Developmentand Structure of the International
Software Industry, 1950-1990
MartinCampbell-Kelly
l
Departmentof ComputerScience
Universityof Warwick
This paperis an attemptto developa modelof the software
industrybasedon historicalprinciplesin orderto complementa
numberof studiesof the industrycarriedout duringthe lastdecade
thatwerebasedsolelyoncontemporary
dataandtheveryrecentpast.
A studyof the historicaldevelopmentof the softwareindustrycan
shed light on severalquestionsonly partially addressedby the
previousliterature:
1) Why doesthe United Statesdominatethe software
industry?What arethehistoricalreasonsfor the weak
positionsof the Europeanand Japanesesoftware
industries?Does the developingnations'software
industryrepresenta threat?
2) What role has R&D playedin successfulsoftware
firms?
3) Why did IBM and the existingsoftwarefirms fail to
penetratethe marketfor personalcomputersoftware
in the 1980s?
4) Canrecreational
softwareandmultimediapublishing
be incorporated
intoa modelof thesoftwareindustry?
The softwareindustryhasexistedsincethe mid-1950s,but until
about 1970 very little attentionwas paid to it, largelybecausethe
• I ammostgrateful
toRobertSeidel,director
of theCharles
Babbage
Institute,
andJudy
O'Neillfor theirilluminating
comments
on a draftversionof thispaper.My thanksalsoto
Luanne James,former presidentof ADAPSO, and Walter Bauer, former presidentof
Informatics,whoprovidedinformationusedin thispaper.
BUSINESS AND ECONOMIC
HISTORY, Volume 24, no. 2, Winter 1995.
Copyright¸1995 by the BusinessHistoryConference.ISSN 0849-6825.
MartinCampbell-Kelly
/ 74
industry was too small to merit detailed analysisother than as an
unquantifiedsectorof the overallcomputerbusiness.As late as 1970,
the annual turnover of all U.S. software firms was less than $.5 billion
-- about3.7 percentof the total computerbusiness[Phister,1979, p.
245].
The softwareindustrybeganto growsignificantlyin the 1970s,
first followingIBM's 1969 unbundlingdecisionandtowardthe end
of the decadefromtheriseof thepersonalcomputer.By 1979annual
sales of U.S. software firms were about $2 billion. The 1980s saw
dramaticgrowthratesin the softwareindustryof 20 percenta yearor
more, so that the annualrevenuesof U.S. firms had grown to $10
billionby 1982,andto $25 billionby 1985-- overtentimesthe 1979
figure.
As softwaregainedin economicimportance,
theindustrybecame
the subjectof severalofficial inquiriesin the mid-1980s,all of them
motivated by anxiety over industrialcompetitiveness.The first
inquiry, during 1983-84, was commissionedby the Information
ComputerCommunications
Policy (ICCP) Committeeof the OECD
andwaspublishedas Software:An EmergingIndustry[1985]. The
principalaim of thisstudywasto movethe softwareindustrydebate
from the technicalcommunityto the arenaof industrialpolicy in
orderto "identif[y]policyissuesfor governments"
(p. 11). Themain
policy recommendations
in the reportconcernedR&D investment,
training,procurement
policies,andstandardization.
Little attention
waspaidto theindividualsoftwareindustries
of themembernations.
The OECD inquiry was followed by a number of domestic
inquiries.The firstof thesewasa lengthyandhighlydetailedreport
producedby the U.S. Departmentof Commerce,A Competitive
Assessment
of the United StatesSoftwareIndustry [1984]. This
report acknowledgedthe supremacyof the United Statesin the
international software industry and made a number of
recommendations
to ensurethat the nationmaintainedits position.
The recommendations
primarily concernedimproved intellectual
propertylegislation,effortsto combatpiracy,andtheeliminationof
tariff barriersagainstU.S. softwareexports. No recommendations
were made regardingthe internationalcompetitivenessof the
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industry, except for a token suggestionabout the need for tax
incentives
for R&D.
In Britain
-- where
the balance
of trade in software
had
deterioratedduringthe 1980s-- the AdvisoryCouncilfor Applied
ResearchandDevelopment(ACARD) conducted
a domesticinquiry
thatwaspublishedasSoftware:A Vital Keyto U.K. Competitiveness
[1986]. This inquiry took a wider view than the U.S. study,
addressing
not only the supplybut alsothe applicationof software.
The ACARD study was very different in tone from the upbeat
Americanreport. The two main recommendations
were first, thatthe
government
shouldusepublicprocurement
policesto fostera thriving
U.K. softwareindustry,and second,that there shouldbe active
governmentsupportfor softwareengineeringR&D and diffusion.
Theserecommendations
hada strongresonance
with the government
measures
thathadbeentakento protecttheBritishcomputerindustry
in the 1960s[Campbell-Kelly,1989].
The ACARD report -- whose authorsincludeda majority of
scientistsand technologists-- made little attempt at a structural
analysisof the U.K. softwareindustry,but insteadfocusedon the
needto improvesoftware-engineering
trainingandmethodologies.
Subsequentlya much more focusedanalysis,The U.K. Software
Industry, was undertakenby Peter C. Grindley of the London
BusinessSchool [1988]. One of his main conclusionswas that the
industry'sproblemswerenotprimarilytechnological;
thispointwas
forcibly andprominentlymadein the covercopy,whichstatedthat
"policiesaimedto establisha majorindependent
softwareindustryin
the U.K. foundedprimarilyon softwareengineering... areunlikely
to be successful."
A comparison
of thesereportssuggests
two observations.First
is thelack of historicalperspective.For example,noneof thereports
attached much significance to a software firm's historical
development
in shapingits organizational
capabilitiesandcultural
perspectives,both of which intimately affect softwareartifacts.
Moreover,althoughfinancialandmarketdatawerequitegoodfor the
1980s,therewasalmostno attemptto collectdatafor earlierperiods.
Second,therewas a markedinconsistency
amongthe modelsof the
MartinCampbell-Kelly
/ 76
structureof theindustry.The OECD report,for example,dividedthe
softwareindustryinto two sectors:the"hardwaremanufacturers"
and
the"computerservicesindustry."The U.S. reportplacedfirms into
three categories:suppliersof "professionalservices,""software
products,"and"integratedsystems."The ACARD reportpaid very
little attention at all to industry structure,simply referring to
"suppliers,appliersandusers."
The Grindleyreportproducedby far the clearestanalysisof the
industry,firstby definingtheconceptof tradableandnon-tradable
software. This distinguished
softwaresoldas an artifactin its own
right(suchasa wordprocessor
or a database
system)from software
thatwasembeddedin a product(suchasthe softwarecomponentof
a telephoneexchange).The report then classifiedthree major
producersof software: "hardwaremanufacturers,""independent
software producers,"and "value-addedretailers" (i.e., systems
integrators).Evenso,Grindley'sconceptof tradablesoftwaredid not
extendto recreationalcomputergames;if it had,the Japanese
firm
Nintendowould (in 1992) have ranked aboveMicrosoft in revenues
[Feigenbaum,1993].
In this paper I will presenta classificationof softwarefirms
based on their historical
evolution.
Three distinct sectors have
evolved:
1) Software contractors
2) The packaged-software
industry
3) The personalcomputersoftwareindustry
The softwarecontractorswere the first programmingfirms, the
earliestdatingfromthemid-1950s.Theirrolewasto developone-ofa-kindprogramsfor computerusersandmanufacturers.
The ethosof
the softwarecontractors
was analogousto that of civil engineering
contractorsin terms of their corporateculture, organizational
capabilities,andrelationships
with customers.
The secondgroup,thesuppliers
of packagedsoftware,emerged
in the 1960sto developprogramproductsfor computerusersin
public- and private-sectororganizations.The packaged-software
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suppliers operated in direct competition with computer
manufacturers,and like them, they have evolvedthe characteristics
of firms in the capital-goodssector.
The third group, the personalcomputersoftware suppliers,
becamea significantsectorin the late 1970s. None of the software
industryreportsof the 1980semphasized
personalcomputersoftware
asa distinctsector,probablybecauseits suppliersandthe packagedsoftwaresuppliersappearedto be in the samebusiness-- developing
andsellingmultiplecopiesof programs.However,virtuallyall of the
personalcomputersoftwarefirmsdevelopedoutsidethe established
software industry; in some cases there was a backgroundin
developinghobby or gamessoftwareand in a "techie"computer
culture.
