Home of the Future Planning Service Software Strategies: The Home Computer anc Videogame Marketplace Report No. 83-3 December 1983 An Executive Service of the Yankee Group SOFTWARE STRATEGIES: THE HOME COMPUTER AND VIDEOGAME MARKETPLACE — iB a copyrighted publication of Yankee Group Research, Inc, All rights reserved. Reproduction without the written permission of the publisher is forbidden. Additional copies of the publication may be obtained by writing The Yankee Group, 89 Broad Street, Boston, MA 02110. Phone (617) 542-0100. © The Yankee Group, 1984 eeGroup 89 Broad Street, 14th Floor, Boston, Massachusetts 02110, (61 7) 542-0100 ii and - 3 Table ES-1 and Table 1-1 THE HOME VIDEOGAME MARKET Consoles 1981 1982 1983 Atari 2600 3.10 5.10 3.00 Atari 5200 0.25 0.95* Colecovision 0.55 1.10 Intellivision 0.72 1 .10 0.35 Odyssey 0.60 0.40 0.20 Other 0.20 0.15 0.10 Total Units (M) 4.62 7.95 ' 5.70 $ Millions $577 $1,320 $540 Software 1981 1982 1983 Units (M) 34.5 60,0 75.0 $ Millions 800 1.500 1.350 Source: the Yankee 1934 1.80 0.70 0.50 0.15 0.05 0.05 3.25 $263 1984 65.0 1.100 Group December 1983 —iv and 6 Table ES-2 and 1-2 U.S. COMPUTER SALES TO THE HOME BY VENDOR AND MACHINE (000s) High End (+$600) 1982 1983 Atari 1400/1450 _ Apple lie 85 170 Apple lie (port.) __ _ Macintosh — _ IBM PC 1 50 IBM PCjr — TRS 80 I/III/4 50 10 5 * Mid Range ($200-$600) Atari 800 140 125 Atari -800XL __ 4 0 * Atari 1200XL -- 50 Commodore 64 40 815 * Commodore 264/CV364 -- — Coleco Adam — 50 Low End (-$200) Commodore VIC-20 485 900 * TI 99/4A 395 14 00 * Atari 400 220 155 Atari 600XL — 70 * TRS 80 Color 150 275 Timex 1000 525 525 * Timex 1500/2068 -- 120 Sinclair ZX80/81 150 — Others 15 70 * March 1984 Source: the Yankee Group - v - and - 7 - Table ES-3 and Table 1-3 U.S. COMPUTER SALES TO THE HOME BY INSTALLED BASE AND DOLLAR VALUE* - 19 80 19 81 1982 1983 1984 (000s) High 116 145 141 342 1,2 60* Medium 3 '155 180 1,115 3,250* Low 25 60 1,940 3,570 785* Total Units 144 360 2,261 5,027 5,265 * Installed Base 144 504 2,765 7,792 13, 057 * Total $ $ 278M $3 9 3M $1. 4B $1.9B $3.IB * * excludes portables March 1984 Source: the Yankee Group 135 TABLE 5-3 MARKET SHARE BY UNITS OF COMPUTER VENDORS TO SCHOOLS 19 8 2 1983 1985 Apple 38% 39% 32% Tandy 3 5% 30% 2 4% Commodore 20% 20% * 24% 24% Atari 5% 3% 6% TI 2% 2% — IBM ___ — 10% Other — 2% 4% December 1983 Source: The Yankee Group TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER ONE OVERVIEW OF THE COMPUTER AND VIDEOGAME MARKETPLACE I. Market Success; Financial Debacle . 1 II. 1982/83 -- Convergence of the Videogame and Home Computer Markets? . 4 III. 1983/84: Convergence of the Home and Personal Computer Markets . 8 IV. The IBM PCjr: Targetting the Elite Consumer . . 13 A. The PCjr Hardware .13 B. Enhancement Slots . 16 C. Graphics .16 D. Software .17 E. Distribution . 18 F. Analysis .18 1. T he Target Markets .19 2. Production.20 Conclusion Animation, Soft Software, Layered User Friendliness 'atibilit tibilit .atibilit a Moving Target Product Trends in rH A pteR TWO the software market, computers and videogames Personal Computer Software in the Home The Game Industry: Finding its True Market Level VIII Market Segments Ma-jor Market Trends. . . • A. Pricing . Bi Distribution . • • C. Entry o f New Players n Advertising and the__ Product Trends and Windows Metaphors, Icons The Home Software Market: Videogames VI. CHAPTER THREE MAJOR ISSUES IN SOFTWARE DEVELOPMENT Distribution and Storage Media Mass Storage vs. Publication/Distribution . . . Technology Trends in Distribution Media . . . . A. Cartridges 1. Near-Term Cartridge Trends a. Larger ROMs Diversity and Databases VII. The Coin-operated Game Software Market C. Availabilit D. Reliability . . E. Standardization F. Game Software . VI II. b. EPROMs 91 2. custom ROMs . 92 3 . Mass Storage In Cartridges .93 B . Wafertape . 95 C. Audio & Digital Cassette Tape .96 D. Micro-Floppies . 97 E. Minifloppy Disks . 98 IXI, Piracy, Copyright and Media Issueg . 99 A. copyright and Computer Software . 101 1-. Patent Protection . 102 2. copyright Protection . 102 3. Trade Secrecy Protection . 103 B. Continuing Anti-Piracy Research . 104 CHAPTER FOUR SOFTWARE TECHNOLOGY AND ADVANCED COMPUTER GRAPHICS X, The Development of Broadcast Quality Graphics . 108 A. Game Level Resolution - the TI 9918A . . • 109 B. Broadcast Quality Graphics . 112 112 1. RAM Memory . 2. Monitor Resolution . 113 3. processor Limitations . 114 a. The Intel 82720 . 116 b. General Instrument's "AGILE" .H 7 118 c. Floating Point Processors . d. Silicon Graphics' "Geometry Engine" Film Quality Graphics . Graphics Standards . Natural Language Software . CHAPTER FIVE EDUCATIONAL SOFTWARE Overview . . A. Defining Educational Software ... , 1. " Learning From " . 2. " Learning With " . 3. " Learning About " . The School Market . . . A. Hardware . 1. An Apple for the Teacher . 2. IBM . B. Electronic Education . C. The Publishers .. 1. Milliken Publishing Co. ...... 2. Scott, Foresman and Co. . 3. McGraw-Hill . 119 119 120 122 125 126 128 12 9 132 133 133 134 134 136 138 139 140 141 4. IBM 143 .... 143 D, Market Segmentation . .145 HI.' Education at Home . " “ , ... 145 . A . size of the Market . .... 146 B . i.eading publishers . .146 1 . spinnaker . . . 149 2. The Learning Company . ..... 151 IV. Enter the Dragons . .... 151 ' A. Parker Brothers . ... 153 B . CBS Software . ... 156 C. Activision . .156 V. Summary . CHAPTER SIX SOFTWARE RETAILING .159 I_ Overview of the Industry . , .160 II. A Choice of Outlets . A. The Emergence of Software S pecialty Stores. 162 .166 1. Survey Results . 2 . gnft-ware-onlv vs. Har dware Integration . • 167 ... 168 3. Franchising . ... 168 a. The Program Store . .... 170 b. Analysis . ..... .... 173 B. Mass Merchants.. The Problem of Product Visibilit; Record Stores . Video Stores . The Retail Environment Lechmere Bullock' Packagin' Trainin' Software Publishers Book and Magazine Publishers Tom Snyder Productions Inc Electronic Arts The Role of the Distributor Toy Supermarkets Child World ....... Analysis . Bookstores ....... Commuter Books, Magazines, and Catalogs Atari .. Electronic Distribution and Publishing Texas Instruments 98 198 201 202 LIST OF EXHIBITS CHAPTER SEVEN SUMMARY AND CONCLUSIONS Table 1-1 THE HOME VIDEOGAME MARKET Table 1-2 COMPUTER SALES TO THE HOME BY VENDOR AND MACHINE . Table 1-3 U.S. COMPUTER SALES TO THE HOME BY INSTALLED BASE AND DOLLAR VALUE (,000s ) . . . .. The Product Table 1-4 TECHNICAL SPECIFICATIONS FOR THE IBM PCjr. . . . Figure 1-1 SOFTWARE OPERATING SYSTEMS, ENVIRONMENTS AND APPLICATIONS Table 1-5 STANDALONE VS. TELECOMMUNICATING TERMINAL FUNCTIONS IN THE HOME Table 2-1 REVENUES OF SELECTED SOFTWARE PRODUCERS Table 2-2 ESTIMATED REVENUES BY SOFTWARE CATEGORY FOR THE HOME MARKET Table 2-3 COMPUTER PROGRAMS PURCHASED OR RECEIVED WITH CONSOLE BY SOFTWARE CATEGORY AND COMPUTER PRICE CLASSIFICATION 1983 . . Table 2-4 PRODUCT OBSOLESCENCE IN THE COMPUTER AND VIDEOGAME MARKETS (12/83) . . . Figure 2-1 FREQUENCY OF COIN-OP PLAY IN U.S Table 2-5 COIN-OPERATED GAMES BASED ON NEW TECHNOLOGY INTRODUCED AT AMOA (OCTOBER 1983) . Figure 2-2 PATTERNS OP COIN-OP GAMERLAYING AMONGST U.S. YOUTH (13-17 YRS.) 83 Figure Chapter Table Table Chapter Table Table Table Table Table Table Figure 9-3 CORRELATIONS BETWEEN OWNERSHIP OF A HOME VIDEOGAME CONSOLE AND PATTERNS OF COIN-OP GAMEPLAYING . Four 4-1 SCREEN RESOLUTION LEVELS OF SELECTED COMPUTERS AND VIDEOGAME CONSOLES (12/83) . 4-2 INTERNAL ARCHITECTURE AND DATABUS SIZES FOR SELECTED MICROPROCESSORS . . 115 Five 5-1 EDUCATIONAL SOFTWARE MARKET, 1982-1985 (12/83) . 5-2 VERSIONS OF LOGO. 131 5-3 MARKET SHARE BY UNITS OF COMPUTER VENDORS TO SCHOOLS . 5-4 EDUTAINMENT VS. SCHOOL SOFTWARE (12/83) . 5-5 HOME COMPUTER EDUCATIONAL SOFTWARE UNIT SHARE BY COMPUTER. 5-6 EDUCATIONAL GAMES nWROOUCED BY 52 SELECTED VENDORS AT CES, JUNE 1983 . . 152 5-1 ENTERTAINMENT/EDUCATION SOFTWARE ^ SPECTRUM . 6-1 SOFTWARE FOR HOME COMPUTERS: 1983 MARKET SHARE OF DISTRIBUTION OUTLETS (12/83) 163 6-2 SOFTWARE FOR HOME COMPUTERS: 1984 PROJECTED MARKET SHARE OF DISTRIBUTION OUTLETS (12/83) . 164 Table 6-3 SOFTWARE SPECIALTY STORE FRANCHISES (12/83) 165 6-4 FRANCHISING REQUIREMENTS FOR SOFTWARE SPECIALTY STORES (12/83) . . 171 Table 6-5 PROFILES OF SELECTED MICROCOMPUTER MAGAZINES (RANKED BY TOTAL CIRCULATION.179 Table 6-6 COMPUTER-RELATED BOOKS: 1981-1983 . . 180 Figure 6-1 COMPUTER-RELATED BOCKS: 1981-1983 . . 161 Table 6-7 BOOK PUBLISHERS IN THE SOFTWARE MARKET.154 Table 6-8 RETURNS POLICIES FOR MAJOR INDEPENDENT SOFTWARE DISTRIBUTORS (12/83) .... 195 Table 6-9 DIRECT SALES BY VENDOR IN 1983 AS A PERCENTAGE OF TOTAL DISTRIBUTION (12/83).2C4 Table 6-10 AVERAGE SALES PER SQUARE FOOT OF TOTAL SPACE (12/8 3) 205 Table 6-11 AVERAGE RETAIL STOCK TURNOVER (12/83) . 206 EXECUTIVE SUMMARY In 1983, sales of computers to the home grew by over 200% to about five million units, yet losses by major vendors totaled over $1 billion. Such enormous losses, in an exploding market and by large companies seasoned in the vagaries of consumer behavior, are without precedent in the annals of American business. Shakeouts are a normal corollary of most rapidly growing businesses, but typically occur on a significant scale only when growth slows or actually declines. The videogame business, both coin-operated and home, has also had its share of casualties. In the arcade arena, both coin-drop and manufacturing revenues plummeted for the entire industry. Major arcade operators count themselves lucky if revenues are within 20% of 1982 levels, on the home front, the shakeout has been even more severe. Mattel, Entex, and Starpath are out of the hardware' business, and companies as large as Timex and as small as Spectravideo are struggling. Even companies such as Milton Bradley, which tried to approach ’ the industry on a niche market and peripherals basis, have been severely affected. Game console sales for 1983 are down to five million units from about eight million in 1982. Cartridge sales are up to about 75 million units from 60 million in 1982, but revenues are flat at $1.5 billion. (See Table ES-1) There is a 20 million-plus cartridge overhang on the market, and closeout cartridges at prices below $10 and even $5 will clog the pipelines well into the second quarter of 1984. The software market essentially is a derivative or dependent market — it is driven by the size of the hardware installed base, and its possibilities are shaped by the technology and performance characteristics of that base. Because computers and videogames emerged at around the same Table ES-1 THE HOME VIDEOGAME MARKET Consoles 1981 1982 1983 1984 Atari 2600 3.10 5.10 3.00 1.80 Atari 5200 0.25 95.00 0.70 Colecovision 0.55 1.10 0.50 Intellivision 0.72 1.10 0.35 0.15 Odyssey 0.60 0.40 0.20 0.05 Other 0.20 0.15 0.10 0.05 Total Units (M) 4.62 7,95 5.70 3.25 $ Millions $577 $1,320 $540 $263 Software 1981 1982 1983 1984 Units (M) 34.5 60.0 75.0 65.0 $ Millions 800 1.500 1.3 50 1.100 Table ES-2 COMPUTER SALES TO THE HOME BY VENDOR AMD MACHINE Commodore 64 Commodore VIC 20 Timex 1000 Timex 1500/2068 Sinclair ZX80/81 Source: Yankee Group Table ES-3 ?VV U.S COMPUTER SALES TO THE HOME BY INSTALLED BASE AND DOLLAR VALUE* (December 1983) ' 000 1980 1981 1982 1983 1984 HIGH 116 145 141 342 2, 050 MEDIUM 3 155 180 1,115 2., 4 2 5 LOW 25 60 1,940 3,570 2,630 TOTAL UNITS 144 360 2,261 5,027 7,105 INSTALLED BASE 144 504 2,765 7,792 14,897 TOTAL $ $ 27 8M S393M S1.4B $1.9B $2.95B * = excludes portables (For machines included in high/medium/low price classifications see Table 1-2, ) VI significant way into the consumer side of the home market. Both companies (and Tandy) already wave a strong presence in the business-from-home and work-at-home markets with their existing product lines. Although revenues from software, the "razor blades" of the computer industry, will surpass those of hardware by the end of the decade, the size of the major software vendors is still surprisingly small. The leading independent software vendors for example, each had revenues in the $10-$40 million range in 1982, and in the $30-$70 million range in 1983. By comparison, Activision had revenues of $125 million in calendar year 1982, before declining to around $90 million in 1983. (See Table ES-4.) For all the successes of the independent software vendors, the companies generating the largest revenues from software remain the computer hardware companies. Of these, IBM is the clear leader, with estimated 1983 revenues from microcomputer software of over $200 million. The advantages for the hardware companies are clearly established distribution, a lead time in developing system and (key) application software, brand recognition, and leverage in advertising, marketing, etc. Definition of Major Markets The categories for computer software in the home are evolving continually. The following is the Yankee Group’s classification of the products currently on the market. Revenue and unit estimates for each category are provided in Table ES-5. • System/Utility . This category is small, but essential, because without system software (i.e., operating systems, programming languages, diagnostic programs, etc.), the computer cannot function. At the consumer level there is a trend to bundle the necessary system software, or. to build it directly into the ROM memory in the machine, as in BASIC. Table ES-4 REVENUES OF SELECTED SOFTWARE PRODUCERS "ms mr ■BlfR Igp- jlpfe'-Aot i vision 1982 -EF 1983 Chief Products 125 90 Pitfall, Decathelon, Bp-Atari soft n/a 75 Ifr Hroderbund 3-5 7 Choplifter, Bank St. |B 5 . (jommodore 18 63 Infocom Series Hi:'? Digital Research 22 46 CP/M, CP/M-86, ' §11-- Resware 0 10 Concurrent CP/m Omnicalc, Heswriter Up' :i bm 80 250 Third Party Software pi .Information Unlimited 4 . 7 Easywriter Lotus Development 0 40 1-2-3 Micropro 25 36 Wordstar fe. M Lcto soft 32 70 MS-DOS, Xenix, Basic pL; . Parker Brothers 75 110 Star WArs, Q-Be-rt p; Peachtree 9.5 18 Accounting f| ' Software Arts 2 6 TK Solver!, VisiCalc P’ Tandy/Radio Shack 53 77 Superscript ■/ VisiCorp 36 53 VisiCalc, Vision etc. Writer December 1983 Source; the Yankee Grou; Entertainment . Games have been associated with computers since the earliest days. They constitute the single largest market for home computer software. Although many of the titles are simply games brought over from the arcade and home consoles, there is also a significant market unique to computers for text and strategy games. Entertainment programs are used by mote members of computer-owning households than any other software category, and constitute the largest aftermarket, in unit .terms, across all brands and price classifications (see Table ES-6). Table ES-5 ESTIM ATED REVENUES BY SOF TWARE CATEGORY - FOR THE HOME MARKET 1983 1980 Education . This is the fastest growing home market and, even more so than entertainment, is tied to the presence of children in the home. It frequently is confused with computer "literacy" which is the skill of programming, not an applications market. Education is the first market after entertainment and business software that has been able to establish a separate marketing identity for retailers. Business/ productivity Business/Productivity . This is the most developed market, in terms of range and quality of software, and covers a number of distinct product areas aimed at professional users. These include spreadsheets, database managers, word processing, graphics, and telecommunications software. This is the only category of software used in the home that is still distributed primarily by computer specialty retail outlets. Home Budget/ neg. Improvement/ Misc. * Home educational market only December 1983 Source: the Yankee Grou; Home Business/Personal Budgeting . Originally limited to "make-work" applications such as checkbook balancing and recipe filing, this category has improved to the point where is it beginning to offer real utility. It includes both simplified versions of professional level programs (word processing, mail lists, spreadsheets), and programs in such areas as tax preparation, personal time scheduling, and household budgeting. Self Help/Miscellaneous . Essentially a residual category, this covers "how to" programs on everything ranging from repairing computers to learning a foreign language. Because it is relatively undefined, it has had difficulty getting retailer support, but clearly offers significant growth potential over the longer term. - X Table ES-6 COMPUTER PROGRAMS PURCHASED OR RECEIVED WITH CONSOLE BY SOFTWARE CATEGOR_Y AND COMPUTER PRICE CLASSIFICATION, 1983 [- Price Classification*- Ca teqor y Average High Medium Low En ter tainment 1.2 1.4 1.-8 1.1 Education 0.5 0.7 0.7 0.5 Home Budgeting 0.3 0.5 0.2 0.3 Business 0.3 1.5 0.3 Q .1 All Programs 2.3 4.1 2.9 1.9 Note: Averages are weighted for all owners using zero for those not buying the specific class of software. * For machines included in each price classification, see Table 1 - 2 . December 1983 Source: the Yankee Group he Game Software Market &• ' The game software market is in a transition.,, phase. Apart " rom the standard litany of industry problems ranging from approaching saturation to competition from computers, there are i’two factors which make 1963/1984 a transitional phase. First, there is a desperate effort by arcade manufacturers in particular to force a technological breakthrough (preferably using videodisc technology) that will allow designers the Hjjg creative freedom they need. Other technical advances are being realized in the new generation of graphics chips that will soon be flowing from companies like Intel, Motorola, General Instrument, and Amiga. g;tpiS The second major consideration is finding the game industry's true market level. 1983 has seen a fallback from . 