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Considering the mountains of money being made by many
software vendors, it is ironic that, given the high-flying
nature of the semiconductor industry, its software suppliers
have fared so badly. Can I really justify that conclusion?
Take our three largest software-only companies: FASTech, Consilium
and Promis. The business recession that is finally concluding
left these three companies so debilitated they could not survive
as independent entities. I doubt that their investors would
have chosen last year as an optimum one in which to cash out.
My guess is they were sold out of necessity. Moreover, the
prices paid will hardly send the venture capital community
scurrying to invest in new semiconductor-related software
startups. It is also interesting and very telling to note
that each was sold to a major hardware supplier.
Software development, like any other engineering discipline,
is expensive. The difference is that once the development
is complete, a software-only product is much cheaper to produce
and distribute than a hardware-based product. That should
work to the developer's advantage, but only if the customer
is willing to pay high enough prices to cover development
costs. This model works well for mass-market software, where
there are thousands or even millions of potential customers,
but not in an industry where the market is a few hundred copies
at most.
What about smaller software companies? Several have fared
better than their big brothers. Examples include GW Associates,
Brookside and a small company in my own little corner of the
world, Jon Goldman Associates. At a minimum they survived
the economic downturn as independently owned companies. While
not privy to the internal workings of these companies other
than JGA, I can venture a reasonable guess at what the prevailing
business model might be. "Find a product niche that's so small
the big companies aren't interested in it, and where the development
costs can be covered by the sale of a limited number of copies.
Strive to be the top supplier in your niche. As a corollary,
if you want to expand your business, find other niches - preferably
ones where you can reuse a substantial portion of your investment
in code development."
GW Associates has made a living by being the last word in
SECS communications. It owns the market for test software,
training classes, drivers, etc. Jack Ghiselli knows more about
SECS than anyone. Brookside has succeeded by being the major
supplier of data capture and host interface software for Lam's
etchers. They have a symbiotic relationship with Lam that
appears to be good for both.
JGA's niche has been in supplying data capture and analysis
software primarily for older technology horizontal diffusion
furnaces. Newer generation vertical furnaces generally come
equipped with OEM-supplied software of this type. We've managed
to worm our way into this market through a relationship with
one of the major OEMs.
Just one final point that will take us back to the starting
point of this commentary - why were all three major software
publishers absorbed by hardware suppliers? Because up to now,
other than for niche players, it has not been possible to
get top dollar for software that is not perceived as being
part and parcel of a hardware-based product. In other words,
a supplier who provides 25 cents worth of hardware along with
a software package that has a value of $10,000 is apt to be
able to sell the product for $10,000. But the value of the
software by itself is still perceived as merely worth the
price of the floppy disk that holds it. This is partially
due to the bootleg mentality many of us (myself included)
suffer from, and partially due to the high value placed on
the machines that actually process wafers. The bottom line
is that the foundation of a truly successful software business
model is probably made of metal.
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