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Industry Outlook -- High Technology: SOFTWARE

SOFTWARE

Battle stations! This industry is up for grabs as never before, with Web mania fueling the ceaseless demand for new programs

Software was once an orderly affair in which a few players called most of the shots. The industry had almost gotten used to letting Microsoft Corp. set the agenda in personal computing. But as the Internet ballooned into a $1 billion software business in 1996, huge new territories came up for grabs. Microsoft enters the new year in a strong position to reassert control. But it will have to fight off Netscape, IBM, Oracle, and dozens of startups that are desperately staking out turf on the Net. "Everyone is racing to find market space and get established," says David Readerman, software analyst at Montgomery Securities in San Francisco.

In the booming Internet arena, Netscape Communications Corp. and Microsoft will extend their battle to electronic mail and collaboration software. In the enterprise-management sector, hundreds of customers will revamp their networks of "servers" and PC "clients" to make use of standard Internet software. This will bring fresh riches to established companies, such as Computer Associates International, Oracle, and Germany's SAP--as well as to some lucky Web startups. Overall, predicts International Data Corp., the global software market will again defy gravity, growing 13%, to $121.4 billion.

The Internet, which provides much of that buoyancy, will be a fertile spawning ground for new software ideas. There will be programs to operate online stores, track advertising, and "broadcast" information to other PCs over the Web. Commercial applications will blossom for the Java programming language (box). Yankee Group Inc. figures companies spent half a billion dollars on software tools to develop Internet applications in 1996 and an additional $400 million on software for "intranets"--corporate networks that run on the same kind of software. In 1997, "extranets" will join the mix, as companies pull customers and suppliers onto their private networks. All combined, Internet software sales will triple, to $3 billion, predicts Yankee Group analyst Brian Murphy.

Web browsers will be the most contentious part of the Internet market. Netscape would like to see its browsers replace Windows as the main user interface on PCs. Microsoft has no intention of letting that happen. Instead, it wants to build Internet access into all its applications, while preserving Windows as the main user interface. Deborah Hess, a senior analyst with the Datapro Information Services unit of The McGraw-Hill Companies, thinks the two approaches will achieve "rough parity" in 1997.

Expect Microsoft to gain precious ground in servers this year. Its Windows NT operating system will attract more new licensees than all the versions of Unix put together, predicts Yankee Group's Murphy. NT's soaring popularity will fan sales of Microsoft's Back Office product, boosting Microsoft's top line by as much as 25% over 1996, to $11.6 billion, predicts Montgomery's Readerman. Net profits could also grow about 23%, he says, to $3 billion.

The market for mainframe software, worth more than $21 billion in 1996, will not evaporate overnight. That's because compared with networks of PCs, giant computers known as "big iron" still do a better job of keeping data secure. At IBM, Chief Financial Officer G. Richard Thoman thinks the company's recent slide in mainframe software revenues has bottomed out. Looking at the whole sector, IDC Group Vice-President Anthony Picardi expects "low single-digit growth, slowing to zero by the end of the century."

Seeing the writing on the wall, Computer Associates is pushing a family of programs known as Unicenter that helps companies manage networks of disparate computers, from mainframes down to desktop PCs. Within a year, Unicenter sales could make up a quarter of CA's total revenues, which Montgomery Securities expects to hit $4.2 billion in the year ending March, 1997, up 22% over the previous year. "If you want to reduce the cost of owning computers, Unicenter works," says CA Chairman Charles B. Wang.

OBJECT LESSONS. Client-server applications will remain a hot market, worth about $4 billion a year. The market includes financial, manufacturing, and human-resources programs running on networks of PCs and workstations. In 1997, these programs will get Web links. SAP is one of the largest players, but smaller U.S. competitors are growing faster. After nearly doubling in 1996, sales of PeopleSoft Inc.--a leader in human-resources programs--will hit nearly $713 million, up 64% from last year, says Salomon Brothers Inc. analyst Neil J. Herman. In late 1996, PeopleSoft launched its first manufacturing applications in a direct challenge to SAP. Baan of the Netherlands and Oracle Corp. also are beefing up manufacturing products.

The boom in client-server applications is driving demand for powerful relational databases, which let managers pluck desired information from mountains of data. That continues to propel growth at industry leader Oracle. Both profits and sales will rise 32% in 1997, to $1 billion and $6.5 billion, respectively, according to Montgomery Securities.

By mid-1997, big database companies such as Oracle and Informix Corp. could get another lift, as Web mania ignites a profitable upgrade cycle. Audio and video clips are proliferating on Web sites, and more companies are using these digital "objects" for advertising, training, or technical communications. Increasingly, they are determined to archive such objects along with financial data and customer information. New products known as "universal" and "object" databases, from Informix, Oracle, and CA will soon make that possible. All three companies began testing their wares with customers in late 1996.

CLOSING GAPS. The Internet also is breathing new life into older software workhorses, such as Lotus Notes. After acquiring Lotus Development Corp. in 1995, IBM rejiggered its flagship product to mesh with the World Wide Web. In 1996, sales of Notes and other products for use on networks made up about 20% of Big Blue's $13 billion in software revenues. The $1.2 billion market for CD-ROM games, getting a lift from multiplayer action on the Internet, is growing about 24% each quarter. When Intel Corp. adds MMX multimedia capability to its microprocessors this year, games will get a further boost.

For all the electricity in the Internet and client-server markets, 1997 probably won't see a repeat of last year's frenzied initial public offerings. For one thing, few of 1996's Internet IPOs were able to sustain the stratospheric stock prices they hit on first-day trading. Yahoo!, for example, which runs a popular directory of sites on the Web, was priced at 13 on Apr. 12 and immediately soared to 33. The stock was trading under 20 at the end of 1996.

This year, analysts say, investors will look for actual earnings--not just charisma--before they plunk down their cash. One company to watch is closely held PointCast Inc. in Cupertino, Calif., which "broadcasts" news and entertainment to more than 1.5 million computer screens. The company signed a distribution deal with Microsoft in late December and could be a prime candidate for an IPO.

Or for a takeover. Analysts say 1997 could be a grand year for mergers and acquisitions, as big players scramble to fill gaps in their technology portfolios. Likely targets could include No.3 database vendor Sybase, network giant Novell, or America Online. All three have established customer bases, and the stocks are trading off their historical highs.

No crystal ball is of much use, however, when all the rules are up for grabs. Even with Microsoft coming on strong on the Net, "nobody really controls the architectures today," declares Stephen Sprinkle, a managing partner at Deloitte & Touche Consulting Group. However the market sorts it all out, 1997 won't be blessed with tranquility.By Neil Gross in New York, with bureau reportsReturn to top


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