1982 levels, particularly in the arcades, with a decline of around 60% at coin-drop and around 85% at the arcade manufacturing level. The current decline in videogame interest i| and revenues is part of a redefinition of the industry in terms )' of its core participants, the serious gameplayers (see Table ES-5) . This group is obviously much smaller than the fad market, but it is still likely to be substantial. Moreover, as the industry moves through its technological rite of passage (the equivalent of the shift to sound in movies, or from mono to stereo in records), its ability to reattract larger numbers of (occasional) players should increase dramatically. However, even once the videogame industry' cuts its technological teeth, and matures in artistic terms, it will continue to experience the revenue volatility of other entertainment industries, such as film and records, which rise and fall with seasonal regularity. LIGHT -16.3% Zx a weak (30%) less than lx a month HEAVY - 47.2% MEDIUM-36.5% 1-3x a month HOME GAME OWNERS NON HOME GAME OWNERS t-Zx a weak (17.2%) ijtiiAttufl R'-Arlvirtfogamftptoyera AVERAGE TIME SPENT PER VISIT LIGHT tow HEAVY -SUM, LIGHT 23 * HEAVY ■ 36* LIGHT HEAVY AVERAGE AMOUNT SPENT PER VISIT LIGHT HEAVY H MACHINES PLAYED PER VISIT' $2.50 52.00 SI 50 PLAY FREQUENCY BY GENDER MALE FIGURE ES-1 PATTERNS OF COIN-OP GAMEPLAYING AMONG U.S. YOUTH (13 -17 YEARS) 1903 Oalllro Po'<<9 v'dto game olayera FEMALE MEDIUM • 1-3 times oer month LIGHT - less than oncel a monlh HEAVY at least once a week MALE - 52% FEMALE - 48% FIGURE ES-3 OWNERSHIP OF A HOME VIDEOGAME CONSOLE AND PATTERNS OF COIN-OP GAMEPLAYING IrAGE TIME SPENT AT LOCATION I AVERAGE EXPENDITURES PER VISIT | AVERAGE » GAMES PLAYED PER VISIT XIV Software Pricing The following factors are forcing software prices down: • the proliferation of vendors and titles, and the glut of product in the videogame market; • the fact that mass market retailers are not as committed to maintaining high margins as the computer specialty stores; • the falling price of hardware consoles, which makes consumers unwilling to pay $35 to $5D-plus for a software program when they are paying only $50 to $200 for the console; • simplified and low-cost versions of high-cost programs; • economies of scale from mass production — for example, Commodore has gone from four-inch to five-inch wafers with significant cost savings; and • ability to amortize development costs over an increasingly large installed base. Advertising and the Cost of Entry One of the most critical issues for companies contemplating entering the consumer software market is the rapidly rising cost of entry. The current success story is Lotus Inc., which has managed to make its innovative "1-2-3" program an industry standard in a few short months since its full launch. However, Lotus spent $1 million in three months, and $3 million in its first year to establish its dominant position. The national launch of a first rate title in the crowded videogame market costs about $1 million in advertising. With the current downturn in the market, even licensed arcade "hits" (such as they are) cannot ensure publishers the massive sales of 1981 and 1982. In 1982, for example, Coleco earned about $11 million on a single title, "Donkey Kong." The top arcade The Cutting Edge of Software Development Though use of functional "metaphors" has greatly advanced the "user friendliness" of computers, they still represent only the first link in a long chain of software evolution. It will take many thousands of man-years of software development before computer usage is sufficiently flexible to become customized so that every "personal" computer is in fact "personal" to its primary user. Major advances in artificial intelligence and natural language interfaces will be necessary for present goals to be realized. Until late 1982, educational software developed relatively slowly, compared to the development of entertainment, business/ productivity, and self-improvement software. The educational Despite the limitations ot the current generation of "user friendly" interfaces, they represent a critical step forward in the mass diffusion of computers. The metaphor approach focuses attention on the issue of "learnabi1ity,’ which may be defined as the ability of the user to quickly gain a conceptual mastery over the product that allows progress from simple initial exploration to more complex subsequent uses. As computer use and ownerhip move further and further away from the existing computer community towards naive and first-time users, learnability or "intuitive obviousness" become increasingly important. Building on a user's prior experience and understanding is the easiest and fastest way to productive use of the computer. titles in 1983 that Coleco has licensed, land 'Mt Do," will not earn anything near 'earlier hit, despite massive advertising hardware base. such as "Time Pilot" the revenues of the and a larger installed The Educational Software Market software that existed was directed primarily toward school use, with occasional modifications for the home. During 1982, several textbook publishers such as McGraw-Hill and Scott, Foresman tentatively tested the waters, and decided that the electronic education market was well worth pursuing. Not only is educational software a logical extension of textbook publishing, it also represents an opportunity — albeit a risky one — for the traditionally staid publishing industry to give itself a much needed financial shot in the arm. By first quarter 1983, most of the major textbook publishing houses, as well as several trade publishers (e.g., Simon & Schuster, and Doubleday), had entered the field, and computer vendors were gathering them avidly into their respective folds. The Yankee Group estimates that total educational software sales accounted for about $80 million in 1982, or 10% of the total 'home/personal software dollar volume at retail, of which approximately $55 million was school software. In 1983, the Yankee Group estimates that educational software accounted for about $150 million in sales, divided almost equally between the home and school markets. (Both educational and business software had smaller shares of the total industry in 1983, with entertainment, system and home business making up the difference.) By 1985, the Yankee Group believes home educational software will have outpaced school programs by almost 100%. (See Table ES~7.) During 1984, the home market for educational software will surpass the school market in unit terms. 1983 was a transitional year for the market, as many new players joined the ever-expanding roster of authors and publishers. Early and mid-1984 should see a flurry of acquisitions and joint ventures as the market nears a saturation point (widespread duplication of program subjects and a glut of titles), especially in terms of new entrants. x Vll Hg?!. ft . Table ES-7 jj . Educational Software Market: 1982-85 (in $millxons) •)' School Home Total 1982 55 25 80 1983 77 73 150 1984 125 240 365 1985 170 330 500 Source: The Yankee Grou Electronic Education So far, the approach to electronic education has been to complement and supplement (to a limited extent) the traditional •curriculum. Most school software cross-references one or more textbooks, with documentation suggesting ways to the teacher to incorporate the text on the screen with that in the book. McGraw-Hill, which had 10 educational programs on the market by first quarter 1983, has concluded that software alone is not' enough; it must be integrated with print-based, computer-oriented materials. The publisher will be placing strong emphasis on developing print and electronic learning products at the junior high level initially, and subsequently for elementary school students. There are four broad categories of publishers for the school market: 1. Mom and Pop operations — former educators who market their own products, often through mail order. Most programs are considered of poor quality and do not sell well; 2 Cottage industry software developers small (under $3 million) companies such as Edu-Ware (Agoura CA) and PDI (Greenwich CT) that have acted quickly to meet specific needs, such as curriculum enrichment or remedial programs; 3. Small- to medium-sized publishers -- such as Milliken, and Sterling Swift (Austin TX), that built early positions, but are now facing increasing' competition; Big publishers — McGraw-Hill, Random House, Scholastic Inc., etc., which have large stables of authors and more capital to invest in new products. 4. - xix - the Market In 1982, educational, software sales into the home ) were around $25 million. The Yankee Group sales to almost triple, to nearly $73 million. By 1984, home education software will have outdistanced software, and will continue on that course until the is divided approximately 70% to 30% between home and software by 1985. While reports of the educational software market's thus far have encouraged myriad companies to develop market products, almost none has shown a profit. Although education revenues range as high as Houghton s $8 million in 1983, product development and marketing usually have exceeded sales. Still, the Yankee Group believes that educational software potentially a profitable mass market category, depending on: • significant product innovation; • attractive pricepoints; a brand and author recognition; a broader advertising exposure; • retailer understanding of, and commitment to, the category. Software Distribution Several elements distinguish computer software sales from videogame sales, including: • pricing; • sales support; a marketing; - XX 0 end users; 0 computer use vs. game console; e level of documentation. The Yankee Group believes that no single kind of outlet will emerge pre-eminently across the computer software field, but rather that several competing channels will co-exist, each marketing according to its individual strengths. Mass merchants and record stores, for example,' are likely to specialize in Top 40 or "hit" computer and game software, with computer hardware and software specialty stores handling the more complex applications packages, backlists, simple but slow-moving lines, etc. Table ES-8 shows the Yankee Group's estimates of market share by distribution outlet for each category of software. In 1983, the first full year of operation for many software specialty stores, they were able to garner a respectable percentage of software sales in each category. The Yankee Group expects their share to grow in 1984, providing . competition mainly to computer stores, specifically in entertainment software. 1984 will also see the erosion of mass merchants' market share in entertainment programs as software downloading for permanent home storage emerges as a new form of distribution. The Emergence of Software Specialty Stores Software specialty stores can be divided into two groups: those that sell software (and accessories) only; and those that also sell the full range of hardware, including computer consoles, printers, disk drives, joysticks, etc. In early 1983, there were fewer than 10 software chain operations and perhaps three times that many independent - xxi - Table ES-8 Software for Home Computers: 1983 Market Share of Distribution Outlets Ent 1 mt. Home Mgmt./ Productivity Educ. Self-. Mi sc 4 5% 20% 35% 15% 15% 12% 8% 11% 16% 35% 25% 40% 9% 10% 10% 15% 5% 18% 10% 10% 4% 2% 4% 3% 6% 3% 8% 6% Merchandisers/ Stores Stores Stores Order Catalog Showrooms Stores* * •Includes programming, "how-to," and personal programs (e.g, recipes). ••Includes book and record stores, drugstores, audio/video stores, grocery stores. Source: The Yankee Group stores. By yearend 1983, the existing chains were to have tripled their number of stores, and there were twice as many franchise operations as there were i (See Table ES-9) xxlr - Table ES-9 Software Specialty Store Franchises* Existing Store/Chain Number of Stores in Mid 1983 Yearend 1983*** ComputerLand** 5 50 Information Please! 1 9 Microcon 6 21 The Program Store 7 24 Programs Unlimited 18 50 Software City 12 100 Software Emporium 2 26 Softwaire Centres International 20 50 New Store/Chain Computer Center — 7 CompuShack — 20 Micro Concepts -- 5 Software Galeria — 30 Softwareland -- 8 * Includes company-owned stores and franchises ** ComputerLand Satellite stores only *** Dealer projections Source: The Yankee Groui flithe explosion of software specialty stores has come about ;•'several reasons, including relatively low start-up costs; Ijiferation of software titles beyond the means of existing • jets; high margins (30%—40%); and because the stores have ■ved as an entry point into the computer retailing industry •those who had previously missed the opportunity. omputer Books, Magazines and Catalogs g|-": There are approximately 3,000 paperback computer-related pj.'tles now in print, and bookstores expect every home computer ipiuyer to purchase three to five of them this year. A Yankee proup survey of the major computer book publishers showed a fJ00%-plus increase in new titles from 1982 to 1983. The pfiphasis is clearly on programming or computer-specific titles targeted mainly to the computer hobbyist reader who is eager for information. H This unslakable thirst for computer information has fueled ||he magazine industry as well. No one is certain of the exact Humber of computer magazines available (any number cited here l^ill be obsolete at the time of publication), but reliable ([estimates put the total between 160 and 175. The Problem of Product Visibility | : One of the most difficult and important problems for the computer software industry is bringing the product before the potential user. Other retail software products all have a market mechanism for exposing consumers to the product — Videocassettes and discs have movie theatres, records have radio, videogames have arcades. So far no satisfactory mechanism has been found to solve the two aspects of this problem: lack of massive product visibility and limited hands-on access to the product for evaluation. - xxiv The Yankee Group expects the use of mail order for software to rise with the entry of major catalog publishers and direct mail vendors such as Sears and American Express. The new entrants will bring improved product presentation and evaluation, sophisticated list management, financial strength, and overall .marketing skills. In an examination of the software retailing industry, it is important to consider the source of the products the publishers. For many retailers, software represents a dramatically new approach — the difference between manufactured products and published products. Marketing published products requires an understanding of issues such as copyright, piracy, licensing and royalties, as well as product identification with individual authors rather than anonymous manufacturers. These factors would appear to make a strong case for the role of bookstores and record stores as viable distribution channels, but they do not necessarily give these outlets the edge against the greater experience of specialty store retailers, and even mass merchandisers. The Role of the Distributor In 1982, about 60% of U.S. software sales went through distributors. Much of this dollar volume was from third-party publishers, and the remaining percentages were divided among the major computer manufacturers who published and distributed their own software. Chief among these were TI and Atari, both of which have initiated policies which have alienated third-party authors and which may result in lowering their respective market shares significantly over the next two years. The national software distribution for the consumer market is shared by three distributors and several rackjobbers. In addition to these major companies, there are a growing number of small local distributors and national distributors that on a specific segment of the industry, such as Soft Kat an. Nuys CA), a national distributor of educational software. Electronic Distribution and Publishing Sp The Yankee Group has tracked the development of electronic publication and distribution in a number of previous reports. For many purposes, electronic publication and distribution is essentially the same activity, but for purposes of conceptual clarity, the Yankee Group defines publication as the ^accessibility of software programs, but only on-line, or in -volatile storage e.g., Control Video Corporation's Gameline ■Service or Mattel's Playcable. Electronic distribution is defined as the availability of a non-volatile copy of the program to the retailer or end user, e.g., the various product offerings by Xante (Tulsa OK), Romox (Campbell CA), and Cumma Technology Corporation (Sunnyvale CA). While both of these features could be combined into a ^single service offering non-volatile distribution to the home/end user, to date the various electronic teledelivery services offer either non-volatile distribution to retail, or volatile publication/distribution to the home. ■ The Yankee Group believes that the economics and convenience of electronic delivery of software and services are so overwhelming that it is only a matter of when, not if, it will significantly displace more conventional methods of distribution. However, as noted in previous reports, there are a number of factors apart from economic and technological feasibility that influence the speed and scope of teledelivery services. These include the changed nature of the product, problems associated with billing and payment, and the psychodynamics of' the shopping experience itself. Clearly however, in 1984, there will be a major thrust by various vendors to make electronic delivery a commercial reality. XXVI In the home environment, the rising installed base of computers, and the declining price of modems are attracting companies eager to launch products as soon as critical mass is reached. Although a variety of competing delivery channels are still being tested (telephone, cable, DBS, FM sideband, etc.), several companies, including Atari/Activision, Coleco/AT&T, and The Games Network (now TGN Inc.), will be testing on-line game services in 1984. The various videotex offerings by Knight-Ridder, Times Mirror and Keycom will move beyond pilot testing into limited commercial testing in 1984, and CompuServe will be adopting a much more aggressive stance. The Yankee Group therefore expects the next two years to offer rapid advancement in the area of teledelivery, although none of the current contenders have yet shown products that are clearly destined for success. Home of the Future will be closely monitoring developments in this fast moving field through a series of special reports on electronic publication and distribution in 1984. rER ONE AND VIDEOGAME MARKETPLACE :ers to the home grew by over 200% , and yet most of the major vendors, money, a great deal of money, iruments alone accounted for : $1 billion in 1983, and the latter Such enormous losses, in an :ge companies seasoned in the , are without precedent in the Shakeouts are a normal corollary - ■ 2 the stars of 1982 with revenues of $75 million, is now reduced to a holding operation liquidating inventory; Fox Videogames has been closed down; Data Age is in Chapter 11; U.S. Games, Zimag, Games by Apollo, and others, are no longer around. Even Activision, the blue-chip of the game startups, and one of the best managed companies in the industry, announced third quarter losses of $2.9 million, down from profits of $8 million at the same time last year, with a further loss projected for the final quarter of 1983. Game console sales for 1983 are down to five million units from about eight million in 1982. Cartridge sales are up to about 75 million units from 60 million in 1982, but revenues are flat at $1.5 billion. (See Table 1-1) There is a 20 million-plus cartridge overhang on the market, and closeout cartridges at prices below $10 and even $5 will clog the pipelines well into the second quarter of 1984. Obviously, the apparent convergence of the videogame and home computer markets was at least in part responsible for the declining fortunes of some computer vendors, such as Mattel and Atari, that were in both markets. What is noteworthy, however, is that in the midst of the markets' turmoil and financial disaster, new entrants continue to emerge, hoping to find their niche and fortunes. The potential markets for interactive electronic entertainment and home terminals are both so huge that entrepreneurs and companies continue to be attracted, even in the face of unmistakable risks. This report focuses on the dynamics and trends of the home computer and videogame software markets. There are large areas of overlap in these markets, and both are evolving rapidly — in technology, distribution, pricing, marketing, etc. The software market essentially is a derivative or dependent market, in the sense that it is driven by the size of the hardware installed base, and its possibilities are shaped by 3 Other Source: the Yankee Group $577 $1,320 $540 $263 1981 1982 1983 1984 34.5 60.'0 75.0 65.0 800 1.500 1.350 1.100 December 1983 TABLE 1-1 THE HOME VIDEOGAME MARKET Atari 2600 Atari 5200 Colecovision IntellLvision Odyssey Total Units (M 3 Millions Software Units (M) $ Millions with •due a ^programming, word processing, education, and productivity/ siness, are used more frequently and for longer periods of jpl Further, there are wide variations among different brands, fferent price categories, and among different categories of ers (age, occupation, sex) within the household. (Tables 1-2 d 1-3 give the Yankee Group's breakdown of the various price Stegories, unit sales and installed bases.) None of this is “l ’that surprising perhaps, but it does complicate enormously ie simple vision of low- and mid-range computers as sentially sophisticated game consoles. p/;j Clearly the convergence, or at least the overlap, of the pame and home computer market is a critical part of the •dynamics of both.' Atari failed to see this convergence, or, pr strategic reasons, opposed the trend too long and paid the rice in seeing its. dominance of both markets rapidly erode, as pmpetitors such as Coleco and Commodore trampled over its arefully planned pricing and positioning schedules. the technology and performance characteristics of that base. 1983 has been an especially tumultuous year. The withdrawal of Texas Instruments (which by yearend 1983 had the largest installed base of any single model of computer in the U.S.), and the concurrent entry of IBM will exert a powerful influence over the market's direction in 1984. Therefore, it is necessary to provide a brief overview of the home computet and videogame hardware markets as a context for the detailed analysis of the software market that follows. II. 1982/83 — Convergence of the Videogame and Home Computer Markets? In the last quarter of 1982, fueled by a series of price cuts and rebates, the home computer market exploded. Suddenly price competitive with videogame consoles, home computers rode to success on the back of the technology (video chips, ROM cartridges), distribution (mass merchants, catalog showrooms) and software of the videogame market. They were able to achieve this extraordinary growth because retailers and consumers were prepared for computers as simply a new kind of multifunctional game console. Based largely on software sales for the 16K-and-under mass market computers, which leaned overwhelmingly towards