Market forces make software stores a dying breed
By Troy Wolverton
Staff Writer, CNET News.com
October 15, 2001, 4:00 a.m. PT
Being a software retailer these days is a lonely business.
Dozens of such stores have closed shop in recent years, unable to compete with discount prices at mass-market chains, software bundled onto computers, or the growing use of the Internet to find software. And for those that remain, the trends don't look good.
"It's just a lousy business for everybody. The bottom line is it's really hard to find any trend that's been up for retail," said Jeffrey Tarter, editor of Softletter, a newsletter focusing on the software industry. "I won't say it's dead, but it's in decline."
The retreat of these specialty stores reflects the tectonic changes of the retail software industry, which has seen its products grow into mainstream commodities, able to be sold by mass merchants alongside paper towels, CDs and furniture. It also marks an end to something of a golden age for software, when specialty stores carried a wide range of titles and enthusiasts lined up for the latest programs.
In a game of narrowing margins, mass retailers and office superstores can negotiate low prices on software and sell titles at deep discounts that independent software stores, and even some of the larger computer stores, simply can't match--relegating them to the equivalent of small groceries competing against Costco.
Moreover, for most consumers, today's computers already come equipped with more than enough software when they are sold. And if customers do need more software and can't find it at a mainstream superstore, they are likely to go to a Web site to search for a free version of what they're looking for.
"The profile of available places for people to buy software has changed over the years," said Anne Griffith, research director for the Software and Information Industry Association. Software has become less exotic, and businesses have begun to buy software in the same place that they buy other office products, she said. Meanwhile, "software-only stores are virtually impossible to find anymore."
One of the highest-profile victims of this trend is Egghead, which filed for Chapter 11 bankruptcy in August. The pioneer retailer tried to reinvent itself out of survival, closing all its retail stores to focus on online sales and merging with online retailer Onsale.
In many ways, the story of Egghead is a direct reflection of software's business evolution.
In the PC industry's infancy in the early 1980s, PC hardware was already becoming a commodity, with a variety of companies offering similar machines with similar features. But because computers didn't really do anything until people bought software to run on them, customers were willing to pay a premium for the latest applications, utilities and games.
Joanne Correia co-owned a computer store in Worcester, Mass., from 1982 to 1984. At the time, Correia and her partners sold their computers at cost, figuring they could make up the difference on sales of printer cables, chair pads and--especially--software.
"That's where stores made their money," said Correia, now a software market analyst with the Gartner research group. "There were good margins on software all the way into the 1990s--wonderful margins."
Chasing after those margins, companies such as Egghead, Babbages and Software Etc. launched national chains of software stores. Along the way, numerous other independent stores or smaller chains sprang up in hopes of cashing in on the boom.
By 1993, Egghead was a profitable chain, with more than 200 stores and sales exceeding $500 million in revenue. Babbages had nearly 250 stores and more than $200 million in sales.
But in the last 10 years, Babbages was sold twice and, like Egghead, resorted to Chapter 11 bankruptcy protections.
The situation is even worse for smaller specialty stores, many of which have been forced to close. Those that remain have begun to focus more on games for consoles such as Sony's Playstation 2 and Microsoft's Xbox than on PC software.
The Happy Mac, a San Francisco-based computer store that sells and repairs used Macintosh computers, offers a small selection of software titles but says they only account for about 1 percent of the company's revenue. "We couldn't compete with Fry's or CompUSA on price, so it's silly for us to even try," owner John Andrews said.
A recent study by the Software and Information Industry Association indicates a growing number of consumers have begun to agree with Andrews.
In 1994, 38 percent of home PC consumers bought "personal productivity" software--programs such as tax planning, databases and spreadsheets--in a software specialty store, according to the survey. By 2000, only 18 percent of home customers bought such products in a software-only store, the study showed. PC hardware stores saw a similar decline.
Instead, home consumers are buying these products at electronics stores, whose market share in productivity software jumped to 22 percent last year from 13 percent in 1996. Office superstores, where 5 percent of home PC users bought such software in 1994, rose to 11 percent last year. And online retailers, where a negligible percentage
of home PC consumers bought productivity software in 1995, jumped to 8 percent by 2000.
After buying a computer online recently, San Francisco resident Daniel Kasoff went into his local Office Depot to buy the operating system for the machine. Kasoff said he makes most of his purchases at Office Depot or CompUSA, not at software specialty stores.
"I tend to go toward those because of the variety and the prices," he said.
When Kasoff purchased his computer on uBid without an operating system, he went against the mainstream in computer purchases. Most computers sold today not only include the operating system, but also come bundled with a large amount of useful software, including Web browsers, word processors, spreadsheet programs and money managers.
The Net effect
The Internet has also had a major impact on software sales. While brick-and-mortar retailers can carry only a limited number of titles, online retailers such as Amazon.com and Buy.com have offered a virtually limitless inventory.
Simon Rivera, a technology specialist at San Francisco's Office Depot, said he often has to refer customers to other retailers because Office Depot doesn't have the software they are looking for. His store doesn't carry any Macintosh software, for instance, or such popular applications as the full version of Microsoft Word.
"I refer people to other places, but most of those don't have them as well," he said.
And customers are starting to figure out that traditional retailers don't have the titles they want. "That's part of a reinforcing cycle: It's not just that buying online is easier, but retail itself has become harder to deal with," Softletter's Tarter said.
There's also a lot of free software online that people have been increasingly willing to try as fast Net connections have made downloads faster and easier.
Adobe Systems has seen that happen with its digital imaging software, said Mark Dahm, product manager for PhotoShop Elements. On the Internet, consumers can find a number of free programs that have many of the features they're looking for in digital imaging software.
In addition, many receive free copies of such software bundled with scanners or digital cameras and, at the retail level, can find fairly sophisticated programs for "next to nothing," he said.
"Consumers tend to think about digital imaging software as something that should be a freebie," Dahm said. "It's very difficult to try to monetize a product at retail."
And as people hang onto their computers for longer periods before replacing them, their software purchases become less frequent. That is likely to continue in a sluggish economy, where projections for PC sales are dismal compared with previous years.
"The net effect for software resellers is that it's a tough business to be in," said Chris Le Tocq, an analyst at Guernsey Research.