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Boom in "middle market"

The next big market for computer software, hardware, and networking will be driven by small businesses, not Fortune 500 companies.

Boom in "middle market"
By Mike Ricciuti
September 18, 1997, 6:00 a.m. PT

special report The next big market for computer software, hardware, and networking technology won't be driven by Fortune 500 stalwarts like Citibank, General Motors, and Boeing.

Instead, the likes of Microsoft, Netscape Communications, IBM, and Cisco will CNET Radio examines niche markets online be knocking on the doors of muffler shops, dentists offices, car washes, and other small businesses, hoping to sell them on the latest cutting-edge technology that could give mom-and-pop operations the same business advantages that the blue chips have been enjoying for years.

Mom and pop businesses

And the technology those vendors will be hawking will be simpler to use, cheaper to buy, and much easier to maintain than the high-end technology sold to large companies.

"These companies do not have, and do not want, an IS department," said Peter Kastner, an analyst with the Aberdeen Group. "They want the benefits of modern computing, but they can't afford to care for and feed this stuff like everyone else."

But why the sudden rush by technology companies to woo the estimated 8 to 10 million small businesses that they have generally shunned in the past?

One reason is a simple matter of economics. Small The market these guys are drooling over is the 20- to 100-employee segment. If someone like Microsoft can capture a fraction of them...that's
20 million seats. companies have become more willing to part with a fraction of their hard-earned money in exchange for much better technology than was commonly available a few years ago, which can give them a competitive edge. The actual budgets may be modest, but the sheer volume of this vast "middle market" between large corporations and home PC users adds up to one hugely attractive target.

"The market these guys are drooling over is the 20- to 100-employee segment," said Eric Brown, an analyst at Forrester Research. "If someone like Microsoft can capture a fraction of them, let's say a million companies, and they each install software for 20 users, that's 20 million seats. And that's a market."

Another reason for the sudden interest: In truth, the technology firms that sell to the Fortune 500 make up a pretty exclusive club. Big corporations typically trust only the household names in technology, and they usually keep coming back to the same ones. That leaves little room for a smaller vendor to break into the big leagues and makes it difficult for even the large players to grow their market share.

"There is a point of maturity in the large-scale environments. There are only so many vendors who really matter in the mainframe space, for example," said Don DePalma, another analyst at Forrester. "At the corporate level, buyers tend to turn to trusted companies. And the Web space is still the Wild West. So that means that vendors need to find new markets [to grow their revenues]. And one of the obvious places for them to go is to small businesses."

Information systems firms have made forays in the small business market in the past. Novell captured a large chunk of business from smaller companies in the late 1980s and early 1990s with its NetWare networking software. But analysts said Novell's influence is waning, and other vendors' previous marketing strategies have just plain failed.

"It's a significant opportunity. But [vendors] have not been able to figure it out," said Rob Enderle, an analyst with Giga Information Group. "Novell has owned it in the past. Now with Novell failing, there is a huge opportunity for other vendors to move in."

This time, technology companies may have hit on The market is underpenetrated: Only 40 percent of small businesses are online. Less than 50 percent are networked. the right formula, analysts say. Vendors like Microsoft have reworked their big-business products with new features aimed at small customers. This fall, for example, Microsoft will ship Small Business Server, a downsized version of its BackOffice package.

That bundle includes most of the features offered by the more complicated BackOffice package, such as the SQL Server database, the Windows NT Server operating system, and the Exchange email and groupware software. Just as important, it also includes new step-by-step setup routines intended to make installation and maintenance a snap for companies that don't have the luxury of a full-time IS staff. And Microsoft is expected to signficantly shave BackOffice's current list price of $2,499.

Companies say the move was driven by small businesses that want access to the technology the big companies use.

Betsy Johnson, group product manager at Microsoft, estimates that of the estimated millions of small businesses, half are "ripe in terms of looking for a new network," she said. "The market is underpenetrated: Only 40 percent of small businesses are online. Less than 50 percent are networked."

IBM plans to target the same market with a server software bundle to debut later this year, sources said. And a slew of networking and hardware companies are already making sales calls on small operations.

Whatever the reasons for the renewed focus, small-business owners are already snapping up products and installing small business packages.

Cortney Foster, partner with Foster & Company, a CPA firm with six employees, is beta-testing Microsoft Small Business Server with the intent of replacing a network that the company has outgrown. "There was a learning curve. It was pretty rapid, and it wasn't that hard," Foster said.

"And I would say that definitely the time I spend learning it has already paid for itself in efficiency." End of story

Reporter Paul Festa contributed to this story.

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