games, this conventional wisdom emerged: the home computer market consisted of essentially three segments — a high-end "professional" market, a low-end "game" market, and a currently limited, mid-range "elite consumer" market. Clearly this perception captured something of the truth of the situation. Nevertheless, the entire phenomenon of computers in the home turns out to be far more complex than vendors and retailers had anticipated. TABLE 1-2 VENDOR AMD MACHINE COMPUTER SALES TO Mid Range ($200 - $600) Atari 800 Atari 800XL Atari 120 OXL Commodore 64 Coleco Adam Low End (-$200) Commodore VIC 20 TI 99/4A Atari 400 Atari 600XL TRS 80 Color/Micro Timex 1000 Timex 1500/2068 Sinclair ZX80/81 Others (NEC, Spectravideo, Tomy, etc) Total December 1983 140 125 --- 70 — 50 40 820 — 50 485 9 50 395 1,450 2 20 155 85 150 275 525 545 — 120 150 — 15 40 2, 261 5,027 Source: Yankee Group Apple II/e TRS 80 I/II1/4 1982 1963 170 115 7 Table 1-3 . U.S COMPUTER SALES TO THE HOME BY INSTALLED BASE ~ 1 AND DOLLAR VALUE* (December 19 8 3) 1980 1981 000 116 145 3 155 25 60 1982 1983 1984 141 342 2,050 180 1,115 2,425 1,940 3,570 2,630 360 504 $3 9 3M 2,261 2,765 $1.4B 5,027 7,105 7,792 14,897 $1.9B $2.95B TOTAL UNITS INSTALLED BASE TOTAL $ 144 144 $27 8M (For machines included in high/medium/low price classifications, see Table 1-2.) Source: The Yankee Group * = excludes portables - 8 - Equally clearly, however, the computer phenomenon is about computers, not higher-priced alternatives to game consoles. It is important to recognize that the apparent crossover of the videogame and computer markets disguises the emergence of two simultaneous and overlapping, but distinct, phenomena — the emergence (and relative decline) of the dedicated game console market, and the emergence of the market for computing power in the home. Home computer vendors like Atari, Timex, and Texas Instruments may be experiencing serious financial difficulties, but their difficulties are different in kind, as well as degree, from those besetting the home videogame industry. III. 1983/84: Convergence ol the Home and Personal Computer Markets Following on the heels of the convergence/crossover of the game and home computer markets is the convergence of the home and personal computer markets. Defining these two markets has always been difficult, and has typically hinged on distinctions, either singly or in combination, of pricing, performance, distribution, or applications. In reality, the distinction was not one so much of "business" vs. "home" computers as it was one of "functional" vs. "pseudo-functional" computers. The overwhelming majority of computers sold into the home in 1982 and 1983 have been of the 16K-and-under variety. While some of these models can be upgraded with greater or lesser difficulty and cost, and while with enough diligence and ingenuity the machines can be made to perform a variety of tasks, the fact is that except as game-playing and computer literacy machines, the 2K-16K mass market computers have very limited utility. This limited utility arises from four different factors: • sophisticated vs. naive users . The same computer in the hands of a novice and "hacker" obviously has very different utility. In the business market, as late as 1982, IBM and Apple sold 16K entry-level versions of their personal computers. However, apart from the fact that the overwhelming majority of these computers were upgraded at the time of purchase to at least 48K of memory, their users typically were relatively knowledgeable and/or diligent in extracting real productivity from the machines. e console only sales . In an attempt to achieve volume economies of scale rapidly, vendors and retailers concentrated on the console-only sale as a way of lowering the price of entry into computing. This approach has been very successful at one level, because unit volume has soared. At another level, it has created problems because consumers have been hyped on a presumed utility that a limited memory, CPU/keyboard terminal cannot provide. To maximize a computer's utility, it needs five basic components: CPU/keyboard, display, mass storage, printer, and modem. Clearly, not every user will have a need for a printer or modem. Nevertheless, a computer's utility is directly related to the degree to which it is a "system" rather than simply a CPU/keyboard, and most especially,.the degree to which it is capable of "communicating," as well as functioning as a standalone. e . microprocessor and memory limitations . The first generation of computers in the home suffers from the constraints of 8-bi't processors and limited memory. Of these, memory size is the more important, although microprocessor speed, and the inability to address more than 64K of memory without using bankswitching techniques, are significant issues. With only 16K or less of memory, however, only the most elementary programs can be run, and none of the new "user friendly" and "integrated" software that is emerging from breakthroughs in the business market can be used. 10 In the consumer market, first-time users do not have the same productivity motivation to work through complex manuals and operating instructions to make their 16K units useful. • software limitations . The software available for most mass market computers through 1983 has been very limited in its scope, power, ease-of-use, and usefulness. Applications such as word processing and spreadsheets take more than 16K, and attempts to scale down educational packages (for example, Control Data's "Plato" series) for home use have been less than successful for these low-end machines. During the last half of 1983, these limitations changed significantly as more powerful machines were introduced at lower price points; the lines between home and personal computer ace blurring rapidly. Several factors have brought about the change: • shortcircuiting the novelty market . At the beginning of 1983, vendors such as Commodore (with the Ultramax), Timex (TS1000), TI (99/2), and a host of would-be competitors (Video Technology, Unisonics, Sanyo, etc.) had products designed for the 2K "computer literacy," "student,” or "novelty" market. Above these were the 16K "mass market" computers, and above them the 64K-and-up "professional" or business computers. Because of the pricing wars between TI and Commodore, these distinctions rapidly became obsolete. The 2K computer has been replaced by the 5K-1GK computer as the entry level, "literacy" product, and, driven by Commodore, 64K computers have become the mass market computer. After June 1984, the Yankee Group expects the home market to be dominated by 64K-plus computers. • shifting from console to system sales . Coleco's entry into the home market with the "Adam" computer signals a .trend that the Yankee Group believes will be very Some retailers have expressed reservations about the }■• "system* sale approach, arguing that it is harder to make ar. Br initial sale of $500 than it is to start lower ar.c nave t. peripherals sold as add-ons. Their main reservation, however, t is that to date the consoles have been sold at or near cost while the peripherals have reasonable margins (25%—30%). Packaging computer and peripherals as a system poses the threat that the system will be discounted and that margins on the §/ total package will therefore be significantly smaller. These are real concerns, but overstated. The Yankee Group believes that after the punishing (and unnecessary) losses of 1983, all the vendors except Commodore will focus in 1984 on significant in 1984. This trend is a twofold shift in product positioning and pricing. Rather than the hype of 1983, and the emphasis on games and computer literacy (programming) as the primary motivations for purchase at the mass level, vendors increasingly are focusing on real utility and applications. The most important of these applications' are word processing and education, but others, such as database accessing and electronic mail, also are starting to emerge. Vendors cannot provide this utility for $100, however, and the Yankee Group expects to see a reversal of the exclusive focus on pricing that characterized the market in 1983. It therefore expects to see the $50Q-$1,500 segment of the home market show a major boost in 1984, as vendors and retailers move to system rather than console sales and the average value of consumer hardware investment rises. This is not to say that all home computers will be packaged as systems, but that an increasing number of sales will be system sales, and that even where the computer is not packaged as a system, consumers will be educated through advertising and word of. mouth about the advantages of fully configured systems, and will be more willing to make the investment, piecemeal if financially necessary, 12 market positions other than pricing. Features, ease-of-use, range and quality of software, peripheral availability, system packaging and after-sales service and support will all become ways of marketing products at a premium. Further, from the retailer standpoint, the system sale is just the start. In most cases the initial sale will still not include peripherals such as modems, joystick controllers, "mouse controllers," digitizer and touch pads, voice/speech modules, music synthesizers, dedicated monitors, etc. All of these, plus accessories such as cables, diskettes, slip covers, storage boxes, etc., provide a potentially lucrative aftermarket for retailers even with (discounted) system sales. The current home computer market does not have a sound foundation at the mass level because it is not delivering adequate functionality and therefore real utility. The shift to 64K-plus computers and low-cost peripherals in 1984 (whether packaged as a system or not) marks the beginning of a product cycle that has long-term growth prospects, rather than the unstable prospects of a market based on the current generation of product. The exit of TI signals a significant diminishing, if not end, to the round of price wars. In 1984, the Yankee Group expects the home market to be price sensitive but not price driven. Reinforcing this shift to system sales, higher prices, and real functionality is the entry of IBM and Apple in a significant way into the consumer side of the home market. Both companies (and Tandy) already have a strong presence in the business-from-home and work-at-home markets with their existing product lines. However, the official entry of IBM into the consumer end of the market with the PCjr, and Apple's expected responses in 1984, mean that the two most visible and successful of the "personal" computer vendors will become hr presences in the consumer side of the home- market. .Their entry will increase the legitimacy of home computing, pll’Will provide a level of pricing and product stability that le' market sorely needs. The entry of IBM in particular is Efficiently important to merit being analyzed in some detail. awBi rv. The IBM PCjr : Targeting the Elite Consumer With the PCjr, IBM continues its aggressive adoption of a Ifinicrocomputer product strategy that depends heavily on the use Kf:i°utside hardware and software vendors. Taking its Personal BfcomP uter strategy a step further, IBM is supplying only the Hi-'- ■ f Mfep mdesign specifications and some chips (notably certain VLSI and g|;|qustom video chips) for the PCjr. All manufacturing for the ■ppjjiachines is being done by independent contractors and subcontractors. Teledyne will be responsible for assembly of the PCjr, using IBM designs and IBM-owned plant, but using Teledyne facilities (Lewisville TN) and labor. The infrared keyboard has been subcontracted to two outside vendors; the slimline disk drives are multiple sourced; the modem has been subcontracted to IBM specifications; and the new thermal printer is from Cannon of Japan. The microprocessor is the Intel 8088; the sound chip is from Texas Instruments (TI76496) and chips from AMD and Motorola, among others, abound. Technical specifications for the PCjr and its peripherals are listed in Table 1-4. A. The PCjr Hardware The most novel feature of the PCjr is the infrared keyboard, which uses two infrared diodes on the front of the 14 TABLE 1-4 TECHNICAL SPECIFICATIONS FOR THE IBM PCjr Microprocessor: Intel 8088 Memory: 64KB RAM, expandable by user to 128KB RAM; 64KB ROM Mass Storage: One slimline 5-1 I A” doublesided drive with 360KB capacity. Space and power provided for only one disk drive in System Unit. Reads and writes single- or double-sided diskettes. Drive is user installable. Keyboard: Detached Infrared keyboard with 62 rubberdome carbon contact "Chlclet”-style keys, Including function and cursor control keys. Powered by four AA batteries. Range 20 feet, weight 22 ounces excluding batteries, tilts at 5-12 degree slope. Can be connected to back of System Unit by op¬ tional cord. ROM Ports: Two adjacent ROM cartridge ports housed under the disk drive, each capable of supporting a 64KB program. Interfaces: Cassette, two joysticks, keyboard, modem (RS 232C), diskette, light pen, direct drive video, composite video and television. Extra unused port labeled “L" for future interface. Expansion Bus: single I/O bus located on right side of drive; suitable for additional diskdrive, memory, etc. Internal Expansion slots: three slots; 64KB memory and display expansion; internal modem; disk drive controller. Graphics: Three modes: low (160 X 200 X 16 colors); medium (320 X 200 X 8 colors); high (640 x 200 2 colors), with two levels of luminescence available in medium and high resolution modes. December 1983 Source: the Yankee Group 15 yboard linked to an infrared receptor card located den in-.: i ole on the front panel of the console. Range is 20 feet, but strong ambient light can disturb the signal. When more than ne PCjr is used in the same room, it is necessary to use the ular jack keyboard connector cable. The keyboard uses jjbberdome carbon contact (rather than the more common apacitive) technology, and consists of 62 "chiclet" or alculator-style keys. The use of contact, non-sculptured keys' s mandated by the limited power of the infrared keyboard, according to IBM — the keyboard is "powered down" when a key is not being struck to save energy. In addition to the cursor ontrol and 10 specifically designated function keys, all keys fare programmable. None of the keys is labeled on the keycaps, which is disconcerting, especially for non-ptofessional typists. Use of the non-standard, rectangular keys does, however, allow IBM to provide paper keyboard templates for the |: ; more popular applications programs. jj The Yankee Group believes that, while the infrared keyboard is an attractive feature, especially in the home (where a large | television set frequently is the display device, and distance is desirable), it is not at the forefront of consumer concerns. Besides, consumers buying the PCjr at between .j $700-$1,300 are precisely the kind of consumers who will buy a dedicated television set or monitor for the unit rather than tie up the family's 19" Sony. The infrared keyboard's appearance on the PCjr is therefore as much a result of IBM's desire to show off proprietary technology (and differentiate the junior from the senior), as it is to meet a real consumer need. The keyboard definitely is a disincentive for purchasers who intend to use the unit for extended periods of time, for applications such as word processing. Third-party vendors will have a field day.providing alternative 62— and 83-key typewriter-quality keyboards for the PCjr. 16 B. Enhancement Slots The PCjr has three enhancement slots: for the 64K/BO column card, the 300 baud modem, and the disk drive. The jr has space provision for only one built-in (360K) disk drive, and the power supply does not support a second floppy disk drive. The most obvious gateway to the future for the jr is an I/O expansion slot on the side of the unit that could support cards for additional memory, additional disk drives (including a hard disk drive), parallel printer, etc. At the back of the jr are a number of special connector ports (including two joystick ports and an RS232C), although they all require a special connector cable ($25) for standard DB 25 shell pin connectors. Each of the ports is coded alphabetically (e.g., C = cassette) so that first time users will not have difficulty making the correct connections. There is also a mysterious "L" port at the back of the unit that IBM is coy about identifying, beyond ' saying that it is for "later" peripheral connections. The jr also has two ROM ports located below the disk drive, each capable of accepting a 64K ROM cartridge (128K in total), although the largest program IBM has introduced so far is a 32K ROM Basic. C. Graphics The PC's graphics modes have been improved. The jr offers three modes: low (160 x 200 x 8 colors x 2 levels of luminescence); medium (320 x 200 x 8 colors x 2 levels of luminescence); high (640 x 200 x 2 colors x 2 levels). The high level graphics modes are only available with the 128K version of the jr. To maintain compatibility with the PC, the jr does not offer "sprites" in hardware, although through software, between three and seven "multiple pages" or graphics levels are available, depending on memory capacity of the machine. 17 On the PC Die self -d xagnost i os come on disKotte; oi. .:k~ I f- pjr they are built into the unit s ROM. Also in ROM is ■Keyboard Adventure" program using graphics, sound, an i color to teach first time users the features of the keyboard. Tne 5 pCjr comes with a 12-month warranty. D. Software PCjr software tuns under DOS 2.10 (a new operating system’, and is thus "essentially" compatible with most existing I a softwate for the PC and XT, sub]ect only to the memory ar.d mass storage requirements of larger programs. Under DCS 2.10, the jr will even run a hard disk drive, provided it has an independent power source and can be attached through the expansion I/O slot. IBM announced 23 pregrams with the PCjr, eight of them from third-party vendors including: Sierra On-Line (Homeword, an introductory, icon-based were processing program, $75); The Learning Co. (three educational pregrams, $35/$4 0); Information Unlimited Software (Easy Writer 1.15, $175); Software Publishing Corp (pfstFile, $140, and Report, $125); and The Image Producers (Time Manager 1.05, $100). Turtle Power, an IBM Logo program ($50), was also announced. Only the 32K extended Basic and four games were announced on cartridge. Another software program, Personal Communications Manager ($100), in conjunction with the IBM internal modem, provides single key access to various database services such as The Source and Dow Jones. Documentation for the PCjr is almost certainly the best on the market. The Guide to Operations booklet and Basic primer are easy to read, color coded, with a multiplicity of clear diagrams, and color illustrations (interestingly enough, featuring children almost exclusively). 18 E. Distribution IBM initially is limiting distribution of the PCjr to the existing network of its national accounts program (mainly for the institutional education market in this case), IBM product centers and independent dealers. PCjr demonstration units are scheduled to be in at least 1,000 outlets by December, when orders will be taken for delivery in the first quarter of 1984. (There appears to be reason to believe that IBM is experiencing some difficulties in production which delayed the actual product availability, originally scheduled for November 1, 1983.) The Yankee Group believes that during 1984, IBM will pursue discussions with Sears about the introduction of the PCjr into its 850 "A" stores, possibly in a special computer boutique. F. Analysis One of the major advantages IBM enjoys over many of its competitors in the business microcomputer market is that, unlike DEC, Wang, Data General, Xerox, etc., IBM is seen as a serious and legitimate microcomputer vendor independent of its mini-to-mainframe computer line. Even though these other companies have good microcomputer products (some offering even better price/performance than the IBM PC), they have thus far positioned their microcomputer products merely as entry products for their existing businesses, rather than attempting to establish them as independent product lines in the manner of a Tandy or an Apple. obviously, IBM enjoys an enormous synergy by virtue of being in every computer market, and of having a complete computer "environment" where others have only product lines. A large part of its success clearly is attributable to its ability to lead users step by step into the IBM garden. Nevertheless, the IBM Personal Computer also has established mm s e)f as; a powerful and attractive product in i-.s cm: , ev»en in markets (e.g., small business and home) that are n .i riven by the advantages of accessing an IBM host envi . Similarly, in the PCjr IBM has made a commitment to the igh-end of the home market that will establish the company ar.c he product as serious contenders. The PCjr is attractive enough in its own right to create a successful beachhead for IBM in the elite consumer market, quite apart from the unit's tractions for the professional and educational markets. However, there are a number of factors that make IBM’s likely impact in the consumer market very different from the Personal Computer's impact in the business arena. 