This backgroundhas profoundlyaffectedthe shapeof the
personalcomputersoftwareindustryandits products.Even though
mostpersonalcomputersoftwareis now soldto corporateusers,the
ethosof theindustryis moreakinto publishing
or consumer
products
thanto capitalgoods.For example,for usersof personalcomputers,
softwareis an intenselypersonalissue-- and the relativemeritsof
WordPerfectversusMicrosoftWord,or dbaseIV versusFoxPro, are
debatedwith an almost religious fervor by their users. For the
personalcomputer software manufacturer,the searchfor a "hit"
productis paramount,leadingto analogieswith the popularmusic
businessor the Hollywoodmovie industry.
Personalcomputersoftwarenowdominates
thepublicperception
of softwareto suchan extentthat it is hardto keepin mind thatit is
only one of three roughly equal sectorsin revenue terms. In
particular,thereis a tendencyto leaveIBM and the othercomputer
manufacturers
out of the pictureandto put firms suchasMicrosoft
and Lotus center stage. Yet, althoughMicrosoft is the dominant
supplierof softwarefor personalcomputers,
IBM remainsby a factor
of threethe largestsupplierof softwareoverall. In 1992, IBM had a
31.9percentshareof theworldmarketfor software($11.36billion),
comparedwith Microsoft's8.3 percentmarketshare($2.96 billion).
Microsoftwasin factthe thirdlargestsupplierof software,narrowly
beatenby Fujitsu's9.9 percentmarketshare($3.52 billion) [Anon.,
MartinCampbell-Kelly
/ 78
1993]. IBM operatesin all threesectorsof the softwareindustry. It
is a major software contractor,and it dominatesthe packagedsoftwaremarketfor IBM-compatiblemainframes.IBM hasthe aim,
so far unachieved,of competingwith Microsoft as a supplierof
operating software for personal computers. All the world's
mainframecomputersuppliershavea similarfootholdin the software
industry.
In attempting a history of the software industry, one is
handicapped
by thelack of datafor thethreedecades1950-1980. It
seemsplausiblethat this is one reasonfor the official reports'poor
historicalperspective
on the industry.None of thereportshashard
dataprior to 1980; the bestinformationis containedin a somewhat
impressionisticgraph"estimated... from varioussourcesincluding
InternationalData Corporation"givenin the U.S. report(Figure 1).
Such was the paucity of data in Britain that the same graph was
redrawn in the ACARD report (without attribution). The lack of
statisticaldataon the softwareindustryin the 1980sis reminiscentof
that for the computerindustryin the 1960s,whenthe OECD report
Gapsin Technology:
ElectronicComputers
[1969] deploredthelack
of basicstatisticaldatato makeinformedpolicyrecommendations
[p.
157].
In theabsence
of quantitative
data,thebesthistoricalapproach
appears
to be onebasedon casestudies.Unfortunately,theexisting
literature on softwareis heavily biased toward internal, technical
literature. For example,of the 150-odditemsin William Aspray's
"AnnotatedBibliographyof SecondarySourceson the History of
Software"[1988], fewer thana handfulare eventangentiallyrelated
to the softwareindustry. There appearsto be only one full-length
studyof a softwarecontractor-- ClaudBaum'sofficial historyof the
SoftwareDevelopmentCorporation,The SystemBuilders [1981].
The packaged-software
industryis somewhatbetterserved,with an
excellent in-househistory of Informatics[Forman, 1985]. Also
worthyof noteis Ben Voth's A Piece of the ComputerPie [1974],
Development
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Figure1. GrowthCurveof World Wide SoftwareRevenues,
1964-1985
lBillions
ofDollars'
64
67
70
73
76
79
82
85
Year
Note:
This curve shouldbe treatedas impressionistic
evidenceratherthan as solid quantitative
data. A revenuegrowthcurveof thisformfirstappeared
in U.S. Dept.of Commerce[1984,
p. 19]. It was subsequently
reproducedin a similarform in Myers [1985] and ACARD
[1986].
MartinCampbell-Kelly
/ 80
whichdescribes
a venturecapitalist'sparticipationin the University
ComputingCompany.A morerecentbook,HeshKestin'saccount
of ComputerAssociates,
TwentyFirst CenturyManagement[ 1992],
is difficultto recommendon anygrounds.
For thepersonalcomputersoftwareindustry,theliteratureis very
different. One is facedwith a glut of informationaboutMicrosofton
onehandanda completeabsence
of monographic
studieson therest
of the industryon the other. Discountingthe hagiographiesof
Microsoft's founderBill Gates,only one book, Daniel Ichbiahand
SusanKnepper'sThe Making of Microsoft[1991], standsout as a
usefulindustrycasestudy.Fortunately,thebusiness
presshastaken
an activeinterestin the personalcomputersoftwareindustryin the
1980s,and thereare quite a numberof articleson individualhighprofile firms.
The Software
Contractors
By the mid-1950s,the mainframecomputerindustryhadtaken
ontheformit wasto keepfor thenextquarter-century:
an oligopoly
of U.S. companies,
of whichIBM wasrapidlybecomingthedominant
player.
The term softwarehadnot yet beencoined(it first cameinto use
in about 1959), and computerprogramswere not a tradable
commodity.Computerusersobtainedtheirprogramsin threeways.
First, some computer manufacturerssupplied (i.e., bundled)
operating-system
softwareasanintegralpartof thecomputer
system.
Because
computers
weresoslowandsmallat thattime(with typical
speeds of 10,000 instructionsper second and random access
memoriesof around10,000characters),
the systemsoftwarecouldbe
developedat a modestcostwith a small programmingteam. For
example, IBM's FORTRAN -- one the largestsystemsoftware
projectsof themid-1950s-- wasdeveloped
by a teamof nomorethan
ten people during 1954-57 [Rosen, 1967]. As well as system
software,computermanufacturers
providedprogramsfor generic
applications
suchaspayroll,stockcontrol,andreportgeneration.The
Development
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mainframemanufacturers
alsodevelopedapplicationprogramsuites
for specificindustries
suchasretailing,manufacturing,
banking,and
insurance.This softwarewas perceivedby the manufactureras a
necessarypart of the overall saleseffort, and in somecompanies
applications
softwarewasactuallylocatedin themarketingarm of the
company.
A secondsourceof softwarefor computeruserswas the free
exchangeof programswithin cooperativeuser groups such as
SHARE for usersof IBM computersand USE for Univac users
[Armer,1980]. Theseusergroups,however,werepopulatedmostly
by technicallyorientedcomputerpeople who traded gossipand
programming
tipsasmuchasactualsoftware;thereis no evidenceof
major competitivesoftwaresystemsbeing exchanged.IBM also
facilitatedthe exchangeof programsamong computerusersby
maintaininga libraryof customer-developed
programs.
Thethirdsourceof programs
wasstaffhiredby a computer-using
organizationitself. The programmingteamwouldthendevelopinhousesoftwarewhennonewas suppliedby the manufacturer.This
wasanacceptable
andoftenunavoidable
expensein thecontextof the
annualcostof a mainframecomputer(typically$100,000a year).
In the mid-1950stherewere two gapsin this softwaresupply
situationthat createdtwo distinctmarketsfor the newly emerging
softwarecontractors. One market -- which came primarily from
government,large corporations,and the computer manufacturers
themselves
-- wasfor verylargeprogramsthattheorganizations
did
not havethe technologicalcapabilityto developthemselves.The
secondmarket was for "custom"programsof modestsize for
ordinarycomputer
userswhodid nothavethein-housecapabilityor
resourcesto develop software. The first market had significant
technological
andfinancialbarriersto entryandwassatisfiedby large
pre-existingfirms. The secondmarket,however,had much lower
barriersto entry and offeredan opportunityfor the first softwarecontractingentrepreneurs.By the late 1960s,thesetwo classesof
entrantshadbecomelargelyindistinguishable.
MartinCampbell-Kelly
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The first major entrantin the large-systemssectorof software
contractingwasthe SystemDevelopmentCorporation,whichgrew
outof theRAND Corporation's
participation
in theSAGE air defense
project.The SAGE system,developed
between1949and 1962,was
the first very large computerproject,with a total cost eventually
amountingto $8 billion. In 1952 IBM wasawardedthe contractto
developand manufacturethe mainframecomputerson which the
systemwas to run [Basheet al., 1986]. The SAGE softwarewas
estimated to need one million lines of code, which was an order of
magnitude
beyondIBM's or anyoneelse'sexperience.The contract
for theSAGE softwarewasthereforelet to theRAND Corporation
in
1955. Althoughlacking any actual large-scalesoftware-writing
capability, RAND was judged to have the best potential for
developingit. To undertakethe mammothprogrammingtask, the
corporation
createdtheSystemDevelopment
Division,whichbecame
a separateentity, the SystemDevelopmentCorporation(SDC), in
1956 [Baum, 1981].
