As computer stores get bigger and bigger, small software publishers are finding it harder and harder to crack the retail market. In this respect, of course, there's nothing unique about the software industry. Whether they're selling books, beer, or backup tapes, small businesses have always found it difficult to squeeze onto superstore shelves. Retail distribution channels dominated by mammoth chains limit both purchasing options for consumers and growth opportunities for small, innovative businesses.
All in all, an estimated $4.3 billion in software was pushed through retail channels in 1995, at least according to market-research firm PC Data. What overwhelms you when walking into a computer superstore is not the variety of software, but the volume--row after row of shiny, shrink-wrapped boxes, but mostly from a few publishers. It comes as no surprise that Microsoft leads the pack, with approximately 21.4 percent of the retail software market. Trailing behind are companies such as Intuit (4.9 percent), Broderbund (4.6), SoftKey (4.2), Symantec (3.8), Adobe (2.5), Novell (2.4), and so on. By some estimates, the top ten software publishers own perhaps three-quarters of the revenue and half of the shelf space in computer superstores.
If supply and demand were all that software retailing is about, there'd be little room for concern. However, there's more than meets the eye when it comes to chainstore glitz. It's common practice in superstores to sell shelf space. You want to have your software on the end of an aisle? As the publisher, you'll pay the chainstore for the privilege. Want to be at eye level on the top shelf? Pull out your checkbook and unlimber your Bic. According to some who've paid the devil its due, it can cost up to $20,000 just to get on a shelf in the first place, with ongoing monthly fees to stay there. Some large software publishers, in fact, are paying upwards of $30,000 per month for prime positions. Interestingly, when I posed the question, "How does a small software developer get onto your shelves?" to a CompUSA spokesperson, her response was, "This is not something we want to talk about now--maybe never."
Of course, other industries--notably grocery stores--sell shelf space, too. The difference, however, is that paid positioning accounts for less than 2 percent of store shelves. Nor, for that matter, is the software industry as cut-throat as, say, the beer business. Anheuser-Busch's recent "100 percent share of mind" policy darn near put microbreweries such as Flying Monkey beer out of business because of the requirement that independent beer distributors carry only Anheuser-Busch brews. (Coincidentally, Anheuser-Busch raised the price of Budweiser three percent after instituting the policy.)
Putting the stein aside for a moment, software publishers do have alternatives in retail channels--direct and catalog sales. (Distributors provide a third option, but are often oriented toward VARs.) Both channels are viable for small software publishers who can't afford superstore entry fees or margins, or who have a package that appeals to a relatively narrow market. In the development-tools market, for instance, catalog services such as Programmer's Paradise and "classified" ads in the back of magazines like DDJ have, for years, been the launching pad for small publishers and the shopping aisles for users looking for innovative and/or hard-to-find software. Nor is there any question that the Web has shaken things up in both the direct- and catalog-sales business, as marketing is easier for publishers and purchasing cycles shorter for buyers.
If nothing else, sophisticated computer users feel comfortable in buying sight-unseen, as evidenced by hardware-sales figures. In the second quarter of 1996, for example, the combined shipments of Dell, Gateway 2000, and Micron grew by 56 percent over the same period in 1995. In comparison, the rest of the PC industry grew just 9.7 percent. (Overall, Dell shipped 405,000 PCs in the second quarter, Gateway 362,000, and Micron 90,000.)
Web-based marketing is also coming on strong in book selling, an industry dominated by superstores and chains. Between mid-1994 and the end of 1995, the number of web sites multiplied 47 times. In the same period, the number of web-based bookstores multiplied 99 times. The Hermes Project, a University of Michigan business school study measuring the commercial potential of the web, found that books and computer software/hardware are some of the most commonly purchased items on the web. The study also indicated that the use of Internet resources for purchase-related information is surpassing traditional direct mail, and approaching print media levels.
Ultimately, the big losers in this mega-mania mindset are consumers--the people who use the software you write. Too often, users don't know what innovation is because it isn't in the interests of superstore chains to stock it--there's no margin and not enough sell through. A superstore marketing executive was recently quoted as saying "Our customers vote with their checkbooks" (apparently, as do superstore suppliers), implying that checkbook voting is the most powerful tool consumers have to bear. He's right. And, in the spirit of this election season, join me and cast your ballot for small business and innovative products.
Jonathan Erickson
editor-in-chief