1. The Target Markets IBM is targeting the PCjr at three specific markets: the business-from-home and work-at-home - market , including the professional worker who wants or needs IBM PC compatibility, who wants to access an IBM host, or who might need a "transportable" unit. (IBM has stated that its own research indicated that in 1982, 40% of all IBM PCs in the U.S. migrated between home and office at least one weekend a month.) the "elite" consumer market . Buyers in this category have diverse needs, including both the productivity applications of the work-at-home market as well as the entertainment/educational/ programming applications typical of the •16K mass market machines. Despite the overlap of applications, elite consumers form a distinct and motivated market. (See below). the institutional educational market. Thus IBM has had limited presence in the educational market, not least because the PC is too expensive to achieve mass penetration, and educational software has been lacking. However IBM has monitored 20 the market closely, engaging in several important field trials, and is now ready to court this market aggressively. Although the educational market is bureaucratic, support-intensive and not very profitable, IBM, like its • competitors, recognizes the leverage available at many levels by having a significant presence in the this market. Already a number of educational institutions, primarily at the college level, have placed orders in the 1 , 000 - 2,000 unit range. 2. Production By the first quarter of 1983, IBM had already produced more PCs than the company had expected to produce over the entire life of the product. Yankee Group estimates that in 1982 IBM shipped about 150,000 units; in 1983 about 550,000 units, and that in 1984 production will be in the 1.5 million range. The PCjr was 18 months in the making, and although IBM is approaching the consumer market very cautiously, it clearly has large ambitions. Little is known as yet about the production capacity of the IBM/Teledyne facility in Lewisville, but the Yankee Group believes IBM will be hard pressed to exceed production of 600,000 units in 1984, including units originally scheduled for shipment in 1983. Apart from "ramp up" and quality control issues, component shortages (which will affect the PC as well), from chips to disk drives, are likely to inhibit production. Yankee Group projects demand well in excess of IBM's potential production in 1984, creating a large potential market for PCjr clones. 3. Impact on the Home Market The PCjr may be IBM's first computer designed specifically for the home, but it is certainly not'intended to be a mass market computer, and the company's ambitions are limited almost exclusively to the upper 25% of the home market. IBM will rtainly use the PCjr's $669 entry-level price in its rketing campaigns to draw in potential buyers, at which point be dealer will try to upgrade them to the $1,269 enhanced nit. (This move is reminiscent of IBM's strategy with the PC, ich came out first in a 16K, $1365 version, which was scontinued after about six months in favor of a 48K unit with one built-in disk drive selling for substantially more.) IBM has indicated to its dealers that it expects them to order a 15:1 ratio of enhanced to basic versions of the PCjr. This fmeans that the vast majority of PCjr sales in 1984 will be ’.^system sales of about $1,500-$2,000. While there is a Significant market for $1,500 IBM machines, that market is ^clearly much smaller than the one targeted by such units as the Commodore 64, Atari 800XL, and Coleco Adam. In its entry into the business microcomputer market, IBM, contrary to early expectations, did not adopt a premium pricing Strategy, but went head-to-head with then market leaders Apple jand Tandy. In its entry into the home market, IBM has positioned the PCjr somewhat differently. The jr offers ^improved.price/performance by comparison with a similarly configured PC, and competitive, but not aggressively competitive price/performance by comparison with .the Apple lie and Tandy Model 4. However, by comparison with the mass market computers like i the Commodore 64, Atari 800XL, and Coleco Adam, the PCjr, for ^;all its features, is significantly overpriced. IBM is therefore effectively providing a price umbrella under which the new generation of 64K-plus home computers can be positioned. As is discussed in the next section, the markets 'for "personal" and "home" computers are converging, and the PCjr's introduction confirms that trend. g' IBM is (rightly) terrified of mass market distribution and SEsf! loss of control of the product and pricing that are 4. Is the PCjr Aimed at the Business Market? Currently, the PCjr is not configured as a business chine. It has limited memory and expansion slots, and does pt yet have the capacity to run the top business application rograms (e.g., Lotus 1-2-3, which takes a minimum of 192K of |rqemory to run) . Moreover, the unit supports only one disk !?,?( 3 rive, and the keyboard is not conducive to serious business usage (e.g., heavy word processing). However, the Yankee Group believes that this situation will change. By introducing a machine aimed at the home that is substantially compatible with the PC, IBM is confirming the _ -perspective that the home is an extension of the office in the llgjp; 1980s. It will not take long for third-party software houses to understand this subtlety, and by the end of 1984, most of •fllfl 1 t ^ e popular PC P C0 9 rams will have a version that runs on HJ PCjr. In its current configuration, the PCjr is best suited ‘ to education, home financial services, games, electronic messaging, and database access. The first group of software programs and peripherals which IBM supports for the PCjr will reflect this priority. Indeed, the Yankee Group anticipates some interesting announcements in on-line services (probably through IBM's Information Network) by late in 1984 or early in 1985 — software downloading, software sampling, electronic mailboxes, videotex services, etc. IBM obviously spent a great deal of time positioning the Pcjr so that it would not significantly cannibalize sales of the PC itself. The jr essentially is a complement to, not a low cost replacement of, the PC. Elite white collar workers may buy a PCjr for the home, but they will not make extensive use of it in the office. On the other hand, first time users, at school or home, are likely to eventually migrate up to a 5. Impact of the PCjr on the PC characteristic of these outlets. The relatively small size of IBM's target market in the home, coupled with its limited distribution outlets and expected production constraints, means that even at its most successful, the PCjr's impact will be nowhere near as extensive — in direct market share terms — in the home market as the PC has been in the business market. However, IBM's impact will obviously go far beyond its market share. In order to compete against its rivals who offer better price/performance in the home market, IBM will emphasize value and utility, not price or technology. In particular it will stress: • product continuity; • software quality; • expandability and upgradability within the IBM product line; • somewhat compatible access to the IBM host environment; • pricing (and margin) stability; « ease-of-use and superior documentation; • servicing and support. IBM's entry will continue the legitimization of the home computer market signaled by the trend toward system sales and real utility. The introduction of the jr will undergird the trend to standardization around the Intel 80B8 microprocessor and MS-DOS operating system for the home market as well as the office. IBM intends the jr to be a relatively ’’open’’ system like the PC (though note the non-standard connector pins at the back of the jr), and will make the technical reference manuals for the machine available to all interested third party hardware and software suppliers. 24 PC. While IBM improves the PCjr, it will also enhance the PC, and continue to maintain a reasonable price/performance gap between the senior and junior products. That gap currently is about 40% {a PC with 128K and a single disk costs about $1900, while a PCjr lists for just under $1300). The Yankee Group expects IBM to create a 25%-3Q% price differential between the PC and the PCjr. By late first quarter, IBM is due to cut PC prices by 10%-15%. This will mean that the basic one disk drive PC will cost $1500 to $1600, next to the PCjr’s $1200. It is important to remember, . however, that the bread and butter of the business PC product line is fully configured PCs or XTs. Even if the PCjr cannibalizes some low end sales, the overall PC base will be relatively unaffected. V. Conclusion IBM has taken a strong but limited stand in the home computer market — 16-bit power, MS-DOS 2.1, business PC compatibility, and what will undoubtedly soon be the broadest range of upgrade and peripheral products of any consumer computer. However, IBM's focus on the high-end of the home market means that it is essentially providing a price umbrella under which the rest of the industry can fight for market share. Given IBM's limited volume shipments during the first year ( 500,000 - 600,000 units), there will be a highly attractive opportunity for high volume, low cost suppliers who can ramp up quickly to provide PCjr compatibles. Despite the attractiveness of the compatible market, the Yankee Group does not expect a rush of PCjr clones or a significant shift to standardization around the IBM unit in 1984. TI, which has an MS/DOS office machine, the TI Professional, now has bowed out of the mass market. Although the Professional is- priced below the IBM PC, and offers a possible re-entry point for TI into a larger, if not mass, llil'market, the company is clearly licking its wounds and seems Ililinlikely to pursue the mid- and low-end market aggressively I-anytime soon. Even if it did, TI would face considerable ^'problems re-establishing distribution and consumer confidence, Although the very fact of IBM compatibility, provided it was full compatibility (which the Professional is not), would • soften consumer and retailer resistance. Atari was the company best positioned to move to IBM compatibility in terms of product development, consumer software expertise, and "cutting edge" image. However, in the wake of its devastating year in 1983, the company appears to have indefinitely, and possibly permanently, shelved plans for 'the Atari 1600, a dual processor machine that would run both IBM and existing Atari software. The 1600, to have been built by Toshiba., would have allowed Atari a graceful migration path from the 8-bit to 16-bit environment, and all the advantages that come with IBM compatibility and more powerful processors for integrated software. The Yankee Group believes that Atari, by combining IBM compatibility with Atari's existing lead in graphics chips, could have positioned itself uniquely in the field, as offering not only the first consumer-oriented IBM compatible, but the first IBM compatible with consumer level video and graphics capabilities. However, apprehensions about going head-to-head with IBM, concerns about how to position the relatively high-priced unit, the ongoing turmoil in the marketplace and within Atari's management structure, all worked to persuade the company not to attempt to break ground with yet another machine. Commodore has had a series of machines, both 8- and 16-bit, to bring to market for most of 1983, but has not had to do so due to the continuing strength of both the VIC 2b and Commodore 26 64. The new series of 8-bit machines that it is likely to introduce at January 1984 CES will not be compatible with either Commodore's existing machines, or IBM. The first machines to use the 16-bit Zilog 8000 will probably be introduced in Hanover in April 1984. As the dominant (and most profitable) vendor in the consumer marketplace, Commodore is in much the same position as NEC in Japan, and sees little advantages in standardizing around a competitive machine that was never designed or intended for the mass market. Therefore, although Commodore will plan defensively for IBM compatibility, the Yankee Group does not expect the company to move to any standard not of its own making. If strong market demand dictates it, Commodore may, however, revive the notion announced several years ago of "universal adaptability" by way of enhancement slots and dual processor boards. Consumers who choose to, may then move to Intel 8Q88/MS-DOS, or Z80/CPM compatibility by purchasing the appropriate board. Coleco's new introduction, the Adam, is a Z-80-based system, and the company has its work cut out making a successful launch of its initial computer product without attempting to execute an intricate dual processor strategy. The company is more likely to move to MSX standardization in the near term than to IBM compatibility. Apple is clearly the company that is most pressured by the introduction of the PCjr; but its likely responses (which include early 1984 introductions of a stripped down He, probably with cartridge slots for the home, as well as lower prices and a mouse option for the lie, and a 16-bit Super II with a new proprietary chip that runs existing lie software) do not include standalone IBM-compatible products (although MS-DOS and CP/M compatibility through boards already exists). Finally, the major Japanese computer and consumer electronic companies appear focused on their domestic market, 27 and on establishing a de jure standard (or. r.hi.; prnhwuly the Z-80 based MSX system), rather than rushing into the PCjr-compatible market. There have been recent repoi r.s ct | problems within the 11 or so companies comprising the MSX 'community, at least partially caused by Digital Research's entry into the consumer computer arena. Even it the Japanese vendors choose to develop PCjr clones with improved, non-infrared keyboards, they ate unlikely to have procuct ready for the U.S. market before June CES, 1984 at the earliest. The Yankee Group believes that the introduction of the PCjr will stimulate the entire home market, push the market towards portability, and in general set- new standards of excellence in marketing and "user friendliness” including documentation, built-in diagnostics, use of templates, etc. The jt will not have a major impact on existing venders, most cf which ate, or will shortly be, offering total systems for something less than .j. the price of the PCjr in its basic version. Over the longer term, the attractions of the compatible market will bring in other vendors who do not have IBM's iU|ip overhead structure, and can therefore compete with even IBM's VLSI program. Mass merchant retailers such as K-Mart, Toys-R-Us, Service Merchandise and others, are shut out of the IBM distribution chain, but desperately want to carry the jjj? product or, even better, a low-cost compatible. The I?' overwhelming attraction of a PCjr clone for these retailers is the knowledge that the IBM unit will be around for at least the Ip next few years, and that the best software and peripherals will g|i'; be made available for the machine. (In the consumer market, the only kind of compatibility that counts is full disk and ROM cartridge compatibility.) These retailers will make space on their shelves to carry anyone's PCjr-compatible machine, a fact §j that will not be lost on manufacturers; by the end of 1984/early 1985, the retailers will probably have their dream machine. 28 VI. Apple Compatibility IBM compatibility has captured the imagination of the press and strategic planners, but Apple compatibility is another clear market trend, and one much further advanced than IBM cloning. Low cost Apple 11/e copies are appearing in the U.S. in increasing numbers from Taiwan and elsewhere. Apple still has a much higher mass market recognition factor than IBM, and in a recent survey by the Yankee Group of 800 O.S. households, Apple was the overwhelming first choice of consumers who had not yet bought a computer. Apple's recent victory in its ROM-copying case with Franklin Computer gives it some leverage against the pirates, and because, unlike IBM, it uses a proprietary operating system, it should be more successful than IBM in legally limiting clones. However, the Franklin case may still be appealed, and it appears difficult but not impossible for would-be-copiers to develop non-infringing machines. Given Apple’s enormous software base, especially in games and education, mass merchant retailers would find a legally acceptable Apple clone a very attractive product, in some way even more so than a PCjr copy. VII. Compatibility, Partial Compatibility, and Graphics Superiority There is one major caveat in the IBM standardization scenario. The PC was designed primarily with text and numeric applications in mind. Its graphics capabilities are extremely limited, especially beside the "sprite" graphics and much broader color palettes of existing mass market machines like the Commodore 64 and Atari 600XL/800XL. The PCjr improves on the PC's graphics, but in the interests of compatibility, does so only marginally. 