This industry classification covers establishments primarily engaged in the design, development, and production of prepackaged computer software. Important products include operating, utility, and application programs. Establishments of this industry may also engage in services such as preparation of software documentation, installation of software, and training users in the use of software. Businesses primarily engaged in preparing software documentation or installing software on a contract or fee basis are classified under SIC 7379: Computer Related Services, Not Elsewhere Classified. Businesses primarily engaged in training users in the use of computer software are classified in SIC 8243: Data Processing Schools. Those primarily engaged in buying and selling prepackaged software are classified in trade industries; those offering custom computer programming services are classified under SIC 7371: Computer Programming Services; those developing custom computer integrated systems are classified in SIC 7373: Computer Integrated Systems Design.
The packaged software industry is a key growth engine in the information economy and the U.S. economy in general. After roaring through the latter half of the 1990s with annual growth rates of 15 percent, there was a slowing of the rapid pace in late 2000. In 2001 a worsening economy was exacerbated by the terrorist attacks of September 11, 2001. Together these conditions translated into an environment of uncertainty and reduced technology spending in the corporate sector that continued through 2002, at which time industry revenues were approximately $150 billion. Although International Data Corp. (IDC) expected a more favorable overall information technology (IT) climate in 2003, the company forecast weak spending on software. However, Value Line predicted that spending on software and services would rise 7 percent in 2003, followed by slightly stronger growth during the following three years.
Software demand has risen steadily, as computer hardware and software innovations have improved business productivity and information management. Sales of desktop computers and higher-end hardware directly fuel new demand for packaged software. Strong PC shipments, for instance, create a fertile market for standard desktop software packages like operating systems and productivity suites.
New product categories, especially those aimed at the business market, also stimulated brisk growth. Emerging business software categories included Web-based service applications companies could customize to meet individual needs, as well as supply chain management, customer relationship management (CRM), sales force automation, knowledge management, security, and e-commerce suites.
Meanwhile, version upgrades drive repeat sales. Microsoft's release of Windows 2000, the most comprehensive overhaul of the operating system since 1995, ushered in a new wave of upgrade sales, particularly by corporate users. In addition, Microsoft changed the way it marketed volume licenses (a significant source of its revenue) to companies in 2001 in an effort to simplify the upgrade process and generate more sales in this area.
The most fundamental changes in the software industry, however, were expected to be how and when end users obtain new software and under what pricing terms.
Software for rent, delivered by so-called application service providers (ASPs) over the Internet, poses a serious challenge to conventional software distribution and pricing. Instead of buying a static version of a program to run on their own computers, users log onto network-based applications that reside on the ASP's hardware. This means the current version is always on tap, and users are not saddled with installation and maintenance chores. What's more, rather than paying a fixed license cost, users pay either a flat monthly fee or a per-use fee. By some estimates, renting can save 20 percent or more over conventional licensing. These savings can be found not only in less money and time put into owning the software itself, but also in reduced or eliminated costs of buying and maintaining servers to run network applications. By 2002 the ASP market had still not blossomed, as some analysts had expected. However, according to Standard & Poor's, IDC predicted revenues in this sector would climb from a mere $1 billion in 2000 to an estimated $24 billion by 2005.
According to industry statistics, there were an estimated 20,840 firms engaged in the design, development, and production of prepackaged computer software. The industry garnered revenues of $113,538.60 million in 2004, while employing some 293,478 people. The average firm generated $6.2 million and employed 14 people. Prepackaged software accounted for more than 83 percent of the overall market employing more than 189,000 people. Combined, they generated revenues of about $76,273.5 million. The business oriented computer software sector numbered 1,175 firms, with $14,615.8 million in sales. Application computer software generated $15,332.9 million, while educational computer software had sales of $1.2 million.
Packaged software is a major segment of the broader software industry, which also includes custom software development and systems integration services. The term "packaged" is thus in contrast to customized software. It is typically mass-produced with standard functionalities that are expected to work across a given class of computers, such as PCs running Windows XP or network servers running Unix. Some high-end business software straddles the packaged and custom classifications because it comes with standard functions and interfaces, but requires customization for a particular company's needs.
From a functional standpoint, there are three basic types of software:
operating systems software, which controls how a computer operates;
applications software, such as word processing or spreadsheet programs; and
utility software, designed to perform support tasks for operating systems or applications. Many software companies sell products in each of these categories.
In broadest terms, the software industry serves two markets, consumers and businesses. There is some overlap, though, particularly between consumers and small, home-based businesses. Productivity suites and operating systems, for example, are common to both homes and businesses.
The U.S. consumer market represents less than 10 percent of industry sales. Important subcategories include operating systems; financial and tax applications; games, including those for game consoles like Microsoft's Xbox, Nintendo's GameBoy, and Sony's Playstation; educational software; and virus detection utilities.
Much larger and more fragmented, the business market is the software industry's bread and butter. Aside from the ubiquitous desktop operating systems and productivity packages, business software includes categories such as application development software; systems management utilities; network operating systems and utilities; database management systems; storage management systems; workgroup applications (groupware); and function-oriented applications for areas such as finance, sales, manufacturing, logistics, and human resources
Leading vendors in these areas include BMC Software, Computer Associates, IBM, Oracle, People Soft, and SAP.
The packaged software industry has its origins in a 1969 U.S. Justice Department settlement that forced IBM to sell software for its mainframe computers separately from the hardware. IBM had included basic software with the computer, and additional programming was generally done in-house. With this decision, individual entrepreneurs were finally able to compete with IBM. Small software companies sprang up, usually to offer a single program or utility. However, most mainframe software was leased rather than sold.
The rise of the packaged software industry was a direct result of the appetite for software for personal computers (PCs). PCs got off the ground in the late 1970s, as computer enthusiasts bought machines by Apple Computer, Inc., Tandy Corporation, Atari, and Commodore. Software publishers such as Microsoft emerged to write programming languages for them, and soon these languages were sold to the public through retail outlets. By the end of 1979, Microsoft had already sold one million copies of its version of the BASIC programming language. Primitive spreadsheets and other applications began to appear as well, created by small, relatively unknown companies.
At this stage packaged software was something of a cottage industry, with programs often written by individuals at home in their spare time. Because authoring software requires little equipment, people who wrote software programs risked only their own time and stood to gain $200,000 to $1 million if the program proved successful, as perhaps 1 percent were, as Forbes reported in 1983. These small companies were encouraged by hardware manufacturers, particularly Apple...