The SAGE softwaredevelopmentprogrambecameone of the
great heroic episodesin the developmentof softwareengineering
[Bennington,
1956]. At a timewhentheentirestockof programmers
in the United Stateswas estimatedat about 1,200 people,SDC
employeda total staff of 2,100 including700 programmerson the
SAGE project. The centraloperatingprogramamountedto nearlya
quarterof a millioninstructions,
andancillarysoftwaretookthetotal
to over a million
lines of code.
It has been stated that the SAGE
softwaredevelopment
wasa universityfor programmers.It wasan
effective,if unplanned,
way to lay thefoundations
of the supremacy
of the U.S. softwareindustry.
In the secondhalf of the 1950sand early 1960sseveralother
majordefensecontractors
andaerospace
companies-- suchasTRW,
theMITRE Corporation,
andHughesDynamics-- enteredthe largescalesoftware-contracting
business.The only otherorganizations
with thetechnicalcapabilityto developlargesoftwaresystemswere
thecomputermanufacturers
themselves.
By developing
largeone-ofa-kind applicationprogramsfor customers,IBM and the other
Development
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mainframemanufacturers
became(andremain)an importantsector
of thesoftware-contracting
industry.
IBM, for example, collaboratedwith American Airlines to
developthe SABRE airlinereservation
system.The projectbeganin
1954 and drew heavily on IBM's SAGE knowhow. The main
softwaredevelopment
took placeduring 1957-59 andwaseasilythe
largestciviliancomputerprojectto thatdate,involvingtwo hundred
technicalpersonneland producinga million lines of code. When
fully operational
in 1964,SABRE -- "thekids'SAGE" -- wassaidto
have cost a total of $30 million [Burck, 1965; Gallagher,1961;
McKenneyet al., 1995]. While stillworkingon the SABRE project,
IBM signedup DeltaandPanAmericanin 1960;EasternAirlinesand
severalEuropeancompanies,
includingBOAC, followedin the later
1960s. Most of the other mainframecomputermanufacturers
also
becameinvolvedin softwarecontracting,usuallycapitalizingon
existing organizationalcapabilitiesinherited from their officemachine pasts: Univac specializedin real-time systems,NCR
developedretailingapplications,
andBurroughstargetedthebanks.
Althoughthe mainframecomputermanufacturers
undertook
major softwarecontractsfor their biggestcustomers,they did not
havethe resources
or the small-scaleeconomiesto developsoftware
for medium-sized customers. It was this market vacuum that the first
programming
entrepreneurs
rushedto fill. Probablythe first smaller
softwarecontractorwas the ComputerUsage Company,whose
trajectorywastypicalof the sector[Kubie, 1994].
The ComputerUsageCompany(CUC) was foundedin New
York City in March1955by two technicallyqualifiedentrepreneurs
who had acquiredtheirknowhowwith IBM. The financialbarriers
to entrywere low because"all one neededwas a codingpad and a
pencil";it waspossible
to avoidthecapitalcostof a computer,
either
by rentingtime from a servicebureauor by usinga client'sown
machine[Fisheret al., 1983, p. 322]. CUC was established
with
$40,000 capital,part privatemoneyandpart securedloans. The
money was used to pay the salariesof a secretaryand four
programmers
who workedfrom the privateapartmentof oneof the
MartinCampbell-Kelly
/ 84
foundersuntilcashflow wasgenerated.The foundersof CUC came
from the scientificprogramming
divisionof IBM, andmostof their
initial contractswere with the oil, nuclear power, and similar
industries;
in thelate 1950sthey secureda numberof contractswith
the National Aeronauticsand SpaceAdministration(NASA). By
1959 CUC hadbuilt up to a total staffof fifty-nine. The company
wentpublicthefollowingyear,netting$186,000,whichwasusedto
buy the firm's first computer.
By theearly 1960sCUC hadbeenjoinedby severalotherstartupsoftwarecontractors
includingtheComputerSciences
Corporation
(CSC -- foundedby a memberof IBM's FORTRAN projectteam),
thePlanningResearch
Corporation
(PRC), Informatics,andApplied
Data Research(ADR). Thesefinns were all entrepreneurial
firms
with growth patternssimilar to the ComputerUsage Company,
althoughwith variedapplicationdomains. Anothermajor start-up
wasthe UniversityComputingCompanyin 1965 [Voth, 1974].
The first half of the 1960s was a boom periodfor software
contractors.By this datethe speedands!.zeof computers,
andthe
machinepopulation,
hadall grownby at leastan orderof magnitude.
This created a software-hungryenvironmentin which computer
manufacturers
contracted
out
much
of
their
own
software
development.CUC, for example,hada teamof twentyprogrammers
engagedonIBM's System/360softwaredevelopment,
andCSC was
a major subcontractor
to Honeywell for systemsoftware. Many
privateandgovernment
computeruserswerealsocontracting
outbig
softwareprojects. For example, in the public sectorthe defense
agencies
weresponsoring
hugedata-processing
projects,while in the
privatesectorbankswere movinginto real-timecomputingwith the
use of automaticteller machines(ATMs).
By 1965 it was estimatedthat therewere forty to fifty major
software contractors in the United States, of whom a handful
employed more than a hundredprogrammersand had annual
turnoversin the range of $10-100 million [Forman, 1985, p. 18;
Fisheret al., 1983,p. 322]. CUC, for example,hadgrownto become
a majorfinn, diversifying
into training,computerservices,facilities
Development
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management,
packagedsoftware,andconsultancy,
in additionto its
core businessof contractprogramming. By 1967 it had twelve
offices,sevenhundredemployees,and an annualturnoverof $13
million. The specialistsoftwarecontractors
hadalsobeenjoinedby
computerservicesandconsultingfirms suchas RossPerot'sEDS,
foundedin 1962 [Levin, 1989], andManagementServicesAmerica
(MSA), formedin 1963 [ImlayandHamilton,1994]. Thereremains
a considerableoverlap between software contractorsthat have
diversifiedinto computerservicesand computerservicesfirms that
have movedinto softwarecontracting.This makesanalysisof this
sectorof the industryalwaysproblematic.
Despitethe riseof the majorsoftwarecontractors,
the barriersto
entry remained (and still remain) low. The major software
contractors
werethetip of aniceberg,beneathwhichlay a very large
numberof smallsoftwarecontractors,
typicallywithjusttwo or a few
programmers. One estimatein 1967 statedthat there were 2,800
software-contracting
firmsin theUnitedStates[Fisheret al., 1983,p.
323]. The only barriersto entryinto softwarecontractingfor these
smallfirmswerea technicalprogramming
capability,knowledgeof
thetargetedapplications
domain,anda client. However,therehave
beenvery few multinationalentrantsinto softwarecontractingsince
the 1960s-- which suggests
that, thoughthere are few barriersto
small-scalesoftwarecontracting,there are formidablebarriersto
embarkingon major softwarecontractsthat involve hundredsof
programmers. Only the existing firms have the necessaryscale,
accessto the rangeof programmingskills,applications
knowledge,
computerresources,and proprietarysoftwaredevelopmentsystems
to embarkon theseprojects.
Europealsodevelopedsomemajorsoftwarecontractors
during
the 1950sand 1960s,generallya few yearslaterthanin the United
States. In France,for example,the SEMA companywasformedin
1958 as a joint venturebetweenthe Marcel Loichotmanagement
consultancy
andthe Banquede Paris [LesourneandArmand, 1991].
The existingorganizational
capabilitiesof the firm lay in the areaof
industrial mathematics,operationsresearch,and statistics. Early
MartinCampbell-Kelly
/ 86
customersthus includedthe oil- and sugar-refiningindustries,the
natural gas industry,the nuclearpower industry,and the defense
agencies.The specialized
localknowledgerequiredin manyof these
applications,or the fact that they were defense-related,
effectively
excludedanyoverseascompetitor.Like its Americancounterparts,
by the late 1960sSEMA had diversifiedinto computerservicesand
consultancyin additionto contractprogrammingand had expanded
intoseveralEuropeancountries.In Britain,besidesseveralcomputer
servicesfirms,two majorsoftwarecontractors
wereestablished
in the
first half of the 1960s, Logica and Computer Analysts and
Programmers(CAP), both of which developedan international
clientele.
The European mainframe manufacturersalso developed
significantcontractingoperations.In Britain, for example,ICL's
major projectsincluded the five hundred staff-year,œ5 million
LACES projectfor LondonAirport during1967-71 [Harris, 1993].
ICL formed its own software-contracting
subsidiary,Dataskil, in
1970.
The Packaged-Software Industry
The packaged-software
industrytook off in the late 1960s
through a combination of economic, technological,and market
opportunities.