29 ®|||$- As computer vendors targeting the mass market design thei: IJtffl ««xt generation of machines, they have to weigh the a 11 r at:1u ns iplf 0 t full IBM compatibility on the one sice, against its 1 im: •„««<: UllJlytaphics capability on the other. Because ol. the strong ^entertainment bias of computer usaoe in the home, superior jfSKp graphics capability is a critical design and marketing issue. The next generation of graphics chips from companies such as General Instrument, some of the Japanese semiconductor vMi:- vendors such as NF.C, and possibly Atari, will offer near ■it » broadcast quality imaging capability. These Chios, however, require extremely powerful microprocessors, such as the new | generation of chips from Intel (8C183, 60186, 80286), Zilcg (2800 and 28000 — which will be offered in Comrodcre’s new ‘ models) and Motorola's venerable 68000 (it was introduced ir. 11 1979) which powers Apple's Lisa and Macintosh computers. Although the 32-bit internal architecture and 16-oit • databus of the Motorola 68000 (vs. the 16-bit arcnitect-re ar.d 8-bit data bus of Intel 8088) has made it the chip cf choice ir. contexts where high graphics capabilities are required, the |p;; Yankee Group believes that Intel's chips will put severe pressure on the Motorola chips as the processing engine in the next generation of consumer oriented computers. At present, therefore, manufacturers face a difficult choice. They can choose to develop a fully IBM compatible machine using the Intel 8088/8086 processor, and accept the graphics limitations, or develop units with partial compatibility that have superior graphics capability. Tandy has gone this partial compatibility/improved graphics' route with its new Tandy 2000, which offers 640 X .400 screen resolution with eight colors, compared to 320 X 200 with four colors for the PC. Other computers that, sacrifice complete IBM compatibility in favor of better keyboards and superior 30 graphics include the NEC APC, the Wang Professional, the Victor 9000, and the TI Professional. At least two other companies, including Mindset Inc., a venture startup headed by an ex-Atari president, are developing 8088 / 80186 -based machines for the consumer market with superior graphics capabilities. While the advanced graphics capabilities of the machines listed above are adequate for business users, they are not adequate for the home market. Even the enhanced screen resolution and broader range of colors of the Tandy 2000 do not really address the graphics requirements of consumer-oriented applications. These include features such as multiple sprites and easy execution of complex screen routines involving animation, as well as the ability to handle the vastly improved imaging capability that only next-generation video chips can provide. (See Chapter Four.) If, on the other hand, vendors choose to abandon IBM compatibility (at least under MS-DOS) and go with the new generation of video coprocessors, then the Intel 8088/8086 chips alone are not really up to the processing task. A. Compatibility is a Moving Target IBM compatibility is a moving target, as mainframe vendors have learned through experience. The PCjr is itself not fully compatible with the PC, and enhancements to these machines and others in the IBM line will not necessarily bring them closer. The PC and XT (and apparently to a lesser extent, the PCjr) have not reached the limits of their graphics potential, thanks to a relatively "flexible" hardware architecture that could accommodate additional coprocessors. The optional Intel 8087, for example, is a powerful math processor that sits next to the 8088 on the IBM PC board. It can upgrade the speed of mathematical functions dramatically applications requite complex trigonometric , but only a few programming languages can address processor at present. Similarly, upgrading the PC's Intel to the Intel 80186, a faster chip that incorporates many the previously external support chips, would allow graphics improvements with or without additional coprocessors. While applications will have to be itten to take advantage of these coprocessors, their addition will not make the older machines' software obsolete. Kather, it will still tun without problems, but the older software will be able to take advantage of the new hardware An alternative route is for third-party vendors provide the coprocessors in board form to fit the expansion slots on the PC and PCjr and "turbocharge" their graphics capabilities that way. One cost problem with all these- increased graphics chips, however, is that for optimum performance they require increasing amounts of dedicated screen RAM . Coleco's Adam, with 16K of dedicated screen RAM, is a harbinger of even larger dedicated memory requirements. Several of the low-end Japanese machines, such as the Panasonic % JR 100/200, have 16K of screen RAM, in keeping with the general commitment by Japanese vendors to graphics excellence, even when other features are lacking. The Yankee Group expects several consumer oriented machines based on the Motorola 68000 chip to be introduced in 1984. In addition to Apple's Macintosh computer, Amiga Corporation has developed a 128K, 68000 based machine with superior video (and sound) capability (price around $ 1200 ) that will be introduced in the fall of 1984; and Sinclair Research (U.K.) is expected to announce a 68000-machine in the first quarter of 1984, priced at under $600. The Amiga machine will offer MS-DOS and possibly PC-DOS capability, and Apple has stated that the Macintosh will offer a "window into the IBM PC world." 32 All of these factors suggest that the move to market standardization around the IBM PC/PCjr, if it occurs, will be a more complex and staggered phenomenon than a simple reading of situation might imply. VIII. Major Product Trends in 1984 The Yankee Group sees several major product trends in 1904, apart from the continuing improvement of price/performance ratios. These are: . " user friendliness ." This term has been so overexposed that it is hard to use seriously anymore. However, the reality that it addresses is critical to the future success of the microcomputer industry, both business and consumer. It has two facets, hardware and software. On the hardware side is the increased microprocessor power and memory size needed to run the new generation of software, and improved or alternative input devices ("mouse" controllers, touch screens, digitizer and touch pads, lightpens, voice recognition/speech synthesis, etc.). The demand for memory and mass storage continues to be insatiable, and because the cost per bit is declining so rapidly, it continues to be easier to throw hardware at a problem rather than figure out ingenious ways to condense software requirements. Most of the new software products make use of the new graphics and "pointing" technologies, almost all of which- currently depend on disk drives. On the software side are the operating systems and the new operating "environments" such as that found on Apple's Lisa and VisiCorp's "Vision" and Microsoft's "Windows" (see Figure 1-1 ) . These product allow "integrated" (another much overused term) software applications^ that include features such as "windowing, "menu management," use of icons, etc. (See Chapter Three.) 33 There are a number of other areas, including the PLP/NAPLPS graphics standards, the likely adoption of the Microcom modem standards, etc., that will have a more limited but still important impact on the issue of standardization. The Microcom Networking Protocol (MNP), available as communications software, or as a modem with built-in error detection and correction, has been adopted by most of the major vendors including (tacitly) IBM for the PCjr, and VisiCorp for VisiOn. MNP is important because it allows different brands of computers to communicate directly with each other without going through a value-added telecommuni- cations service such as Telenet. • telecommunicating vs. standalone terminals , so far, the computer industry has attempted to create one vanilla computer terminal for all applications in the home. The Yankee Group believes that during 1984/85, the distinction between standalone and telecommunicating functions in the home (see Table 1-5) will become • increasingly important, and that companies like Atari (through its Ataritel division), AT&T, ITT, GTE, and others, standardization . As discussed above, the most important standardizing influence in the market at present is IBM's entry. However, Apple's II/III line, and "Macintosh/Lisa" computers, possible consumer products from AT&T using the UNIX/Xenix operating system, and the Japanese MSX standard all mean that computer standardization of hardware and operating systems, will not happen in a major way in 1984. There is a long-term market bias towards standardization as a means of overcoming fragmentation and less than optimal production runs for third-party peripherals and software. During 1983, this trend moved strongly in the direction of the IBM PC, a market focus reinforced by the introduction of PCjr. However, as noted, the limitations of the PCjr, in the realm of graphics, significantly undermine the attractions of the unit as a straightforward standard in the home. Source: the Yankee Group TABLE 1-5 STANDALONE VS. TELECOMMUNICATING TERMINAL FUNCTIONS IN THE HOME Telecommunicating Database Accessing Electronic Messaging Host Computer Accessing Home Banking Classified Ads, etc. Teleshopping Billing Energy Monitoring (remote) Security (remote) Standalone Programming Entertainment Education/Self Improvement Productivity Wordprocessing Home Budgeting Energy Monitoring Security will offer a range of enhanced telephone/computerphone/teleterminal products that can handle most computer-based telecommunication consumer applications in the home. (See HOF VIII: "Personal Computers in the Home," and the forthcoming 1984 HOF Report on "The Home Terminal.") Each of these product trends raises important software issues, which are dealt with in the following chapters. CHAPTER TWO THE SOFTWARE MARKET: COMPUTERS AND VIDEOGAMES As the microcomputer market fragmented into various submarkets (corporate, small business, educational, scientific, home, etc.), small companies, frequently simply one-person operations with a mailbox, began offering programs targeted at specific applications for specific machines. As the installed base of personal computers grew, a few of these companies had spectacular successes with single products. These included: • Digital Research Inc. (Pacific Grove CA) with its CP/M operating system originally developed for 8-bit Z-80-based machines, and later with CP/M 86 and Concurrent CP/M for 1.6-bit machines, including the IBM PC; The term "software" was originally coined to describe the and application programs that make computers run. colloquial use of the term has since been extended to cover variety of products including computer programs; videogame for home and arcade; video programming, both broadcast on disc and tape; and even audio records. This chapter an overview of the markets for computer software in home, and for videogame software for home and coin-operated I. Personal Computer Software Market Computer software for mainframe and minicomputers traditionally was developed either by the vendor, or in-house by the end user in conjunction with the vendor. Although a of firms provided software on a subcontract basis to end users,'independent software houses publishing their own products emerged only with the microcomputer industry in the 70s. 38 • Microsoft Inc. (Bellvue WA) with Microsoft BASIC, and later, the MS-DOS operating system developed for use on the IBM Personal Computer. Although Microsoft also produces some hardware products (such as the CP/M "Softcard" for the Apple II/e), over 50% of its revenue is still derived from licensing its version of BASIC; • Micropro International (San Rafael CA) with Wordstar, the first word processing program to offer many of the features found on more expensive dedicated word processing machines. Wordstar has the largest installed base of any software program (about 600,000 licensed Micropro claims, excluding bundling agreements with companies such as Osborne and Kaypro), and the program accounts for 75% of MicroPro's 1983 revenues. • VisiCorp Inc. (San Jose CA), which markets VisiCalc (around 550,000 units licensed), the spreadsheet, program developed by Software Arts (Cambridge MA) that probably did more to expand the personal .computer market than any other single program. VisiCalc reportedly grossed $36 million in 1982 and $53 million in 1983, with total royalties for Software Arts of $7 million to date. Vision, VisiCorp's powerful new integrated software package, promises to be a big revenue earner for the company thanks to a distribution deal with IBM. However, a year after announcement at the fall 1982 Comdex, Vision had still not been shipped. The common thread is that these companies were all single product firms that established an early lead in the personal computer software business, and have been scrambling ever since to maintain their advantage. To do this, they have all attempted to develop varying product lines, bringing them into increasingly sharp competition with each other as well as with a flood of new competitors. These include companies such as Lotus Development Corp. (1-2-3), Ashton Tate (dBase II), Software Publishing International (PE'S series), and others. An important feature of the software market is the degree to which the original products of these companies still dominate their respective markets (and their originators' bottom lines), despite the appearance of competitive products that frequently offer superior features at lower prices. Lists of bestselling products by distributors like Softsel and MicroD illustrate dramatically the staying power of the originals, and the enormous difference in units shipped between, say, "Wordstar" and its closest rivals. This sales edge, in the face of superior product competition, points to the leverage available for a product that establishes an early lead, is demonstrated and supported by the retailers, and then comes to dominate the shelfspace. The leading independent software vendors also are still relatively small companies despite their rapid growth and the fact that they dominate the industry. All of the companies mentioned had revenues in the $10-$40 million range in 1982, and will be in the $30-$7Q million range in 1983. By comparison, Activision had revenues of $125 million in calendar 1982, before declining to around $90 million in 1983. (See Table 2-1.) Activision's best selling game cartridge was "Pitfall," which sold around 3 million units in 1982/3, for retail revenues of $90 million. For all the successes of the independent software vendors, the companies generating the largest revenues from software remain the computer hardware companies. Of these, IBM is the clear leader, with an estimated 1983 revenue from microcomputer software of over $200 million. Moving beyond its own rapidly expanding software line, IBM recently announced that 68 titles not carrying the IBM logo can now be sold by its direct sales force. The titles include Ashton Tate's dBase II, Micropro's Wordstar, Lotus's 1-2-3, Digital Research's Concurrent CP/M-86, and Microsoft's Flight Simulator. 40 TABLE 2-1 REVENUES OF SELECTED SOFTWARE PRODUCERS Vendor 1982 -m- 1983 -$M- Chief Products Activision 125 90 Pitfall, Decathelon, etc. Atarisoft n/a 75 Broderbund 3-5 7 Choplifter, Bank St. Writer Commodore 18 63 Infocom Series Digital Research 22 46 CP/M, CP/M-86, Concurrent CP/M Hesware 0 10 Omnicalc, Heswriter IBM 80 250 Third Party Software Information Unlimited 4 7 Easywrite r Lotus Development 0 40 1-2-3 Micropro 25 36 Wordstar Microsoft 32 70 MS-DOS, Xenix, Basic Parker Brothers 75 110 Star WArs, Q-Bert Peachtree 9. 5 18 Accounting Software Arts 2 6 TK Solver!, VisiCalc Tandy/Radio Shack 53 77 Superscript Visi Co rp 36 53 VisiCalc, Vision 41 Tandy's fiscal 1983 software revenues of around $77 million from about $53 million in 1982) are about 8% of computer sales, which in turn account for 34.6% of Tandy's 1983 revenues of $2.47 billion. (Database management word processing accounted for about 70% of total software .) Commodore has announced that in 1983 software also for about 9% of its $681.2 million in revenues, and indicated that it is planning an extraordinarily ambitious increase to $500 million in software revenues in 1984. Apple's from software are stable at just over 12% cf tctal The advantages for the hardware companies are clearly established distribution, a lead time in developing syster a.-.d (key) application software, brand recognition, and leverage in advertising, marketing, etc. II. Computer Software in the Home The home software market has developed along somewhat different lines. The major hardware companies (Apple, Atari, Commodore, Tandy, Timex, Coleco, Texas Instruments, Mattel) all proprietary operating systems, despite the fact that all used either the 6502 or Z-80 microprocessor-. 's BASIC in one version or another is the programming language available on almost all consumer-oriented computers.) Because no one company dominates the home market, no standardized operating system has emerged, and applications software cannot be rewritten easily for various machines. This placed the primary burden, and opportunity, on the hardware Vendors to provide software for their machines. It is not possible to provide a neat definition of the home software market, for two reasons: 42 e overlap between business and consumer applications. Because the home hardware market covers both "personal" computers (including portables) and "home" computers, software demand ranges over applications for both types of machines. As these markets converge (see Chapter One), customary categories become ever more suspect; • creative turmoil in the software market. The computer software market is undergoing rapid and wider product evolution. The extension of operating systems into operating "environments" on the one hand, and the development of "integrated" applications software on the other, mean that the distinctions between system and applications software are breaking down, and that the distinction between different kinds of applications is blurring as they are integrated on various levels into a single giant program. Most of these developments are occuring first in the business arena, where larger hardware capabilities (16-bit processors, larger memory, hard disk storage, etc.) make it easier to implement the new programs. However, the same set of creative challenges faces the consumer software developers how to make applications-more powerful and at the same time easier to use. These developments are therefore finding their way into the consumer world in a variety of ways. These include scaled-down versions of business programs (i.e., Commodore's "Magic Desk"), introduction of consumer-oriented programs that are almost pseudo-operating environments (Digital Research's "Dr Logo"), and the official entry of both Microsoft and Digital Research into the consumer market. Microsoft has approached the consumer market in several ways. The first is by way of an investment in HES (Human Engineered Software), a Torrance CA-based software company, with a presence in the game and educational field. The agreement allows HES to market Microsoft's "Multiplan" program to the consumer market, presumably ir. <1 sea 1 ed-dcwn version. .(Commodore's earlier announcement at lone OFS th.it iv. would bo marketing Multiplan for "under ItOO” for the Commodore seems ’ to have fallen away with the HEli agreement.) The second ar.d more important approach is a new operating system, MSX-DOS, which Microsoft developed for spectravideo, and then managed tc get most of the major Japanese consumer electronic companies to adopt formally as a standard for heme computers in Japan. The MSX standard, which consists of a hardware configuration as well as the MSX-DOS operating system, is intended primarily for the Japanese domestic market, and possibly Europe. (See HOF Report No. IX, "Japan and the Next Generation cf Consumer Electronics.") Despite a formal announcement of the system (largely at the initiative of Matsushita), most of the announcing companies have done little to forward the system. In particular NEC (which has about 50% of the Japanese microcomputer market) and Sharp (10%) see little to be gained by adopting a system which | t weakens their own market position, though it would clearly assist in growing the total market. m ■ Pertinent reservations have also been expressed by a number of signatories, such as Sony, about the wisdom of standardizing on an 8-bit rather than 16-bit or 32-bit system, and the problems that MSX would face if a serious attempt was made to export MSX systems to the U.S. ‘So far Activisioh and Atari (and possibly Coleco, which almost meets the hardware configuration requirements) have announced software support for the MSX system in Japan . None of the majors is making any commitments for the U.S. market. Further clouding the issue is the fact that Digital Research (DRI) is scrambling to establish its own consumer division, headed by a former president of Atari's coin-operated game division. The division's first offering will be Dr. Logo 44 To increase the attractions of CP/M in the consumer environment, the Yankee Group expects DRI to announce a ROM-based version called "Personal CP/M" by yearend 1983. The new operating system, which will be manufactured, marketed and distributed by Zilog and American Microsystems, Inc. (AMI), will be embedded in a single chip, operating processor based on the Z-80 microprocessor. By building the operating system in ROM, OEMs can cut cost, and consumers are saved both the cost and inconvenience of having to use a disk drive to load the operating systems. "Personal CP/M" will feature "help" screens and other visual aids to simplify use for first-time users. III. Definition of Major Market Segments As noted above, the categories for computer software in the home are evolving continually. The following is the Yankee Group's classification of the products currently on the market. Revenue and unit estimates for each category are provided in Table 2-2. (which will be available on introduction for most consumer computers), and the market focus in general will be education and productivity software for schools and home. DRI also has had extensive conversations with the adoptors of the MSX system, attempting to persuade them of the advantages of DRI's own forthcoming consumer operating system as a putative standard. • System/(Jtility . This category is small, but essential, because without system software (i.e., operating systems, programming languages, diagnostic programs, etc.), the computer cannot function. At the consumer level there is a trend to bundle the necessary system software, or to build it directly into the ROM memory in the machine, as in BASIC. 