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Industry Outlook -- INFORMATION

SOFTWARE

Remember the early days of personal-computer networks? Pundits hailed a New World Order called "client-server" computing that would make mainframes obsolete. Then came the Internet, intranets, and extranets. And before you could take a breath, the Java programming language arrived, with its lexicon of applets, network computers, network PCs, "fat servers," and "thin clients."

Another day, another revolution. But in reality, mainframes never faded away, and neither will Ethernet networks or Windows PCs. The high-tech universe simply expands each year, allowing software companies to make piles of money in every imaginable niche. Following a 12% rise in 1997, global sales of all packaged software will grow 12.8% in 1998, to $133 billion, predicts Anthony C. Picardi, group vice-president for worldwide software at International Data Corp. in Framingham, Mass.

Microsoft Corp. rules, of course. And in 1998, its grip will tighten. Even so, the marketplace will grow more diverse. UNIX-based enterprise applications will continue to flourish. And many niche players that help companies exploit the Internet will grow far faster than Microsoft. "The world is heterogeneous and complex," declares Charles B. Wang, head of software giant Computer Associates International Inc. "That means lots of new opportunities."

In the PC arena, Microsoft hopes to introduce Windows 98 by midyear. It may manage to integrate its Web browser into the software, despite a temporary court injunction ruling that PC makers must have the choice not to include it. By yearend, sales of Microsoft's Internet Explorer could rival those of the Navigator browser from leader Netscape Communications Corp.

Since Microsoft gives its browser away, there will be no windfall. And the company will be hurt by the economic slowdown in Asia--particularly in Japan, where Microsoft does more than $1 billion in sales a year. Some of the damage may be offset by a U.S. boom in sub-$1,000 PCs, which Microsoft CFO Gregory B. Maffei calls an "unalloyed good." Those cheap computers will give Microsoft the chance to sell more copies of Windows, at $70-$90 a pop. Still, predicts Dain Rauscher Inc. analyst Barry W. Randall, the company's net earnings for calendar 1998 will rise just 15% over 1997 to $4.7 billion, on sales of $14 billion--up only 9% from 1997.

In the corporate space, Microsoft's operating systems will keep gaining ground. IDC says sales for Microsoft Windows NT and Windows 95 combined will grow 35%, to $11 billion. In contrast, different versions of UNIX software sold by Sun Microsystems, Hewlett-Packard, IBM, and others will grow just 18%, to $8.3 billion.

When it comes to the powerful, enterprise-wide applications that run on top of UNIX and NT, the Redmond (Wash.) giant is nowhere to be seen. Databases and integrated programs for manufacturing, sales, or accounting remain the special preserve of companies such as Oracle, PeopleSoft, SAP, and Baan. Their products bolster other hot niches, such as help desk programs (chart).

PRICE WAR. That won't change in 1998. SAP co-chairman Dietmar Hopp says the German Goliath will grow about 50%--thanks in part to the Year 2000 problem. Some of SAP's best customers are small and midsize companies that are scrapping old mainframe programs--which are vulnerable to Year 2000 dating errors--and converting to SAP's Y2K error-resistant programs. Baan and PeopleSoft will snare the same types of customers.

Oracle is a trickier case. Weak quarterly earnings announced in December battered the company's stock, and temporarily trashed the whole NASDAQ exchange. The big fear was that demand for databases could be flagging. In 1997, the sector grew 11% to $7.2 billion, according to Dataquest Inc. This year, an ongoing price war waged by competitors Informix Software, Sybase, and Microsoft could hold growth to 12%, says Dataquest.

Some analysts think Oracle may have other worries as well. After a strong start, its attempt to match SAP in financial and manufacturing applications hit a rough patch late in 1997. But Chris Le Tocq, principal software analyst at Dataquest argues that the trouble just creates more buying opportunities. "Oracle has hordes of consultants prepared to tune those applications," he says. Consulting is one of Oracle's most profitable businesses.

For real pyrotechnics, watch how companies use the Internet to link manufacturers, distributors, and customers. The philosophy is called supply-chain management, and the software niche it serves was created by small companies such as i2, Manugistics, SynQuest, and Logility. Gartner Group's supply-chain maven, Art Mesher, reckons group sales were less than $800 million in 1997 but grew about 70% over 1996 and will repeat the performance in '98.

Supply-chain software complements financial and human-resources programs from SAP, Oracle, Baan, and others, who dominate the niche called enterprise resource planning (ERP). The supply-chain programs let managers study their companies' webs of relationships with suppliers, distributors, or retailers, so they can better forecast demand and schedule production and sales.

Using supply-chain programs, a PC manufacturer who gets a sudden, large order from an important customer can scope out inventory, reschedule other customers, and quickly propose a delivery date, explains Prudential Securities analyst Douglas Crook. i2 of Irving, Tex., is the star in this sector. Crook figures it grew 157% in 1997 and will jump at least 70% in 1998, to $335 million.

Supply-chain startups also make tasty prey for larger ERP vendors. In October, 1996, PeopleSoft dropped $225 million on supply-chain startup Red Pepper Software Co. A year later, this helped PeopleSoft win a big manufacturing contract from Toyota Motor Manufacturing North America. More consolidation is likely.

Most of these companies hope to take advantage of Sun Microsystems' Java programming environment, which lets programmers write one set of code that can run on any computer. After two years of constant drum rolls, Java will finally begin to make cash registers ring in 1998. With name brands such as J.P. Morgan, Home Depot, Philips Petroleum, and Simon & Schuster all singing its praises, Java software sales should soar to $90 million in 1998, up from barely $15 million in 1997, according to IDC.

MAINFRAME MIGHT. Java, in turn, is supposed to make lean and low-priced "network computers" a reality. Oracle and Sun have both been trumpeting diskless NCs as a way to reduce costs and headaches for network administrators. But don't toss out that "fat" PC quite yet. Despite powerful new applications such as eSuite from IBM's Lotus unit, the NC camp is still waiting for even one large company to place an order for a few thousand units.

IBM's role in launching NCs is critical. Along with Oracle, Big Blue supplies the lion's share of database software for corporate networks, so it can deliver a roster of grade-A corporate customers. IBM's clout still rests in its vast mainframe legacy. All told, sales of mainframe systems software will total about 12 billion in 1998, according to IDC.

Growth in this sector, at 4.2%, trails the rest of the industry. But mainframe programmers, along with SAP and Baan, are getting a welcome lift from the Year 2000 problem. Gartner Research Director John A. Bace says there's a dire shortage of mainframe programmers who can sift through old code written in COBOL and correct two-digit date errors. In 1998, almost anyone with those skills will be able to find jobs at nearly a 50% premium over 1996 salaries, he says.

A fluke? Maybe. The Year 2000 pay premium certainly won't last past 2003. But in a landscape this complex, there will always be something new to hack. Viva la Revolucion.By Neil Gross, with Amy Cortese, in New York, and Steve Hamm in San MateoReturn to top


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