The economicopportunityarose with the arrival of "thirdgeneration" technology during the 1960s, when computer
performanceimprovedby two ordersof magnitude(with processor
speeds
of up to a millioninstructions
persecondandmemoriesof up
to a quarterof a megabyteby the end of the decade);in the same
periodsoftwareproductivityhadimprovedby a factorof two or three
at best. Therewasthusa growinggulf betweenthe capabilitiesof
computersto exploit softwareand its supply. Exceptfor the very
largestcorporations,
most computerusers-- even if they had the
technologicalcapability-- now foundit economicallyinfeasibleto
exploit the potential of their computersby writing very large
Development
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programs,becausethe developmentcostswould be impossibleto
recover.This situationcreatedan opportunityfor existingsoftware
contractorsto developprogramswhosecost could be recovered
throughsalesto ten or even a hundredcustomers.
The technologicalopportunity'for the packaged-software
industrywasthe simultaneous
emergence
of "thesoftwarecrisis"and
its panacea,"softwareengineering,"
during1967-68. The essenceof
the softwarecrisiswasthatthe errorsin andcostof writing software
tendedto grow geometricallywith the size of a softwareartifact
[Brooks,1975]. The mostnotoriousand well-documentedexample
of the softwarecrisiswasthatexperienced
by IBM in developingthe
systemsoftwarefor itsthird-generation
Systern/360
computers,
which
was estimated to have cost a total of $.5 billion.
The OS/360
operatingsystemaloneis saidto haveinvolvedfive thousandstaffyearsin its making,with a peakdevelopmentstaff of one thousand
[Pughet al., 1991,pp. 331-345]. For manyusers,writingbig reliable
programswas no longer a practical possibility:the choice was
between paying a softwarecontractorto develop a programand
makinguseof a proprietarysoftwarepackage. The useof a package
wasverymuchmorecost-effective
thancustomsoftware.Sometimes
a firm tailoredthepackageto its business,
but asoftenit adjustedits
business
operations
to takeadvantageof an existingpackage.
Thus,particularlyafterthelaunchof theIBM Systern/360,
which
established
the first stableindustry-standard
platform,a handfulof
softwarecontractors
beganto explorethe idea of convertingexisting
softwareartifactsinto packages.The economiesof scopein writing
custom software for different finns in the same industry, or in
specializingin a genericapplicationsuchas payroll, had already
madethat an established
practice,but packagingtook the processa
stagefurtherandwasreflectedin the price. In 1967the marketfor
softwarepackageswas still in its infancy,however,with only fortysevenproductsin theSoftwareNewsletterof InternationalComputer
Programs(ICP - a softwarelisting agency). And as late as 1970
packaged
softwaresaleswerejust $70 million,comparedwith $650
million for softwarecontracting[Bauer,1971, p. 55].
MartinCampbell-Kelly
/ 88
The developmentof the packaged-softwareindustry was
dramaticallyacceleratedby IBM's December 1968 decisionto
"unbundle" its hardware and software--thatis, to price them
separately. It has never been establishedwhether ordinary
commercialjudgmentor antitrustpressurelay behindtheunbundling
decision.Accordingto IBM sources,
the decisionwasmadebecause
of rising softwaredevelopmentcosts. Between1960 and 1969, the
softwarecomponentof IBM's R&D costsrose from about onetwentiethto aboutone-thirdof thetotal [Flamm, 1988,p. 24]; IBM's
customers
paid for this softwarewhethertheyusedit or not, andthe
step is said to have been taken to releasecustomersfrom this
"onerous"obligation.Accordingto Fisher,McKie, andMancke,who
were consultants to IBM's
antitrust team:
IBM's announcement,on December6, 1968, of its intention
to unbundlecame before the filing of the government
complaintin early 1969,but afterthe AntitrustDivision's
investigation
hadbeenunderwayfor sometime, ashadthe
considerationof unbundling. No evidencein the trial
recordssuggests
thatthetwo eventswere related[Fisheret
al., 1983,p. 177].
This opinionhasto be set againstthe observationthat a numberof
mainframecompaniessoughtcompetitiveadvantageover IBM by
remaining bundled for a few years while price structuresreestablished
themselves.But by the mid-1970s,unbundlingwasthe
norm.
It took aboutthreeyearsfor the packaged-software
marketto
becomefully establishedafter unbundling. No doubt a thriving
packaged-software
industrywouldhavedeveloped
eventuallyin any
case, but the unbundlingdecisionacceleratedthe processby
transformingalmostovernightthe commonperceptionof software
from a free goodto a tradablecommodity. For example,Yates
[1995] has noted that, whereas in the 1960s the American insurance
industry
hadlargelymadedowithIBM's "free"software,
unbunding
Development
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was "themajoreventtriggeringan explosionof softwarefirms and
softwarepackages
for thelife insurance
industry";
by 1972therewere
eighty-onevendorsoffering 275 packagesfor the life insurance
industryalone. Severalcomputer-services
firmsandmajorcomputer
users also recognized the opportunity to recover their sunk
development
costsby spinningoff packaged-software
products.The
OECD report[1985, p. 52] observedthat"noteworthyinstances
are
Boeing, Lockheedand McDonnell Douglas in the United States,
ImperialMetal Industries,
PechineyUgineKuhlmann,Elf-Aquitaine
andAlitaliain Europe."In theUnitedStates,softwarefirmsbeganto
organizethemselvesas the Associationof IndependentSoftware
Companies
(ASIC); thisshort-livedorganization
wastakenoverby
theAssociation
of DataProcessing
ServiceOrganizations
(ADAPSO)
in 1972,whichthenrepresented
bothcomputer-services
andsoftware
firms.
Perhaps
themostspectacular
beneficiary
of thenewenvironment
for packagedsoftwarewas Informatics,the developerof the topsellingMark IV file management
system[Forman,1985]. Informatics
was founded in 1962 as a softwarecontractorby former TRW
personnel.In 1964thecompanytookoverthe software-contracting
operationof HughesDynamicsand in so doing acquireda file
managementsystem(an early form of database)known as Mark III.
At thistime the database
offeringsof the mainframemanufacturers
were very weak, so Informatics decided to turn Mark In into a
marketableproduct,Mark IV. Theyestimatedthedevelopmentcosts
at $500,000.Venture-capital
firmshadnotyetbecomeinterested
in
software,soInformaticssecuredsponsorship
from a heterogeneous
groupof firms(thePrudential,
Standard
Oil, NationalDairyProducts,
AllenBradley,andGettyOil), eachof whichputup$100,000.Mark
IV waslaunchedasa productin 1967;therewerefew precedents
for
softwarepricing at this time, and its purchaseprice of $30,000
"astounded"
computeruserslongusedto obtainingsoftwarefor free.
By late 1968 it was only a modestsuccess
with 44 sales. After
unbundling,
however,growthwasexplosive-- 170 installations
by
spring1969,300 by 1970,and600 by 1973. Mark IV now tookon a
MartinCampbell-Kelly
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life of its own, andevenhadits own usergroup-- called,predictably
enough,theIV (Eye-Vee)League[Bauer,1995]. Also in the wakeof
unbundling,Informaticswasableto makethe development
costsof
Mark IV an inventoriedsoftwareassetthat appearedon the balance
sheet.Mark IV wasthe world'smostsuccessful
softwareproductfor
fifteenyearsuntil 1983,by whichtime it hadcumulativesalesof over
$100 million.
Other firms, however, failed to make a smooth transition into
packagedsoftware. The ComputerUsageCompany,for example,
effectivelyabandonedits $10 million a year softwarecontracting
operation,
notin favorof packages,
butto develop"turnkey"products
-- selling a combinationof hardwareand a proprietarysoftware
packageto a particularindustrysector. Turnkeysystemsoffereda
middle road between pure software packagesand software
contracting. However, supplyinghardware alongsidesoftware
requiredorganizationalcapabilitiesthat the firm failed to develop.
CUC had heavylossesin the secondhalf of the 1970s,eventually
goingbankruptin 1986. The UniversityComputingCompanyalso
stumbled
in thenewmarketplace;
by diversifying
intonetworks,it too
founditselfin thehardwarebusiness.By 1974it wassufferingheavy
losses, from which it took a decade to recover. SDC also made a
difficulttransition.It tooka numberof its existingapplications
and
tried to turn them into packages-- the first of them its Text H
typesettingpackagefor the newspaperindustry.That industrywas
never sufficientlyuniform to createa standardproduct,however;
aboutfifteensystems
weresold,butmostof themrequiredextensive
tailoring that had not been built into the cost. Eventually SDC
returnedto its corebusiness
of softwarecontracting,but it took most
of the 1970sto recoverfinancially;in 1979it wasacquiredby the
BurroughsCorporation.