45 TABLE 2-2 ESTIMATED REVENUES BY SOFTWARE CATEGORY FOR THE HOME MARKET ff - $ Millions - 1980 1981 1982 1983 1984 |Entertainment 3 18 157 405 710 If - • pducation neg. 4 25 73 240 Business/ .Productivity 5 16 53 135 195 jSystem 2 6 26 50 73 j'Home Budget/ ^Improvement/ Misc, neg. 2 11 22 65 ■* Home educational market only December 1983 Source: the Yankee Group 46 • Entertainment . Games have been associated, with computers since the earliest days of mainframes. They constitute the single largest market for home computer software. Although many of the titles are simply games brought over from the arcade and home consoles, there is also a significant market unique to computers for text and strategy games. Entertainment programs are used by more members of computer-owning households than any other software category, and constitute the largest aftermarket, in unit terms, across all brands and price classifications (see Table 2-3). • Education . This is the fastest growing home market, and even more than entertainment, is tied to the presence of children in the home. It frequently is confused with computer "literacy" which is the skill (of programming, not an applications market). It is a complex market (see Chapter Five) and overlaps with several others, including the school educational market) entertainment (especially, for example, when using Logo-like formulations); and the "how to" or self-help market (see below). It is the first market after entertainment and business software that has been able to establish a separate marketing identity for retailers. • Business/Productivity ■ This is the most developed market, in terms of range and quality of software, and covers a number of distinct product areas aimed at professional users including spreadsheets, database managers, word processing, graphics, and telecommunications software. The vast array of vertically-oriented software applications packages aimed primarily at various professional groups such as lawyers, doctors, real estate brokers, etc., falls into this category (depending on the sophistication of the package.) This is the only category of software used in the home that is still distributed primarily by computer specialty retail outlets. TABLE 2-3 COMPUTER PROGRAMS PURCHASED. OR RECEIVED WITH CONSOLE BY SOFTWARE CATEGORY 48 Although falling, prices and margins are still typically five to 10 times higher than those of other home software categories, where $50 is the top end of the range. Because of the size of the hardware and software investment involved, product continuity and compatibility is a major consideration in this market. • Home Business/Personal Budgeting . Originally limited to makework applications such as checkbook balancing and recipe filing, this category has improved to the point where it is beginning to offer teal utility. It includes both simplified versions of professional level programs (word processing, mail lists, spreadsheets), and such areas as tax preparation, personal time scheduling, and household budgeting. a self Help/Miscellaneous . Essentially a residual category, this covers "how to" programs on everything ranging from repairing computers to learning a foreign language. Because it is relatively undefined, it has had difficulty getting retailer support, but clearly offers significant growth potential over the longer term. IV. Major Market Trends In most "software" businesses, after a number of years the amount of money invested by the consumer in software (records, tapes) comes to exceed the original hardware investment by a considerable amount. As the size of the installed base rises, therefore, the software industry comes to dwarf the hardware industry in revenue terms. The home videogame industry has followed this pattern, with software revenues surpassing hardware in 1981, and the differential has increased, even in the current market downturn. (S.ee Table 1-1.) The home computer software industry should prove no exception, and the Yankee Group estimates that by 1988 software 49 revenues will exceed those of hardware. The major trends that he Yankee Group expects to characterize the software market uring 1984 include the following: A, Pricing p IhHKI In thS personal com P uter industry, microcomputer software S aMreii li historically has been priced extremely high in relation to actual production costs, in order to reflect the cost of development which had to be amortized quickly over a relatively small installed base. This has led to a pricing structure for business/productivity software that is a reflection of perceived value, not manufacturing and distribution costs. This same pattern, albeit at much lower pricing levels, prevailed in the home software arenas — computers and videogames — until early 1983. The Yankee Group believes the home software market is moving to one more closely resembling other software industries, (i.e., cost-based pricing). End-user prices will be based on the cost of manufacturing, distributing and marketing the product, plus a profit margin in the 15%-25% range. The shakeout in the videogame industry already has changed its overall pricing structure dramatically. Commodore has also made a commitment to driving down software prices and margins the way it has done for hardware, and will significantly affect other vendors. As in any industry, vendors always face the choice of reducing prices and/or offering improved performance/features. So far business/productivity software has proven resilient in holding its price structure in the face of intense competition. In particular the industry standards ("Wordstar," "VisiCalc," etc.) have held up surprisingly well. However, they have been marketed through computer specialty stores which 50 require substantial margins of 30%-40% to survive. The situation is quite different in the mass market, where computers and software simply are additions to existing business lines, and the margins can be based on variable rather than fixed costs. The following factors are forcing software prices down: • the proliferation of vendors and titles, and the glut of product in the videogame market; • the fact that mass market retailers are not as committed to maintaining high margins as the computer specialty stores; • the falling price of the hardware consoles, which makes consumers unwilling to pay $35-$50-plus for a software program when they are paying only $50 to $200 for the console; • simplified and low-cost versions of high-cost programs; • economies of scale from mass production — for example, Commodore has gone from four-inch to five-inch wafers with significant cost savings; and • ability to amortize development costs over an increasingly large installed base. B. Distribution The volatility of the software market, coupled with the enormous market inventory of mediocre game cartridge titles, has made retailers very reluctant to make a substantial commitment to new inventory. The bail out of Mattel and Texas Instruments has made everyone skittish about the remaining vendors, especially Atari and Timex. Over the longer term, the only way to deal with the inventory problem, including backlists and software for discontinued hardware lines, is electronic distribution, whether to retail store or home. are many issues that have to be addressed before distribution becomes a real market force. However, announcements such as those between Coleco and AT&T, and Atari and Activision, signal the beginning of a trend will have an enormous impact on current distribution and on software pricing. (See Chapter Seven.) C. Entry o( New Players The software market traditionally has been a market of in which small third-party firms subcontracted to the hardware manufacturers, or introduced their own products on a mail order basis through advertising in the major computer magazines. The Yankee Group estimates that there are about 3,000 software "publishers" offering around 25,000 titles in various formats. However, in terms of real mass market potential, there are only a few dozen companies that have the creative, financial and distribution clout to become or remain serious factor in the business over the next few years. Prior to the ubiquitous establishment of electronic publishing or software downloading, the major retail outlets face the continuing problem of proliferating titles, formats, and vendors. They will respond either by moving to rackjobbing, and/or dealing directly with a limited number (typically around a dozen) of publishers and distributors. The Yankee Group believes that the home software business, even with electronic distribution, will essentially become a three tier business consisting of: major publishers . These are large companies from a variety of fields including hardware (Atari, Coleco, Commodore, Apple, IBM), software (Activision, Digital Research, Microsoft, Parker Bros.), and publishers from other fields (CBS, McGraw-Hill, Random House, Houghton Mifflin, Time Inc.). These two dozen or so companies will dominate the 52 industry, frequently controlling their own distribution. They are large enough to support their products at retail with everything from point-of-sale displays, advertising and superior documentation, to field trainers and credible customer hotlines. Although some of these companies, especially the computer companies, will retain large in-house programming staffs for strategically critical products, for the most part the titles they publish and distribute will be from outside authors and program developers. . minor publishers . As in the movie, book and record industries, there will always be a place for a number of smaller independent "labels" which target specific niche markets. Obvious candidates in the home software industry include vertical software packages, specialized entertainment and educational software. Epyx Inc., for example, has developed a small but comfortable market niche by positioning itself as the "thinking person's game company." Most of the home educational companies fall into this category. All of these companies are candidates for takeover or merger, and many will take this route in order to get the resources needed to compete effectively. The specialized labels within the record industry {Arista, Geffen), and of market-specific divisions and imprints within the large book publishers, are obvious models for computer software houses which need larger resources but want to retain their functional autonomy. However, analogies and models to other "software" industries should be used with caution, because just as records, books, and movies have their own market dynamics, so too does computer software. These secondary publishers, probably numbering about 100, will distribute their products either through the major distributors or by agreement with one of the larger publishing houses. - 53 - 1 : : ip Ifesiip rjgjp ] !£ ' ( M HilSir e authors/micro publishers . At the base of the publishing pyramid will be the thousands of author/programmers and entrepreneurs that constitute one of the industry's greatest resources. Working on a contract or independent basis, as individual programmers or in small ad hoc groups or companies, they will be responsible for much of the specialized software that the majors publish. Obviously, an enormous amount of strategic effort currently is being devoted by the smaller software houses to follow the steps of an Activision, Microsoft or Lotus and break into the big leagues. However, the cost of doing so is rising every month, and it now takes at least $1 million to launch a major pew product nationally (see below). Very few of the aspiring candidates will be able to break away from the pack and make it into the big leagues. Moreover, the "big leagues" of the computer software publishers are still miniscule by comparison with the annual revenues of other software publishers moving into the business, such as McGraw-Hill or CBS. Electronic publishing clearly lowers some of the entry level barriers to smaller publishers, because the inventory cost is minimized for both publisher and retailer. However, manufacturing is only part of successful publication. Creating awareness of the product through advertising, and supporting it after sale, are and will remain critical to market success. Even though the market is moving towards products that are increasingly self-explanatory, the range of applications is sufficiently large, and the tasks of much software sufficiently specialized to maintain demand at retail stores to demonstrate and customize particular programs. D. Advertising and the Cost of Entry Advertising costs continue to rise for all computer 1;': software markets. The current success story is Lotus Inc., which has managed to make its innovative "1-2-3" program ap » HI industry standard in a few short months since its full launch. However, Lotus spent $1 million in three months, and $3 million in its first year to establish its dominant position. The national launch of a first rate title in the crowded videogame market costs about $1 million in advertising. With the current downturn in the market, even licensed arcade "hits" (such as they are) cannot ensure publishers the massive sales of 1981 and 1982. In 1982, for example, Coleco earned about $11 million on a single title, "Donkey Kong." The top arcade titles in 1983 that Coleco has licensed, such as "Time Pilot" and "Mr Do", will not earn anything near the revenues of the earlier hit, despite massive advertising and a larger installed hardware base. There is a general trend away from celebrity endorsement advertising towards a focus on utility. Commodore has abandoned Captain Kirk of Stactrek fame; Apple no longer uses talk show host Dick Cavett; and even before it left the business, TI was phasing out comedian Bill Cosby in favor of more targeted advertising. Atari is the only one going against the trend, and has reportedly signed a five-year, $20 million deal with actor Alan Alda. V. Major Product Trends The computer software' industry is in a state of creative turmoil. Product development breakthroughs are happening in half a dozen areas, although not as easily or quickly as the flood of press releases would have one believe. As noted in Chapter One, the most important issue facing vendors at all levels of the market is improving "user friendliness," or making the functionality of the computer easier to access for inexperienced users, even as the programs become more powerful. Much of what is happening in microcomputer R&D can be seen essentially as footnotes to Apple's March 1983 55 introduction of "Lisa," which itself car. r>e seen as a root o 'to the development of the Xercx ’.star" and the picr.iit'tmg “research done at Xerox's PARC laboratory. Although L!ia focus f pf the best development efforts (and publicity) is for ^personal* computer products, these same developments will rapidly migrate to the mass consumer level. The following are the software product trends that the Yankee Croup believes will be the most significant over the next few years. A. Integrated Software The current enthusiasm for integrated software disguises the fact that there is no standard definition of what the term entails. There are at least five different senses in which ■software can be said to be integrated: • concurrency . Concurrency permits different programs to reside and operate from the computer's memory at the same time. Different programs, such as word processing and spreadsheet can be loaded into memory and the user can switch instantaneously from one program to the other without having to first save the results of one program before loading up another program, a fairly inconvenient and time consuming process. Alternatively, one program can be printing or telecommunicating, while the user works with another program. Concurrency permits two or more programs to be run simultaneously; this is the key difference between it and other forms of integration. Other approaches allow the user to view different programs simultaneously, and to transfer data between them, but typically only one program is actually running at any given moment. VisiCorp's "Vision" and Digital Research's "Concurrent CP/M" both offer concurrency, among other advantages. * simple coordination . The simplest form of integration is a series of programs, usually from a single vendor, that are designed to share similar commands for similar functions. Because the programs cams usually store files in .the same format, passing information between them is fairly simple. However, to get this compatibility, only members of that particular series of programs can be used, regardless of whether each individual program is the best for an intended purpose. Perfect Software's "Perfect" series (Perfect Writer, Perfect Calc, etc.), bundled with the Kaypro portable computer, is an example of simple integration or coordination. - A '- 1 -’ —v or multi-function One qualification on these programs is that they are typically built around one core program (in Lotus's case, a spreadsheet) which can limit the flexibility and performance of the other applications. Like coordinated programs, one can only use the applications built into the program, whatever their particular merits. A recent variation on the multi-function approach .has been the introduction of programs that use database management systems as the core program upon which a variety of applications programs are run. The various applications therefore all have a common database. Vendors using this approach include Condor Computer Corporation, Microrim Inc., and Alpha Software Corporation. • integrated operating environment. This approach offers the greatest potential for real integration of a number of different programs, and all the major software __ Shared technology products combine various application technologies such as spreadsheet, database, graphics, word processing and communications within a single program. Lotus Development Corporation's "1-2-3" combines the first three applications mentioned into a single program; Context Management Systems' "MBA" program integrates all five. Information can be moved easily between the different programs, and both "1-2-3" and "MBA" allow the user to split the screen into several different windows and work with a different application in each window. houses are locked in fierce competition, including Digital Research, Microsoft, VisiCorp, and Micropro, as well as newcomers such as Quarterdeck Office Systems (Santa Monica CA). Some environments, such as that built into Apple's "Lisa" computer, or VisiCorp's "Vision" program, require use of specific applications programs developed by the vendor (in Vision's case, "VisiCalc" and "VisiWord"). Others, like Microsoft's "Windows" (which is essentially an enhancement of the MS-DOS operating system), and Quarterdeck's "LesQ," are designed to use any vendor's application program that runs under MS-DOS. Although Microsoft's "Windows" is not as powerful as either "Vision" or "DesQ", it has the advantages of being cheaper, and of working with 192K of memory and dual floppy disk drives, vs. the 256K plus hard disk drive required for the other two programs. If Microsoft can deliver the product close to the scheduled delivery date of Aptil/May, 1984, it could affect the demand for other integrated software packages significantly, since end-users can use their existing (MS-DOS) applications programs under "Windows." However, "Windows" will not work with all MS-DOS applications, or rather not all applications will be able to take advantage of its windowing capability, at least not without further rewriting. Programs that fall into this category include 1-2-3, Supercalc, and Wordstar. B. Metaphors, Icons, Mice and Windows In addition to allowing the user to move quickly and easily between different applications programs, and to shift information between them (move figures from a spreedsheet to a word processing or graphics program), the above-named integrated environments offer several other important features. To make the packages easier to learn, software developers have adopted a number of hardware and software interfaces that make the programs more intuitively obvious for unskilled users. 