measure this trend is by looking at the median size of Soft . letter 100 companies over the seven years that we've compiled our rankings. The mid-point for 1984's top 100 was $2.6 million; the median this year has risen to $10.3 million, up from $8.9 million in 1989.

Moreover, the industry's traditional Big Three--Microsoft, Lotus, and Ashton-Tate--no longer dominate our rankings as decisively as they once did. Last year, in fact, WordPerfect edged out Ashton-Tate for the #3 spot. (Ironically, the "Big Three" concept was an invention of an Ashton-Tate publicist.) In addition, we now have six companies besides the original Big Three with at least $100 million in sales; last year, there were only two. Clearly, small companies aren't being shaken out--they're just turning into bigger companies.

Growth leaders. Soft.letter 100 companies tend to run well ahead of the pack in terms of overall growth. Here's how the ten fastest-growing companies on our list performed in 1989:

Employment. Total employment reported by Soft.letter 100 companies reached 23,027 by the end of 1989, up 23.5% from last year's level. Not surprisingly, Microsoft is by far the industry's largest employer, with 4,789 people on its payroll. The median headcount for all the companies on our list is 80 employees; the smallest company--for the second year in a row--is Chronos Software, #87, with 15 employees.

Productivity. Average sales per employee in 1989 was $176,004, virtually unchanged from last year's $174,653. As usual, size and productivity were closely linked: The 25 largest firms on the list achieved average sales per employee of $188,551, while the smallest 25 averaged $104,721. Ranked by sales per employee, here are the leanest and meanest of the current Soft.letter 100:

Development platforms. When we looked at the choice of development platforms reported by this year's Soft.letter 100 companies, two interesting patterns emerged. First, compared to last year, there has been almost no change in the relative penetration of DOS, Macintosh, Unix, and OS/2 operating systems. (We asked about Windows for the first time this year.) However, our data shows a very dramatic decline in the popularity of four platforms--Apple II, Amiga, C64/128, and Atari--that are usually associated with consumer and entertainment software:

Departures. A total of 18 companies from last year's Soft.letter 100 did not make a repeat appearance on this y ear's list. Four did not provide us with current revenue data, five were acquired, three were disqualified because less than 50% of their revenues came from publishing and development activities, and six reported sales that fell below this year's cutoff.

Geography. As usual, California leads as the favorite home base for Soft.letter 100 companies, with 47 companies. New England is the runner-up: 11 in Massachusetts, plus three in Connecticut and one in New Hampshire. Washington State, with five companies, is the industry's third biggest headquarters choice.

Public vs. private. Despite a recent round of public offerings, the software industry is still dominated by private companies. Of this year's Soft.letter 100 companies, 78 are privately held, and 22 are public. (However, of the top 10, only WordPerfect remains private.)

* NOTES ON METHODOLOGY

The first version of the Soft.letter 100 appeared in 1984, and since that time we've continued to fine-tune our eligibility rules and data collection methods. Data for our rankings comes from several sources: our own historical database of company revenues and related statistics, survey questionnaires we distribute to approximately 3,000 companies, and telephone interviews with company officials. (To assure accountability and accuracy, we accept only data that has been supplied on the record by the companies themselves; no analysts' estimates or anonymous sources are ever used.)

The great majority of companies in our survey universe are privately held. As a result, there are always a few eligible companies that do not appear in our rankings because they declined to supply revenue data. In addition, the industry itself continues to evolve in ways that require constant reexamination of our ranking criteria. Our basic rules remain unchanged: To be ranked, a candidate must be an independent U.S.-based company (subsidiaries do not qualify) that generates at least 50% of its revenues from software development or publishing.

This year, however, we've made a small but critical shift: Instead of including any company that develops "microcomputer" software, we now describe our universe as "personal computer" software. This change reflects our sense that hardware alone no longer provides a clear dividing line between micro-based machines and larger systems. As high-end, networked desktop applications begin to compete directly for sales against workstation and minicomputer software, traditional market categories look increasingly arbitrary.

Nevertheless, we feel there is a genuine distinction--though admittedly subjective--between "personal" software (products that treat the individual user as a primary frame of reference) and "organizational" software (products that primarily serve enterprise-wide functions, with individual, users in a secondary role). We continue to pay attention to this issue, and we welcome advice from readers about how to frame a useful eligibility rule.

At the low end of the market, we've had to address a different question: Should we include video game software, a market that literally dwargs most of the traditional entertainment software category? Our decision, (which probably won't make everyone happy) is that there is still a significant gap between dedicated video game machines and true personal computers--though again the gap is closing. So, for the moment, videogame companies don't qualify for the Soft.letter 100.

Electronic editions. Copies of the 1990 Soft.letter 100 are available in several disk-based worksheet formats--including Lotus (3.5" and 5.25") and Excel (Mac and 3.5" and 5.25" DOS)--for an additional $25 change (prepaid orders only). This year, we also plan to publish a worksheet version of all the responses we've received in the last two years, a database of 300-400 companies. We expect this version to be ready by the end of May, at a price of $185. Give us a call if you'd like more information.
COPYRIGHT 1990 Soft-letter
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Copyright 1990, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:the annual ranking of the largest independent microcomputer software companies in the US
Author:Tarter, Jeffrey
Publication:Soft-Letter
Date:Mar 19, 1990
Words:1452
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