Therewererelativelyfew entrepreneurial
start-upsin packaged
software, because in order to enter the market one needed to have a
fully developedproduct,andthiscouldbe veryexpensive.The most
active market was in databasesystems(in which IBM's offerings
wereweak),for whichdevelopment
costswere estimatedat asmuch
Development
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as$10 million [OECD, 1985,p. 43]. In general,the newpackagedsoftware firms were organized by technically sophisticated
entrepreneurs
with accessto venturecapital. One of the first and
most successfulwas the Cullinane Company,foundedin 1968 by
John Cullinane, a former IBM databaseexpert. The Cullinane
Companywastypicalof the new packaged-software
entrantsin that
it was totally product-oriented
and did not diversify into software
contractingor computer servicesø Other new entrants into the
databasemarket in the mid- to late 1970s included Cincom, Software
AG, andOracle.Thedatabase-system
suppliers
of the 1970sconform
very closelyto the capital goods-supplier
model of the packagedsoftwareindustry. Databasesoftwarewas usedexclusivelyin the
corporatecontext,its customerbasewas modest(typically a few
hundredinstallations),
andtheproductwastechnicallysophisticated.
Advertisingfor database
products
wasconducted
exclusivelyin trade
magazinesandthroughdirectmail.
By the mid-1970s,all of the existingcomputermanufacturers
were importantmembersof the packaged-software
industry. IBM
was,of course,a majorplayerfrom thedayit unbundled.Despiteits
oftenmediocreproducts,it hadtwo key advantages
-- inertiasalesto
the hugebaseof pre-existingusersof its software,andthe ability to
leaseits softwarefor a few hundreddollarspermonth.Leasinggave
IBM a greatadvantageover the restof the softwareindustry,which
did not have accessto leasingfundsand neededoutrightsalesto
generatecashflow.
Of the independentpackaged-software
producers,the most
successful
was unquestionably
ComputerAssociates,which was
formedin 1976 by formerexecutivesof the UniversityComputing
Company.ComputerAssociates
initiallyoccupieda nichesupplying
a sortingprogramfor IBM mainframes.ComputerAssociates
was
one of the first majorcomputersoftwarefirms to make a corporate
strategyof growththroughmergerand acquisition. All Computer
Associates'
moveswereaimedat acquiring
"legitimate
products
with
strong sales" rather than technologicalcapabilities -- indeed
ComputerAssociates
typicallyfiredhalf of the staffof thecompanies
MartinCampbell-Kelly
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it acquired[Kestin,1992,p. 15]. By 1987 ComputerAssociateshad
taken over fifteen companies,includingthe UniversityComputing
Company(then called Uccel), the world's secondlargestsoftware
company,
for $629 million. Numerous
otheracquisitions
followed,
including ADR, Panasophic,and Cullinet. By 1992 Computer
Associates
hadannualrevenues
of $1.4billion,placingit fifth among
softwarecompaniesworldwide. ComputerAssociateswasthe only
member of the old-line packaged-software
suppliersto make the
transitionto thenew marketof personalcomputersoftware,andit did
soby acquisition.
The Personal Computer Software Industry
The personalcomputersoftwareindustryeffectivelybeganin
1975-78. Apartfromits meteoricgrowth,the mostremarkableaspect
of the industryhas been its almost total disconnectionfrom the
previouslyexistingpackaged-software
industry-- whichin 1975was
a $1 billion-a-year businesswith several major international
companies.
A distinctpersonalcomputersoftwaresectordevelopedas a
result of the low financial and technicalbarriersto entry and the
failureof theexistingsoftwarefirmsto recognizethe potentialfor a
personalcomputersoftwaremarket. That failure in turn stemmed
from the originsof personalcomputingin 1975, as a pastimefor
young,maletechnophiles,
with a cultureakinto thatof amateurradio
enthusiasts.In 1975, the first personalcomputer(the Altair 8000)
wasadvertisedto hobbyists
in thepopulartechnicalpressandsoldby
mail orderfor construction
from parts[FriebergerandSwaine,1984].
The computerwas programmed
by handswitchesand did not do
anythingremotelyuseful.
During the period 1975-78, however,the personalcomputer
evolved very rapidly into its classicalconfigurationof a central
processingunit equippedwith a keyboardfor input and a visual
displayunit for output(at first often a televisionreceiver). During
this period several manufacturers, including Atari, Apple,
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Commodore,andTandy,beganto makeanddistributemachinesin
quantity.At thistime the line betweenpersonalcomputersandvideo
gameswasblurred,with Atari, Commodore,andTandyexploiting
that sectorof the market at least as activelyas that for personal
computing. The personalcomputermarket thus came to be
associated with consumer electronics, and it was natural that the
existingcorporatepackaged-software
supplierswould not perceive
this marketas an opportunity.
The financial and technicalbarriersto entry into the personal
computer software industry were initially low because the
specifications
of an earlypersonalcomputerwerelow. The personal
computerof 1975-78hadroughlythecapabilityof a mainframeof the
mid-1950s(for example,havinga memoryof 16-64 Kbytes). The
key organizational
capabilitiesof the existingsoftwarefirms, with
theirpowerfultoolsandmethodologies
for developinglarge,reliable
softwaresystems,were irrelevantfor developingprogramsfor the
tiny memoriesof thefirstpersonalcomputers;
indeedtheywerelikely
to be counterproductive.Entrantsto the new industryneedednot
advancedsoftware-engineering
knowledge,but the samekind of
expertiseasthe first softwarecontractors
in the 1950s-- creativeflair
andthetechnicalknowledgeof a bright,first-yearcomputerscience
student.
It is importantto note that, althoughthe existing software
companieswere obliviousto the personalcomputer,theywere well
aware of the potential of the microprocessor-- the chip at the
machine's heart. They saw the microprocessor,however, as a
componentin an integratedsystem(for example,in photocopiers,
faxes, and other smart machines). Software for such "embedded
systems"
tendedto be developedwith sophisticated
softwaretoolson
full-sizecomputers.The technological
andculturalgulf betweenthe
two viewsof themicroprocessor
wasenormous.Policymakers
were
no better than participantsin the existing software industry at
recognizingthe opportunityrepresented
by the personalcomputer.
ThusboththeOECD [ 1985]andACARD [ 1986]reportsdevotedfar
MartinCampbell-Kelly
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moreattentionto embedded
systems
thanto theburgeoning
personal
computerindustry.
The PC softwareindustrycanbe seento havedevelopedin two
phases.The firstphase,whichcanbe characterized
asthegold-rush
era, lastedfrom about1975 to 1981;duringthis period,barriersto
entrywereextremelylow, therewere severalthousandnew entrants,
and firms developedthroughorganicgrowth. The secondphase,
which beganabout 1982 following the standardizationof the PC
market around the IBM-compatible platform, was a period of
consolidation
in whichmanyof theearlyfirms were shakenout, new
entrantsrequiredheavyinputsof venturecapital,anda smallnumber
of (American)firmsemergedas globalplayers.
The mostprominentof the first wave of PC softwarefirms was
SoftwareArts, which producedthe VisiCalcspreadsheet.VisiCalc
wasdevelopedthroughpart-timework by two youngHarvardMBA
students,
DanielBrinklinandBob Frankson,for theApple 11in 1979;
it wasreportedto havecostjust $500 to launch[Anon.,1985]. Many
popularhistoriesof thepersonalcomputeridentifythe introduction
of VisiCalc as the criticaleventin the developmentof the industry.
Thus, in Robert Slater's Portraits in Silicon [1987] we read:
Suddenlyit becameobviousto businessmen
that theyhad
to have a personalcomputer:VisiCalc madeit feasibleto
useone. No prior technicaltrainingwasneededto usethe
spreadsheet
program. Once,both hardwareand software
werefor hobbyists,thepersonalcomputera mysterious
toy,
usedif anythingfor playinggames.But afterVisiCalcthe
computerwasrecognizedasa crucialtool [pp.265-266].
ChposkyandLeonsis[1988] statein BlueMagic, theiraccountof the
developmentof the IBM personalcomputer:
Then, in the Springof 1979, a softwareprogramcalled
VisiCalc was developedby two graduatestudentsat the
HarvardBusinessSchool.... For a full year,the program
Development
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wasmarketedexclusivelyfor the Apple II computer.This
wasa shrewdmoveon Apple'spartbecause,in a numberof
instances,
customers
wouldgo to a computerretailstoreto
buy VisiCalc, andthen askfor "something
to run it on."
The programwasa deservedsuccess,
andit is oftencredited
as the impetusbehindthe rise in Apple's revenuesfrom
$800,000in 1977to almost$48 milliononlytwoyearslater
[pp. 7-8].