58 The first of these is the use of "metaphors," or contexts that are familiar to the user. The most popular metaphor for business-related programs is the desk. Because users know what it is to have different objects and files on their actual desks, they also know intuitively what the relationship and ordering sequence between them is. By using "icons" or visual representations of a desk and typical objects (files, filing cabinet, trash can, typewriter, etc.) software developers can create an immediately familiar environment that first time users can manipulate (select file, open file, select document, respond to document by answering (typewriter), or deleting (trashcan), etc.). To facilitate movement around the desk and selection of particular icons (programs), vendors also offer a variety of alternative hardware interfaces. The most common of these is the "mouse" cursor controller, used as a simplified pointing device, that has been popularized by Apple's Lisa computer. Commodore and Coleco make use of joystick controllers to achieve the same result, and Hewlett-Packard's recently announced HP-150 computer uses a touch screen. Finally, in keeping with the desk metaphor, where several files may be in view at any one time, software developers offer the capability of splitting the screen into overlapping or adjacent "windows" so that several files/programs can be viewed simultaneously. Not all integrated software packages offer all these features. Vision', for example, offers concurrency, overlapping windows, and (for an additional $200) an optional optical mouse controller, but does not use icons. Apple's Lisa offers overlapping windows, partial concurrency, a mechanical mouse and extensive use of icons. Microsoft's Windows offers a maximum of four adjacent or tiled (not overlapping) windows, a mechanical mouse capability, portability to 8- or 16-bit systems running MS-DOS, but not concurrency. ■ Twenty-three vendors, including Wang, Digital Equipment Corp., 60 61 The design flexibility and programming power made possiole by the combination of integrated software environments and .^'alternative hardware interfaces will lead quickly to •'pr significant improvements in existing programs, and interesting new programming. The flood of entrants, including large 'companies with specialized expertise, mandates a niche market approach for all but the most powerful software companies, fy Apart from games and educational programs, word processing in particular seems likely to become a powerful force in me fUfh student market, especially once the cost of ccr respor.dence j quality printers drops below $200. Word processing will he a 8 6 major beneficiary of the integrated software approach, with an iincreasing trend to built-in spelling checkers, dicticnaries, |thesauri, and glossaries. Other programs routinely will rake ; use of built-in databases of varying sophistication and , specialization. If D. Animation, Soft Software, and Layered User Friendliness Another major trend of consumer programming, ever, that I-,aimed at productivity applications, will be increased use of HI color, animation, speech synthesis, voice recognition, music, • etc. The graphics capabilities of consumer-oriented computers, as most of which offer "sprite" graphics and an extensive range of colors in several modes, frequently are greater than that of even sophisticated business systems. Coupled with lew cost digitizer and touch tablets, these features will allcw software developers to create programs that ate easier and mere attractive to use because they involve many senses. "personal” computer is in fact "personal" to its primary user. Major advances in artificial intelligence and natural language interfaces will be necessary for present goals to be realized. As .noted earlier, most of the new integrated software packages require 16-bit processors, and much expanded memory arid mass storage capability, including, typically, at least a five Megabyte hard disk drive. This capability will not be availaule at mass consumer price points until 1985. Moreover, most of the software currently being developed for the consumer market is cartridge- and cassette-based, rather than disk. However, scaled down versions of the above programs that still offer many of their most useful features will make their appearance cr. 64K, disk consumer models during 1984. Mere important than the translation of existing programs for the consumer market is the issue of how to make use of these new hardware and software approaches for non-business applications in the home. One of the important breakthroughs of VisiCalc (like that of word processing for dedicated word processing units) is that it created a use so persuasive that the microcomputer marxet took off largely on the strength of that initial application. (It can be argued that PAC MAN had a similar breakthrough impact in extending the appeal of videogames, whatever the industry’s current problems. See below.) So far, no equivalent breakthrough program has fueled the consumer computer market. otably in education (programs for particular age gro_ps, earning disabled, foreiqn language, etc.) and enter: a i nr. < tit video versions of bridge and chess, crossword puzzles?, Strategy games for business, etc.). C. Diversity and Databases It is, of course, quite possible, even likely, that no single program will emerge to drive the consumer market, but rather that a whole range of programs, each contributing a small but significant utility, in aggregate will drive it. Indeed, the clear trend of the home computer market is to greater diversity and the beginnings of vertical markets, most 62 "User friendliness" is a requirement that varies between naive and sophisticated users, and even for the same user over time. The icons, menus, templates and prompts that are helpful when first learning a program become unfriendly once the user has mastered the program and becomes more concerned with speed and power. Developers are therefore writing programs that have different "layers," so that the user can adjust the help and feature levels of the program as experience increases, and the need for elaborate guidance decreases. The advantage of the layered approach is that a single program can offer both introductory and advanced features, and the first-time user, does not later have to relearn, say, new word processing commands, in switching to another vendor's more powerful program. Similarly, developers are working on programs that incorporate features that allow users to modify easily everything from the basic parameters and functions of the program to the differing skill levels required for mastery. Games and educational programs already offer these capabilities. Pioneering examples are Bill Budge's Pinball Construction Set {Electronic Arts, Sunnyvale CA) and Rocky's Boots (The Learning Company, Portola WA). The Yankee Group believes that this "soft" software approach increasingly will become the norm over time, allowing users to customize their most used programs to their particular needs and work styles. However, successful execution of consumer programs that incorporate these features will take time, and, in general, more powerful computers than currently constitute the home installed base. Beyond these approaches is the whole world of artificial intelligence r. The office is therefore considering, among other options, submissions in machine language rather than the more accessible [t languages; like Fortran and Pascal. CHAPTER FOUR SOFTWARE TECHNOLOGY AND ADVANCED COMPUTER GRAPHICS Advances in home and personal computer software technology are rarely advances in software engineering at all. With a few important exceptions in the areas of interactivity and multi-processor machines, very few new software techniques are pioneered on small machines. Rather, the rapid progress of micro software generally is a result of the increasing power of micro hardware, which has allowed an increasing number of existing minicomputer and mainframe functions to be implemented on personal and home machines. Personal computer software, then, progresses; by a "trickle down" effect from the mainframe world. Spreadsheets and "what if" financial modeling programs were in existence' long before VisiCalc — indeed, VisiCalc was developed on a-minicomputer, before being ported to the Apple. Mainframes dra'w better graphics with higher resolution and can even, with proper peripherals, play better games. Only a few microcomputer research areas — data flow machines, reduced instruction set computers (Rises) — are on what university and major R&D organizations would consider the frontier of software engineering. That said, the exciting prospect of home and personal computers is precisely that they will take areas out of the lab and put them into mass circulation. Until the advent of microprocessor-based computer game systems, computer graphics primarily were of interest to draftsmen and a few CAD/CAM % engineers. In a real sense, color business graphics and such highly interactive systems as Apple's Lisa have been legitimized by games, not the other way around: few companies would have made such an investment in a pre-Atari era. 108 109 „ chapter Two Impli.d, ptadictihg changes in »icrooo»putet software technology is an indirect process, requiring a prediction of trends in .icroco.puter hardware and an ana ysx of „h.t "big computer" features this progress will allow pass market levels. Per the rest, software aevelopp.n , especially entertainment software, revolves arc nd creativity, whidh is notoriously difficult to predict. Mr una ' creativity in software, as in architecture and other practical arts, eperates in the real wcrld. Chips and systems are building materials of software'artists: some types o _ creativity are possible with adobe, other types with glass steel. I. The Development of Broadcast Quality Graphics very few areas have been voted on by consumers with greater clarity than the guestioh of graphics. Mattel's Into 1 v slob - whether on, believed George Plimpton or not - useth. specific issue of graphics capability in its successful .. Z. with Atari, only to be knocked =ut in 1PBP by ole , which did the same thing to it. The resolution of a » P system is generally measured by how many vertical raster are used by the system and by the number of independent "pixels" (picture elements) it can display horizontally. Vertical resolution, the first number, is not arbitral, on 1 -v.D mv's raster beam paints conventional television sets, since the TV s ra a fixed number of lines down the screen. In the NTSC television system used in the U.S. and Japan, there are a 525 horizontal lines from top to bottom on the screen of t e at best no more than 4.4 are visible, the others berng v 1 distributed into the black -bars- at top and bottom o thescreen, that Is, in the vertical blanking interval, on the average home set no more than 250-400 lines can be be Visible, since consumer sets typically overscan to elamln the black bars, and may also be old or poorly adjusted. 1 ! ' m To reduce flicker, television displays are interlaced, that is, half the lines are drawn on one pass, and half the lines on another. Graphic display chips can generate non-interlaced video easily, but interlaced video requires considerably more circuitry, effort, and expense. The vertical resolution of computer systems thus "clusters" around two points, essentially 200 vertical lines per screen, and, less common, 400 lines per screen. Horizontal resolution is more variable, but also clusters around certain points as a result of the properties of the NTSC color signal. In general, horizontal resolution that is some multiple of 160 prevents a smearing of the color of a picture ("artifacts"). Thus, the resolution of the older Atari VCS is exactly 160 color, points, while that of the newer Atari 5200 is exactly 320. The horizontal resolution of the IBM personal computer color system is 640 dots across. The vertical and horizontal resolution of some popular systems generate color NTSC composite video. (See Table 4-1.) A. Game Level Resolution - the Tl 9918A For the balance of 1983 and into 1984, most video games and home computers will operate at a "game machine" level of resolution of approximately 256 points horizontal and 192 lines vertical. In large part, this standard of resolution will be the result of design standardization around the Texas Instrument 9918A "sprite" chip, used in the Coleco, TI 99/4A, and Japan MSX standard. . A number of companies have designed video display processor (VDP) chips, which take care of the "busywork" involved in updating raster screen displays. The first important VDP was Atari's early "ANTIC" chip used in the VCS game system. This chip, also known as "Stella" or simply as the VCS Television TABLE 4-1 SCREEN RESOLUTION LEVELS OF SELECTED COMPUTERS " AND VIDEOGAME CONSOLES x No. of Colors Screen Resolution: Ho. of Hues Horizonta l x Vertical Apple lie 8x1 280 x 192 Atari VCS 16 X 8 160 X 192 Atari 5200 16 x 16 320 x 192 Atari 400/800 16 X 16 320 x 192 Colecovision/ Adam 16 x 1 256 x 192 Commodore 64 16 x 1 320 x 200 Commodore VIC 20 16 x 1 176 x 176 IBM PC 8x2 320 x 200 IBM PCjr 8x2 160 x 200, 320 x 200 4 x 1 2X2 640 ■ X 200 NEC APC 8 x 1* 640 x 470 Telidon** 16 X 1 256 x 200 TI 99/4A 16x1 256 x 192 Timex 2068 B x 1 256 x 192 Monochrome Resolution: 720 x 364 Apple Lisa 720 x 350 800 x 300 Wang professional - 110 - Many shades available to end-user through User can create own colors by mixing different colored pixels with any standard color. * NAPLPS standard provides for a resolution of 256 x 192, although a terminal with higher resolution is supported. Lch individual frame can support 16 colors, though with color-mixing over 2,000 shades can be created. December 1983 Source: the Yankee Group 111 interface Adaptor (TIA), was designed by Steve Mayer and Ron Milner in 1976, not long after their first look at the 6502 processor that would become the "brain" of the VCS. "Stella" implemented a system now known as "player-missile" graphics. The VCS is a clever piece of hardware design intended to reduce RAM memory costs by generating its video display "on the fly," making the most out of its processor's' speed, rather than use a memory-intensive bitmap. Thus the VCS has only 128 bytes of RAM memory, in addition to some 16 or so 8-bit registers within "Stella." These serve to give the VCS a basic background (not unlike Apple II's low resolution mode) of 40 blocks across the screen. On top of this background, the VCS can "paint" two high-resolution players, each eight bits wide. By clever programming, 48 bits of high-resolution detail can be drawn across each horizontal line of the screen at a rate of 60 times per second. Interlacing the screen display produces more detail at a frame rate of 30 times per second. Updating the screen display slower' than this creates more detail, but with flicker, which consumers found highly objectionable in the first Atari version of "Pac Man." While the video chip used in the Atari 2600 can support two players, the chip used in the Atari 400 and 800 computers, and 5200 game machine can support four, along with a complicated array of other video effects. Atari's chips, however, have, in keeping with that company's arcade game heritage, generally been designed to move objects (spaceships, aliens) on a flat, .two-dimensional playfield. TI's video display chip, designed about the same time as Atari's second ANTIC chip, allowed not only for moving objects (up to five can be displayed on the same horizontal scan line), but for these objects to exist on-multiple planes, up to 31, 112 113 each with ascending order of priority. The result is a visual field that can easily be used to create an illusion of depth, since "nearby" objects mask out "distant" objects. The TI chip, like other video display chips, is essentially a type of coprocessor, which communicates with a main processor or CPU. . The architecture of the Coleco game system is a typical example of the use of a coprocessor to reduce the workload of a microprocessor or CPU, in Coleco's case a Z-80. The microprocessor need not concern itself with updating the video display, and can concentrate on executing the game, perhaps the classic example of a system that does not do this is the Atari VCS when it attempts to play chess; when playing the Atari "Chess" cartridge, the VCS simply turns off the screen, displaying random colors, while the microprocessor is calculating. B. Broadcast Quality Graphics A level of graphics quality beyond "game quality" graphics must be called "broadcast quality" graphics, that is, graphics that can, if properly formed and animated, create the impression of being broadcast analog television. Broadcast quality graphics have a screen resolution of 484 lines down and approximately 640 horizontal dots across, although the "temporal" resolution of such a system—the quality of animation that can be achieved—is far and away its critical measure. Video games and other forms of electronic entertainment are essentially interactive, real-time animation. As such, three hardware items are critical to their production: RAM memory size, monitor quality, and processor speed. 1. RAM Memory To be fair to the Atari VCS, the Coleco system was designed at a time when RAM memory prices were considerable lower than they were in 1976. In general, the steadily falling price c: RAM has allowed the development of "bitmap* graphics. Apple' Lisa, introduced in .January 1933, is perhaps the extreme example to date; Lisa comes standard with a full megabyte c: memory. Were the monochrome Lisa to use an 8- or 16-color display, the amount of memory needed by Lisa would be multipled by at least a factor of two. hr- With the advent of 256K RAMs, sampled in 1981 by the Japanese and in 1982 by IBM, AT&T, Intel and others in the U.S., and with 1- and 4-Megabit chips on the drawing boards, memory prices can be expected to continue to decline into the late 1980s. Memory cost, however, is not the only limit on the quality of graphics resolution that can be expected in home and personal computers. Equally important are total processing power, and monitor display resolution. 2. Monitor Resolution Although Milton-Bradley's Vectrex game system is sold with a specialized monitor, most home games and mass computers are likely to use standard television sets for the rest of this decade. The resolution that can be achieved in the NTSC system places a fairly firm limit on graphics resolution at 484 lines down the screen (the number visible out of the 525 lines used in the NTSC system) and approximately 640 horizontal dots across. The average ill-adjusted home television, of course, cannot be expected to achieve even this level of performance, and the number of horizontal dots varies' with the size of the picture tube. The highest-quality monitors (not commercially available) made by Panasonic, for example, have the following horizontal resolution: 920 horizontal 890 horizontal 790 horizontal 750 horizontal 20 inch tube 18 inch tube 16 inch tube 14 inch tube Internal Architecture and Data Bus Sizes for Selected Microprocessors adow-mask technology being technology with higher resolution ipeting technologies, like plasma i jlution, if other more convenient mnnihor resolution will hold for MC 6809 Intel 8 08 B Intel 188 Zilog Z-80 MOS 6502 Intel 80 8B 3. Processor Limitations Intel 8086 Zilog 2-8000 Intel 186 becomes less expensive, Other limitations or ,pear. Perhaps the most serious is the speed lessors work, or, more generally, the total , P ut that can be achieved in a multi-processo. jisa, despite its state-of-the-art 32-bit coprocessor, cannot, for example, update its . mode anv faster than a Intel iAPX 432 HP 9000 Motorola 68020 Source December 1983 have also increased in speea. new the Motorola 68020, operate at a frequency ■ta, compared to the four megahertz of the snahertz frequency of the 6502 used in the can r 116 processor. For high-quality graphic animation, no amount of processing power is enough: Digital Productions, a Hollywood computer graphics company started in 1982 by two computer scientists who, while at Information International, Inc., had worked on Disney's "Tron," uses a Cray-1 supercomputer for its animated effects. Semiconductor chips, at least those made of silicon and kept outside supercooling baths, will probably never achieve speeds comparable to that of the Cray. The realistic approach to graphics processing in micro-based systems, then, favors distribution of compression techniques for the video image among many chips. Video display processors Schuster Sterling Swift publishing Company Tab Books Warner Publishing December 1983 Source: the Yankee Group await a finished product. -They feel that each member of the team has a specific strength and that, by pooling separate but equal talents, a high quality product will emerge. While teamwork may be effective in some cases, the product may suffer from conflicting personalities and too much input of equal weight. The Yankee Group believes that better software results from a single source or a project under the leadership of one individual. This may best be achieved using a two-tiered approach in which a publisher contracts with a software production house to produce one or more programs.. The software house, in turn, oversees