Finally, in what is easilythe bestandmostrestrainedaccountof the
development
of thepersonal
computer,
Frieberger
andSwaine'sFire
in the Valley [1984], we read:
VisiCalcwasa noveltyin computersoftware.Nothinglike
it existedon anycomputer,
largeor small.... Year afteryear,
evenasVisiCalcincreased
in price,thevolumeof salesrose
dramatically. At first releasein 1979 personalsoftware
shipped500 copiesper month. By 1981 it wasshipping
12,000 [p. 230].
One can find similaraccountsin virtuallyeveryhistoryof the
personalcomputer.RobertX. Cringley'sdelightfulbutidiosyncratic
AccidentalEmpires[1993] hastakentheprocessa stagefurtherand
made the "killer app[lication]" the central thesis of his book.
VisiCalc has become an icon that overshadows the fact that there
were three key genericapplicationsthat legitimatedthe personal
computer:the word processor,the spreadsheet,
and the database
system. All of theseapplications
existedin the corporatecontext
(includingthe spreadsheet
-- which as a financialanalysistool had
existedin variousmanualandcomputerized
formssincethe 1930s).
The technicalachievement
of theearlyentrantsintothe industry
wasto write softwareusingprimitivetechniques
(oftenemploying
softwaretools that had long been abandonedin the mainstream
softwareindustry)andto shoe-horn
theresultsintothetinymemories
of personalcomputers.Equallyimportantto their success
wasthe
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attentionto humanfactorsthat made working with a personal
computera comfortableand productiveexperience. The humancomputer interface was at this time a very underdeveloped
organizationalcapabilityin the existingsoftwareindustry,givinga
competitiveadvantageto thosenew entrantswith backgroundsin
developing
computergames-- whichrequireda highlydeveloped,if
intuitive,knowledgeof human-computer
interaction.
The late 1970swas a fiercelycompetitiveperiodfor personal
computerapplications
software,with thousands
of new entrantsinto
theindustry,
almostall of whichwereundercapitalized,
two-or threepersonstart-ups.By about1980,however,a smallnumberof marketleading packageshad establishedthemselvesthrough superior
marketingandtheprocess
of defacto standardization
[Arthur,1989].
After thelaunchof theIBM PC in 1981,thepersonalcomputerwas
fully legitimatedas a seriouscorporatetool, and the associated
hardwareandsoftwareindustries
wentinto exponentialgrowth. By
1983personalcomputersoftwaresaleswere approaching
$1 billion,
anda smallnumberof clearindustryleadershademerged(Table 1).
Perhapsthe most strikingcontrastwith the 1970spackagedsoftwareindustrywasthe sheervolumeof PC packagessold. For
example,at theendof 1983 WordStar(MicroPro'stop-sellingword
processor)had cumulativesalesof 800,000, and the companywas
shipping
20,000copiesa month.Veryfew of thecorporatesoftware
packageshad cumulativesales in four figures. (For example,
Informatics' Mark IV, reportedly the world's most successful
softwareproduct,had just four thousandsitesin 1983.) Another
remarkablecontrastwith the traditionalpackaged-software
industry
wastheimportanceof popularadvertising
in productpromotion.One
widely cited sourceput advertisingcostsat 35 percentof revenues,
against15 percentfor R&D [Sigel, 1984, p. 127; U.S. Dept. of
Commerce,1984,p. 16; Myers, 1985,p. 83; ACARD, 1986,p. 52].
By about1982thegold-rusherawasover,andthreesignificant
barriersto entryinto the personalcomputersoftwarebusinesshad
beenerected.The firstwasa technological
barrierthatresultedfrom
the dramaticallyimprovingperformanceof personalcomputers,
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whichwere now approaching
the powerof a mainframeof the mid1970s. The new generationof IBM-compatiblecomputers
thathad
begun to dominatethe market were capableof running software
comparablewith that used on small mainframes, and similar
technological
resources
were requiredfor its development.(To take
one example, whereasthe original VisiCalc had containedabout
10,000 instructions, mature versions of Lotus 1-2-3 contained about
400,000 linesof code.)The secondbarrierto entrywasthe needfor
expertise about computer-humaninteraction. The sourcesof
knowledge of how to create personalcomputersoftware with an
attractiveinterfacehad becomelockedinto the existingfirms; such
knowledge was not somethingthat could be learned from the
literatureor in a computerscienceclass.The third,andprobablythe
greatestbarrierto entryinto thepersonalcomputersoftwarebusiness
was access to distribution
channels.
In 1983 it was estimated that
there were 35,000 productscompetingfor a placeamongthe two
hundredthat a typical computerstorecould stock-- for example,
there were threehundredword-processing
packagesfor the IBMcompatiblePC alone [Sigel, 1984, p. 126]. A huge advertising
campaign-- and thereforean injection of venture capital -- was
needed to overcome this barrier.
Onemightexpectthatthesebarriersto entrywouldhaveresulted
in a stableoligopolyof the existingpersonalcomputersoftware
suppliers,but this was not the case. Of the top five firms and
productslisted in Table 1, only Ashton-Tate'sdbase remaineda
marketleaderby 1990 (andAshton-Tateitselfhadbeenacquiredby
ComputerAssociates);
theotherfirmshadbecomealso-ransor gone
outof business
altogether.Today'sfourleadingpersonalcomputer
softwarefinns -- Microsoft, Novell, Lotus, and WordPerfect -- were
all minorplayersin 1983.
The reasonsfor this transformationare complex, but the
dominantfactor appearsto be the importanceof a single "hit"
product,whosearrivalcantransforma balancesheetfor severalyears,
andwhosedemisecansendthefinn intoa spiralof decline.Perhaps
the most poignantof thesedramaticturns of fortune was that of
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Table 1. Cumulative Sales of Best-SellingBusinessPersonal Computer
Software, 1983
Program
Publisher
Cumulative Sales
(units)
Wordstar
MicroPro
800,000
VisiCalc
VisiCorp
700,000
SuperCalc
Sorcim
350,000
PFS:File
SoftwarePub.Corp.
250,000
Ashton-Tate
150,000
dbase II
Total
2,250,000
Source: Sigel [1984, p. 125].
VisiCorp (the company that, as Software Arts, had developed
VisiCalc).At itspeakin 1983,VisiCorphadannualrevenuesof $40
million; by 1985 it had ceasedto exist as an independententity.
VisiCorp was effectivelywiped out by the arrival of a competing
product,Lotus1-2-3, compounded
by a seriesof strategicerrors.
The Lotus Development Corporation was founded by the
entrepreneur
Mitch Kapor in 1982 [Peters,1985]. As a freelance
developerfor VisiCorp, Kapor alreadyhad the technologicaland
human-factors
expertisenecessary
to overcomethetechnicalbarriers
to entry.Usinghispersonal
fortuneof $1.7 milliontogetherwith $3
million in venturecapital,he developeda spreadsheet
programthat
wouldcompetewith VisiCalc. The product,Lotus1-2-3, costsome
$1 million to developandat thetimeof its launchwassignificantly
aheadof the field in its technicalcapabilitiesandhuman-computer
interface.
To overcomethe most formidablebarrier, marketing,Lotus
reportedlyspent$2.5 million on the initial launchof its new
spreadsheet.Of the retailpriceof $495, about40 percentwentinto
advertising.With this blaze of publicity,Lotus1-2-3 sold 850,000
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copiesin its first eighteenmonthsandinstantlybecamethe market
leader. The launchof Lotus 1-2-3 in 1983 was probablythe last
momentwhenit waspossibleto overcomeat a strokeall the barriers
to entry to launchinga major new personalcomputersoftware
product. Therehasbeenno comparablesuccess
in the last decade
from a start-up.
The principal victim of Lotus' successwas VisiCorp. In an
attemptto capturea broadermarket,VisiCorphadlauncheda raft of
new products-- a word processor,a database,and severalother
programs.It hadalsoinvesteda reported$10 millionin developing
a "graphicaluserinterface,"VisiOn. All of thesedevelopments
were
funded by the revenue stream from VisiCalc. None of the new
products
succeeded
againstthemarketleaders,however,andafterthe
launchof Lotus1-2-3, revenuesfrom VisiCalcdeclinedrapidly. In
1985VisiCorpmergedwith anothercompanyandceasedto havean
independentexistence[Sigel, 1985]. The VisiCorp-Lotusstruggle
was mirroredby severalothers,suchasthatbetweenMicroPro and
WordPerfect,whose positionswere similarly reversed:in 1984
MicroPro's WordStar had a 23 percent market share, against
WordPerfect's1 percent[Fertig, 1985, p. 164]; five years later,
WordPerfectwas hugely successful,and WordStar'smarket share
was essentiallyvestigial.