production of those programs using an in-house team process or project leader method. The following section is an example of a small production company that has been using the project leader approach very successfully. B. Tom Snyder Productions Inc. Based in Cambridge MA, Tom Snyder Productions is one of a growing number of small production houses that are becoming a significant factor in the software industry. The fact that the company is named after its founder is, itself, interesting, in that software is being identified with authors rather than with corporate entities. Tom Snyder is probably the best known creator of educational software today. (He dislikes the "education” designation, preferring to consider his programs simply as games.) His first commercial products were published by then newly-established Spinnaker, and the programs — Snooper Troops I and II — have sold beyond Spinnaker's and Snyder's greatest expectations, Snyder .started his company three years ago with three employees. There are 12 now, and more will be hired by 196 yearend. Snyder comes up with all of the potential game ideas, then assigns a programmer to take over the project. That person has full responsibility over the production of the game, overseeing coding, documentation, artwork, and time tables. Programmers can call half-hour brainstorming sessions once a week, inviting anyone else in the company to participate, but otherwise are on their own. The company's operating costs are about $40,000 per month and each project takes an average of nine months to complete with costs ranging from $60,00D-$100,000. Snyder currently is working with four publishers on a royalty basis: Spinnaker, Scholastic Inc., McGraw-Hill, and Scarborough Systems. In general, publishers are paid 40% of the distributor's revenues. Snyder's royalties come out of the publisher's revenues, averaging 22% for disk products, and 10% for cartridge software. With Snooper Troops, $3 out of every $44.95 {suggested retail) sale goes to Snyder Productions. C. Electronic Arts With the expectation that software publishing will mirror book publishing and the record industry to the extent, that authors -- not publishers or manufacturers -- are commodities to trade upon, a San Mateo (CA) company called Electronic Arts is amassing an impressive "stable." The "electronic artists" who have already signed on with the company's Talent Development Department to help conceive game ideas include basketball headliners Larry Bird and Julius W. "Dr. J" Erving, cartoonist Gahan Wilson, and Bill Budge, creator of the electronic pinball game "Raster Blaster" and the highly lauded "Pinball Construction Set." Electronic Arts was founded with $5 million in venture capital (compared with the average $1 million or less most software startups receive) and projects revenues of $250 million by 1986. The company released its first six games in May to 800 retail outlets and has seen four of them climb into the ranks of the top 10 best-sellers. An additional 24 titles were introduced in December 1983, packaged in record album format, with liner notes, snazzy graphics, playing hints, and the artist's name prominently displayed. Again, the Yankee Group issues the caveat that the world's greatest marketing and promotion efforts will be for naught if the product is weak, but Electronic Arts appears to have the bases covered. The company has put together what appears to be a hard-to-beat strategy: get a big name, promise him a higher ■ percentage of sales than other software publishers offer, then promote, promote, and promote some more. The higher volume such promotion should theoretically produce more than covers production and royalty expenses, according to Electronic Arts. Although the company's initial emphasis has been on entertainment and simulation products, it will be developing home management and educational software as well. Several of its non-educational titles promote learning nonetheless: • "M.U.L.E." — an economic simulation game in which players are stranded on a planet for six months and required to compete for and make use of raw materials in order to survive; • "Music Construction Set" -- developed by a 16-year-old high school student, this program uses musical icons to compose music which the user can playback immediately and/or print out. Loving detail also has been lavished on the Dr. J and Larry Bird game, "Dr. J and Larry Bird Go One-On-One" (available fall 1983). Not only did Erving spend several hours with the programmers assessing the accuracy of the strategy used in the game, but freeze frame photographs were taken of Dr. J on the basketball court to be incorporated into the game's graphics. 198 All of Electronic Arts' titles are in disk-based format, available for the Apple II, 11+ and He and the complete Atari computer line, and new titles will be announced for the Commodore 64. V. The Role of the Distributor in 1982, around 60% of O.S. software sales went through distributors. Much of this dollar volume was from third-party publishers, and the remaining percentages were divided among the major computer manufacturers who published and distributed their own software. Chief among these were TI and Atari, both of which have initiated policies which have alienated third-party authors and which may result in lowering their respective market shares significantly over the next two years. The national software distribution for the consumer market is shared by three distributors and several rackjobbers. (See Table 6-8.) In addition to these major companies, there are a growing number of small local distributors and national distributors that focus on a specific segment of the industry, such as Soft Kat (Van Nuys CA), a national distributor of educational software. A. Texas Instruments Although TI is no longer in the business, its strategy as a major contender in a tumultous year is of interest. TI used distributors for. only 10% of its software, selling the rest directly to its retail accounts. With its patented GROM (graphic ROM) chip technology, TI threatened legal action for any third-party publishers that develop software for the 99/4A Without prior consent from the vendor. Several publishers — most notably, Atari and Thorne EMI - called TI's bluff, however, by marketing software for the 99/4A. TI usually Deal with Mass Merchants 2 00 commissioned programs from outside sources, paid the author or publishing house a royalty, then manufactured, marketed, and distributed the product under its name. Many third party publishers, after extensive and fruitless negotiations, refused to cooperate with TI. They viewed the vendor’s rigid policies as shortsighted and unfair from the publisher's financial viewpoint. The larger publishers were reluctant to cede all control over packaging, marketing, and distribution to TI, but some concluded acceptable agreements. For example, Spinnaker (best known for its educational games), and Broderbund Software (game and computer software manufacturer) agreed to supply the program coding for several of their established "hits" to TI, which then translated it into ROM cartridge format for the 99/4A. In the first week of August, TI began a new service for its larger national accounts, called "detailing," otherwise known as rack jobbing. The vendor had agreements with KMart and Sears, in which TI agreed to assume responsibility for inventory, upkeep, stock balancing, and training, while the retailer maintained veto power over the detailer's activities. Detailers check their respective stores every other week, making sure that the demonstration console and software are in working condition, distributing literature, checking product movement, and generally seeing to it that TI's programs have a prominent position on the shelf. TI entered the rack jobbing ranks so that it can establish more direct control over its retail accounts. For example, whereas KMarts had been distributing products to the individual stores through company warehouses, as of October, each store ordered directly from TI, bypassing the warehouse. 201 B. Atari Atari, meanwhile, sells direct to many of its major accounts, but relies on its newly-created exclusive distributor force for most of its sales. This force consists of about 40 of the country's largest distributors who have agreed to drop all other lines in order to handle Atari's products. As inducement to join up, Atari offered the distributors 25% markdowns on its 1982 inventory (and a 40% markdown on the overestimated "E.T." videogame). The advantages to distributors include: • better gross margins; • fewer units of inventory; • ability to put marketing efforts behind a single line. The disadvantages to the distributors include the loss of a significant, percentage of volume from other publishers, an increase in risk by being tied to a single vendor (in this case one with mammoth losses), and an Atari-imposed restriction of sales to specified geographic boundaries. But the primary disadvantages are to national retail chains which will now have to deal with many different distributors instead of one or two, and to other manufacturers, which may be losing distributors to Atari. The Yankee Group believes that the cost to Atari of establishing an exclusive distributor network has not yet been fully realized in either amortised financial losses or industry goodwill. Claiming antitrust violations, Parker Brothers filed suit against Atari and initially succeeded in obtaining a restraining order on March 28, 1983. But the order was lifted a week later when the federal judge ruled that the freeze on Atari's plans would not foster competition. 202 C. Electronic Distribution and Publishing The Yankee Group has tracked the development of electronic publication and distribution in a number of previous reports. For many purposes, electronic publication and distribution is essentially the same activity, but for purposes of conceptual clarity, Yankee Group defines publication as the accessibility of software programs, but only on-line, or in volatile storage eg. Control Video Corporation's Gameline Service or Mattel's Playcable. Electronic distribution is defined as the availability of a non-volatile copy of the program to the retailer or end user, eg. the various product offerings by Xante (Tulsa OK), Romox (Campbell CA), and Cumma Technology Corporation (Sunnyvale CA). While both of these features could be combined into a single service offering non-volatile distribution to the home/end user, to date the various electronic teledelivery services offer either non-volatile distribution to retail, or volatile publication/distribution to the home. The Yankee Group believes that the economics and convenience of electronic delivery of software and services are so overwhelming that it is only a matter of when, not if, it will significantly displace more conventional methods of hardcopy distribution. As noted in previous reports however, there are a number of factors apart from economic and technological feasibility that influence the speed and scope of teledelivery services. These include the changed nature of the product, problems associated with billing and payment, and the psychodynamics of the shopping experience itself. Clearly however, 1984 will see a major thrust by various . vendors to make electronic delivery a commercial reality. In the retail environment, the horrendous inventory problems associated with videogame and computer software makes some kind 20 3 of electronic distribution extremely attractive, even as it threatens existing ways of doing business, and especially the livelihood of intermediaries like distributors and rack jobbers. In the home environment, the rising installed base of computers, and the declining price of modems is attracting companies eager to launch products as soon as critical mass is reached. Although a variety of.competing delivery channels are still be tested (telephone, cable, DBS, FM sideband, etc.), several companies, including Atari/Activision, Coleco/AT&T, The Games Network (now TGN Inc), NABU/Servenet, and Playnet, will be testing on-line game services in 1984. The various vidoetex offerings by Knight-Ridder, Times Mirror and Keycom will move beyond pilot testing into limited commercial testing in 1984, and CompuServe will be adopting a much more aggressive stance. The Yankee Group therefore expects the next two years to offer rapid advancement in the area of teledelivery, although none of the current contendors have yet shown products, that are clearly destined for success. Home of the Future will be closely monitoring developments in this fast moving field through a series of special reports on electronic publication and distribution in 1984. TABLE 6-9 DIRECT SALES BY VENDOR IN 1983 AS A PERCENTAGE OF TOTAL DISTRIBUTION Apple. 4501/0 Atari..70% Commodore. 50% Tandy. ° 0// ° Total apace refers to total square footage of store, including inventory space. Source: National Retail Details of America (NARDA) The "Big 3” - Sears, J.C. Penney, Montgomery Ward. Source: the Yankee Group - 205 - TABLE 6-10 AVERAGE SALES PER SQUARE FOOT OF TOTAL SPACE* Bookstore Audio store**.. General Merchandisers***.... Sales Type of Retailer Toy supermarket.. Department store. Mass merchant/discounter,... Computer store’*. Software specialty store. Video store**... Record store. $150.00 107.70 95.56 390.00 300.00 350.00 150.00 125.00 300.00 97.33 206 TABLE 6-11 AVERAGE RETAIL STOCK TURNOVER Type of Number Establishment of Turns Pizzeria. 47 Retail Mean Market. 35 Doughnut Shop. 21 Delicatessen.15 Toys. 7 Arts & Crafts. 7 Cameras. 5 Offices Supplies. 5 Books & Stationery. 5 Records & Tapes. 4 Radio, TV & Electronics. 4 Computer Store. 10 Software Specialty Store..6 Source: the Yankee Group CHAPTER SEVEN SUMMARY AND CONCLUSIONS I. The Market The home computer and videogame markets are complex and rapidly evolving. The videogame market is going through a severe shakeout that will get worse before it gets better. Although the installed base of home videogame consoles will rise by 35% (five million units) this year, and software unit sales will rise about 30% to between 75 and 80 million units, software revenues will be flat with 1982, at $1.5 billion retail. There is a shortage of megahits, either licensed from the arcade or originally developed. No title appears likely to generate unit sales much in excess of one million units in 1983, compared to three million plus units for Activision's "Pitfall" or five million plus units for Atari's "Pac-Man" in 1982. The market is glutted with mediocre product that will depress prices through the first half of 1984, and probably permanently alter the industry pricing structure. The value of the existing (1982) installed base of 14 million consoles (U.S.) is rapidly crumbling with the exit of Mattel and Odyssey, and retailer resistance to distributing software for hardware they no longer carry. Continuing software development for these units (as well as the Timex TS1000 and TI 99/4A) is problematic at best. New purchasers are spending less money on hardware and software, old purchasers are using their game consoles less, and retailer and consumer focus has clearly shifted away from dedicated game consoles to computers. The videogame industry, coin-op and home, is settling into a new and much reduced, but hopefully more stable, level of market activity. The Yankee Group believes that interactive 208 electronics is an important new mass entertainment form. However,’ it will take further breakthroughs in imaging technology, most notably in instant-access laserdisc players and broadcast quality graphics chips, to restimulate the market significantly and to broaden its scope. Depsite the enormous and largely unnecessary losses in the home computer market this year, the industry is well positioned for growth in 1984. The exit of TI, coupled with the official entry of IBM and Apple into the consumer side of the market, will impact the fortunes of the industry positively (though obviously not of every player within it). The Yankee Group believes the hardware market as a whole will move upscale and performance in 1984 will move towards the $500-$l,000 range. A move to the system sale, higher margins, and positioning based on factors other than price will help stabilize the market and move it in the direction of providing real utility rather than relying on hype and consumer fears for their children s education as it has in 1983. The installed base of home computers will be over seven million units by yearend 1983, and should be around 15 million units by the end of 1984. Most of the sales in 1984 will be of 64K-plus computers, which will provide a real and active base for software development. Perhaps the most important market development in 1984 will concern the emergence of electronic "delivery" of software. There are several important distinctions to be made about the various proposed services. The first is the targeted location of the service — retail location or home/office. The second is whether the service offers true delivery, i.e., permanent (non-volatile) copies for the consumer, or merely on-line access. 20 9 II. The Vendors The current shakeout among game developers is only the forerunner of a larger shakeout among software developers generally. The proliferation of titles, the increasing competition for shelfspace and the resistance of major retail accounts to dealing with more than a dozen -or so software suppliers will force a restructuring of the market. The new market will consist of several dozen major "publishers" drawn from the ranks of hardware manufacturers, software developers and traditional print publishing. These will leverage their existing product development, marketing, and distribution and financial strength to dominate the intensely competitive multi-billion dollar marketplace. Below them will be the veptical market and niche publishers numbering around a hundred, and below them, the author/ developent companies. Large scale software development, especially when geared to new hardware configurations, typically requires expensive development systems, this will remain the domain of the majors such as VisiCorp and Apple. However, authorship does not easily lend itself to the bureaucratic requirements of even the most flexible in-house control, and the Yankee Group expects the lone author/ entrepreneur and small software houses to continue to make major contributions to the industry. The rising cost of entry now typically around *1 million for the advertising costs alone for a national new product launch, will limit the role of the startups to authorship. The new few years will be years of acquisitions, mergers and joint ventures as the industry restructures itself. The channels relative success of the different software disttibtuion (video specialty, records, bookstores, software 210 specialty) in providing the appropriate levels of service and support will clearly shape the fortunes of the companies traditionally tied to those outlets. Because it obviates the inventory risk, electronic distribution is the one factor capable of shifting the balance of opportunity significantly back towards the smaller companies, at least in the short term. Market awareness of the product, documentation, demonstration, support and packaging remain factors pushing the market towards a limited number of major vendors. Ill; The Product The home software industry is still waiting, for its "VisiCalc" breakthrough product. Even without it, software for computer usage in the home will improve dramatically in both quality and range in 1984. Vertical markets will become increasingly important. The general trend of the consumer hardware market towards systems sales and more powerful units will give software developers greater flexibility in incorporating the design approaches opening up the business market. These approaches include various levels of program integration and the use of icons, micro controllers, touch screens and digitizer pads, for easier machine interface. However, hardware limitations will still impose some restraints, especially microprocessor power, memory and disk drive availability. Progress will be made toward standardizing operating systems around IBM and MS-DOS, but a multiplicity of incompatible systems will continue to prevail at the consumer level through 1984. For some inportant applications, such as word processing, spreadsheets and telecommunications, these will be a trend to either building the program directly into ROM {e.g., Coleco's Adam and Commodore's C264), or at least to bundle the applications with the hardware.