The biggestturnaroundin fortunesin the personalcomputer
software industry has been that of Microsoft. In 1980 -- when
VisiCorpwasa $40 million company-- Microsofthad an annual
turnoverof just $8 million andwas almostunknownto computer
usersandthegeneralpublic. At thattime Microsofthadmuchmore
in commonwith a 1960s-style
softwarecontractorthanwith a 1980s
personalcomputersoftwaredeveloper.Its co-founders,
Bill Gates
andPaulAllen,haddeveloped
a BASIC programming
systemin 1975
that had becomethe industrystandardand that was shippedwith
Apple, Commodore,Tandy, and other microcomputers.In 1980
Microsoftobtained
a contract
to supplytheoperating-system
software
for the new IBM personalcomputer.The storyof MS-DOS hasbeen
MartinCampbell-Kelly
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told even more often than that of VisiCalc; suffice it to say that
Microsoft'srealtalentlay in beingin therightplaceat therighttime.
The IBM PC andits clonesrapidlycameto take nine-tenthsof
the personalcomputermarket,with the user-friendlyMacintoshthe
onlyseriouscompetitor.EachIBM-compatiblemachinewasshipped
with a copyof MS-DOS, for which Microsoftreceiveda royaltyof
between$10 and$50. With MS-DOS thestandard
operatingsystem
for the personalcomputer,Microsoft was assuredof a constant
revenuestream,whichit usedto broadenits productline, developing
new productsandacquiringothersby take-over. It is worthnoting
that exactly the same strategywas adoptedby the now-defunct
VisiCorp. The strategyhasbeensuccessful
for Microsoftapparently
becauseoperating systemsdo not provide a good basis for
competition:
thoughpeoplecarepassionately
abouttheirchoiceof a
word processor
or a spreadsheet,
they do not very muchcarewhat
operatingsystemis usedin their personalcomputer-- certainlynot
enoughto switchto a rival product.Microsofi'srevenuestreamfrom
MS-DOS set it apartfrom everyotherpersonalcomputersoftware
supplier.WhetherMS-DOS wasgoodor badwasirrelevant:it was
theinfrastructure
thatsupported
therestof thesoftwareindustry,and
(unlike IBM that originatedthe personalcomputer,and Intel that
madethe chips)its intellectualcontentcouldnot legally be copied.
Throughoutthe 1980s,therehasbeen intensecompetitionto
developa successor
to MS-DOS -- a user-friendly,Macintosh-style
graphicaluserinterface. As well as Microsoft,at leastfive major
playerswere hopingto succeedin this market. All theseattempts
havebeenfraught. IBM, for example,spenta reported$1 billion in
R&D, plus undisclosed
advertisingoutlays,in developingits OS/2
operatingsystem[Bakke, 1992]. Microsoftlaunchedits Windows
operatingsystemon no lessthanthreeoccasions
(version1 in 1985,
version2 in 1988, and version3 in 1990), beforemeetingsuccess.
With Windowsversion3, Microsoftappears
to havea producthit that
should see it well into the next century. But should Windowsbe
eclipsedby a rival product,then Microsoftwould lose its assured
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revenuestream,becomerelianton its applications
software,andbe
justasvulnerable
to competition
asanyotherplayerin theindustry.
Conclusions
Thispaperopened
bysuggesting
thata historical
analysis
of the
softwareindustrycould illuminate a number of contemporary
concerns.The first concernwas the U.S. dominationof the industry
(primarily
a concem
outside
theUnitedStates,
of course).
Thelikely
primereasonfor U.S. software
supremacy
is a paradoxical
one-government
support
for theindustry.The paradoxarisesfromthe
fact that, althoughthe United Statesis non-interventionist
in
principle,in practiceit promoted
theearlyindustry
massively
by
creating
a market
forcomputers
andsoftware
through
programs
such
astheSAGEproject,
theDepartment
of Defense's
ADPprogram,
and
theNASAprogram,
tomention
onlythelargest
[Flamm,1987].In
Europe,thoughgovernments
wereinterventionist
in principle-Britain,France,andGermanyall hadactivepoliciesto createthriving
information-technology
industries
-- in practicetheirprogramswere
alwaystoosmallto havemorethana marginaleffect. The failureto
developcomputer
hardware
industries
in the 1950smeantthatthe
software industries could not follow in their wake in the 1960s.
The other reasonsfor U.S. dominancein the softwareindustry
stemmostlyfromearly-start
advantages.
In the 1950s,thediffusion
of computers
in theUnitedStates
wasthreetofiveyearsahead
of that
in Europe,
andthemachines
themselves
weremuchmorepowerful.
More powerfulmachinescreateda demand,for example,for
programming
languages
suchasFORTRANandCOBOL;theUnited
States controlled the standardizationof these languages,further
consolidating
theearly-start
advantage.
Thisdisparity
washighlighted
in 1962by Christopher
Strachey(a founderof theBritishsoftware
house CAP), who noted the huge gulf between the 200,000instruction
commercial
programming-language
translatorthat the
ComputerSciences
Corporation
wasdeveloping
for theHoneywell
Corporationand an attemptby the United Kingdom'sleading
MartinCampbell-Kelly
/ 102
computermanufacturerto do the samething "in a much smaller
machinewhichin Americawouldnotevenbe regardedasan off-line
printer. Clearly,thereis somethingwrong"[Anon., 1962,p. 124].
With suchan inadequatecomputinginfrastructure,
therewas little
opportunityfor the U.K. softwareindustryto developcompetencies
in constructing
reallylargesoftwareartifacts.
Thereis currentlygreatuncertainty
aboutthenatureof thethreat
from the softwareindustriesof Japanand the developingnations
[Cusumano,1991;UNIDO, 1993]. Historically,non-U.S.companies
havedonebestwheresecurityconsiderations
haveprotectedthem
from American competition, or where local knowledge has
differentiated
themfrom theU.S. firms. For thesereasons,European
companiesdominatethe defense-software
sectorandcompetewell in
nichessuchasfinancialsystems
andretailing,but do muchlesswell
in globalsectors
suchasairlinereservations
systems.Japan,lacking
a defense sector, has succeededonly in its largely protected
mainframesoftwareandin custom-software
for Japanesecompanies
[Feigenbaum,1993]. This suggests
thatdevelopingnations'software
firms areunlikelyto be a competitivethreatto theWestin software
contracting,whereindigenousknowledgeof an industryis necessary.
Moreover, at present,the emergingsoftware industriescompete
largelyin termsof raw codeproduction;this is now lessimportant
thanthehuman-computer
interfacetechnologies
thataresocriticalto
personalcomputersoftware.
Although the U.S. packaged-software
industrybenefitedfrom
early-startadvantages,
the size of the domesticmarketwas a more
crucialfactor. The Americanmarketwasat leasttwentytimeslarger
than that of any other singlecountry. For the packaged-software
industry,recoupingdevelopment
costsovera largenumberof sales
wasthesinequa non. Whereasin the UnitedStatesit waspossible
to obtainsalesof mostsoftwarepackages
in threeor fourfigures,this
wasrarelypossiblein Europe.Moreover,theEuropeanmarketswere
particularlyattractiveto U.S. suppliers
becauseof thelow marginal
costof softwareproduction.To sellpackaged
softwarerequiredonly
a modestregionaloffice and a salesforce,andin the 1970smostof
Development
of theInternational
Software
Industry/103
the major U.S. packaged-software
firms developed successful
marketingoperationsin Europeor soldunderlicensein Japan.
The failureof the existingpackaged-software
firmsto compete
in the new marketof PC softwarein the early 1980s is a major
phenomenonthat is not addressed
by any of the official software
industryreports.This historicalsurveyof the industrysuggests
that
the main reason for the failure was the nature of the firms' inheritance
of organizational
capabilities.This wasmostpronounced
in the case
of IBM, andwasevena partialcauseof itsfall fromgracein theearly
1990s [Usselman,1993]. IBM's traditionalstrengthsin software
were an understanding
of businessapplicationsinheritedfrom its
officemachinepastanda sophisticated
butbureaucratic
organization
geared to developing large software artifacts. IBM lacked a
competence
in consumermarketing,andits human-factors
research
was weak and orientedtoward traditionalcomputerusage. Thus
IBM's softwarestrengthswere irrelevantto the developmentof
personalcomputersoftware,while the competencies
it lackedwere
imperativefor success.
What wastruefor IBM wastruefor all of the
old-linecomputermanufacturers
and softwarefirms.
One might have expectedthat the gulf betweenthe old-line
packaged-software
industryand the new PC softwarefirms would
have narrowed in time; but, although the technologieshave
converged,
theculturaldifferences
havenot. Forexample,ratherthan
join the trade associationof the computer-services
and software
industries, ADAPSO, the new PC software firms established their
own SoftwarePublishersAssociation(SPA) in the mid-1980s. The
board membersof ADAPSO constantlypressuredits president,
Luanne James, to "take over" SPA, but she resisted because the
differencein culturewas "soblindinglyobvious";at an ADAPSO
conference,
for example,-business
dressis still the norm,whereasat
anSPAconference,
"if you showup wearinga tie theycutit off and
throwyou in the pool.... Thesearenot compatiblecultures"[James,
1995].
Perhapsthe aspectof the softwareindustryon whichtherehas
beenleastconsensus
amongpolicyandtechnology
expertsis the role
MartinCampbell-Kelly
/ 104
of R&D. In 1967-68 therewas a major pushfrom the computer
sciencecommunityto raisesoftwareproductionfrom a craft to an
engineeringdiscipline.The originof thisconcernwasa numberof
softwaredisasters
thathit the headlinesin thelate 1960s-- typically
involvinghugecostoverrunsor catastrophic
systemerrors[Ceruzzi,
1989].
The result was to focus research on the need for better
software production techniques and on the application of
mathematicalmethods to develop error-free software. Most
Europeanpublicresearch
funding,andmuchof theU.S. funding,has
goneinto improvingsoftwareengineering
technologies.
Thesepolicydecisions
haveoftenflown in the faceof evidence
suggesting
theabsence
of anyreallink betweenR&D expenditureand
industrialsuccess.For example,one setof statisticsfor 1983 in the
U.S. Departmentof Commercereport[1984, p. 31] showedthatthe
traditionalpackaged-software
firms ADR andComputerAssociates
were devoting,respectively,13 and 12 percentof theirturnoversto
R&D, while the manifestlymore successfulLotus Development
Corporation
wasspending
just 2.2 percent.One sensesthatbeneath
the surfacecalmof the official software-industry
reportstherelurked
a polarizationbetweenthetechnologists,
who tendedto determinethe
practical implementationof researchprograms,and the policy
analystsandeconomists,
whoserole wasgenerallylittle morethan
advisory. Only occasionallydoesthe trenchantview of a policy
analystemerge.One memorableexampleis PeterGrindley'sreport
on The U.K. SoftwareIndustry,whichdevotedan entirechapterto
condemning the software engineering initiative of the Alvey
Programme,
theU.K.'s mainpubliclyfundedinformationtechnology
researchprogramin the 1980s[Grindley,1988;Oakleyand Owen,
1989].
As a resultof thetechnological
fixationon softwareengineering,
verymuchlessattentionwas(andis) paidto human-factors
research
devotedto makingsoftwareeasyand attractiveto use. The United
States,however,was fortunatein havingin the AdvancedProjects
Research
Agency(ARPA) in the 1960s,a "man-computer
symbiosis"
programthat fosteredstudiesof human-computer
interaction,at a
Development
of theInternational
Software
Industry/105
time when the topic was barely recognizedin the wider research
community[Norbergand O'Neill, forthcoming]. Eventuallythese
human-factorstechnologiesdiffusedinto a numberof West Coast
computerandsoftwarefirmssuchasXerox,HewlettPackard,Apple
Computer,andMicrosoft. For all thesefirms, "usability"wasnot
only a marketingrequirement,but also a core technology-- and
sophisticated
techniques
of requirements-gathering,
productdesign,
andevaluationweredeveloped.Human-factors
technologies
arenow
locked into these firms, and it will be severalyearsbefore the
conceptsare diffused sufficientlywidely that they to no longer
constitutea barrier to entry. Given this barrier -- and the trivial
marginalcostof softwareproduction-- it seemshighlyunlikelythat
theU.S. dominance
in personalcomputersoftwarewill be overcome
in the foreseeable future.
Finally,a topicthatnoneof theofficialsoftwareindustryreports
addressed
is recreationalsoftware-- that is, softwarefor computer
games,personalfinance and time management,and multimedia
entertainment.Most of the reportsdodgethe issueentirely,although
the U.S. Departmentof Commercedid at least recognizeits
commercialimportanceand dealt with it in a separatereport
[Watkins, 1984].
In 1982 domesticsalesof U.S.-produced
gamessoftwarewas
estimated
at$1.2billion[Watkins,1984,p. 20], whichwasmorethan
10 percentof the globalsoftwarebusiness.The otherreportsfailed
to discussrecreationalsoftware primarily becauseit was not
perceivedassoftwarein the traditionalsense:it was frivolousrather
thanserious;
it wasaboutephemeralconsumer
spending
ratherthan
capital investment;it was typically createdin an unstructured
environment
outside
the
industrial
establishment
of
software
engineering;and its cultural values were less concernedwith
functional
requirements
thanwith entertainment
andgraphicdesign.
Even today,recreationalsoftwareis not recognizedas a major
sectorof theindustry.ThusMicrosoft'sinsistence
onsellinga flight-
simulatorgamein thelate 1980swasseenmoreasaninexplicable
whimof thecompany's
founderthanasa strategic
position.Although
MartinCampbell-Kelly
/ 106
very popular computer games such as SimCity and Sonic the
Hedgehog are recognized as major cultural and economic
phenomena,
theydo notfeaturein the computertradepress.Events
are beginningforce a changein this perception,however. For
example,Microsoft'sabortive$2.2 billion take-overof Intuit (the
makersof Quickenpersonalfinancesoftware)hasfinally causedthe
computerpressto take an interestin non-professional
software. It
helps,perhaps,that personalfinancesoftwaresitspreciselyon the
thresholdbetweenprofessional
andnon-professional
computerusage.
There have been other signalsthat recreationalsoftware is
crossinga threshold.Severalmainstreamsoftwarefirms,including
Microsoft,havecreatedmultimediadivisionsandlaunchedproducts
-- typicallyreferenceworksandeducational
software.Publishersand
entertainmentcompaniesare also crossingover into electronic
publishing-- the most dramatic example being DreamWorks, a
reported$2 billion multimediaconsortiumheadedby Steven
Spielberg and others, with prominent investors who include
Microsoft'sBill GatesandPaulAllen [Corliss,1995]. Clearly,many
of theseenterpriseshave beenformedin anticipationof a thriving
marketfor informationgoodsdistributedvia the Internet.
Whetheror not thesemarketexpectations
aremet,the presentdayrecreationalsoftwarebusiness
is of sufficientscalethat it should
be discussedalongsidethe traditional softwareindustry. In the
historicalmodel of the softwareindustrypresentedin this paper,
recreational
softwarecanbe seenas a culminationof two long-term
trends that connect it to the three established
sectors of custom
programming,packagedsoftware,andPC software.
The first trendis an ever-increasing
emphasison the cultural
contentof softwareas opposedto purefunction. The first software
artifacts in the 1950s were almost completelyfunctional and
mechanistic;typically, they converteddata from one form into
another(sayfroma programmer-oriented
programming
language
into
the computers'own binarycode). With the introductionof more
powerfulcomputersand packagedsoftwarein the 1970s,however,
programproducts
beganto incorporate
a richerculturalcomponent
--
Development
of theInternational
Software
Industry/107
a payrollpackage,for example,wouldembodytaxationrulesand
employmentlaw, while an industry-specific
packagewould codify
manyof thecustoms
andpractices
of an industry.With PC software,
the balance of functional and cultural content shifted still further -- in
a spreadsheet
program,for example,perhapsonly one-tenthof a
programwasrelatedto "number-crunching,"
with therestsupporting
a user-friendlyinterfaceand facilities for data presentationand
visualization.Recreational
softwarecanbe seensimplyasa further
shift toward a richer cultural and artistic content.
The secondlong-termtrendis the reshapingof the marketfor
softwareproducts
froma professional
eliteto themassconsumer;
this
shifthasbeenaccompanied
by risingvolumesandfallingunit costs.
In the 1950sand 1960sthepriceof a typicalcustom-written
program
rangedfrom$100,000to $1 million,andthebuyerof suchan artifact
would invariably have been located in the central computing
department
of anorganization.The emergence
of packaged
software
in the 1970sgraduallytookcontrolawayfrom centralizedcomputer
departments
by enablingtheuserdepartments
of a firm to participate
in purchasingdecisions. A 1970s programproduct,such as an
industry-specific
packageor a database
system,wouldtypicallyhave
rangedin price from $10,000 to $100,000. With the arrival of the
personal computer, software acquisitionwas made still more
democratic.Individualsnotonlymadetheirownsoftware-purchasing
decisions,
buttheyoftenformedloyaltybondswith specificproducts;
at the sametime, the priceof a PC package(typicallyin the range
$200 to $500) made it affordablefor a departmental,or even a
personal,
budget.Recreational
softwarecanbe seenasanotherphase
in this democratizationof software,with computergames,non-
p•ofessional
financesoftware,
andmultimedia
products
all priced
typicallyunder$100. This is softwarefor everyone.
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