Doug Carlston - Software People. An Insider’s Look at the Personal Computer Software Industry

Companies should usually be undercapitalized. It’s good for them because it helps them to remember the essential purpose of their business—to make money, not to spend it. The very existence of the venture capital community with its vast investment resources changed the way many companies did business and in a way blurred their vision of their purpose. There was incentive to posture, to try to show the greatest rates of growth and most positive financials at a very early stage in a company’s life. Many of my associates took to fudging their numbers slightly upward when they talked to investors, sometimes doubling or tripling their actual sales. Maybe they just changed the time frame a little. A question was asked about last year’s sales, and they would answer with next year’s expectations.

The fudging that I’m describing was never intended to be a form of deception. If anything, we were deceiving ourselves, or instead, falling prey to a kind of delusion that was relatively well founded in fact. After all, we were in an industry where a company could start with revenues of several hundred dollars a month and grow to a million dollars a month within a couple of years. Look at Microsoft, MicroPro, Brøderbund, Sirius, Sierra—all started on shoestrings, and all soon were doing business in the tens of millions of dollars annually. Of course next year’s sales figures would be a healthy multiple of this year’s. That’s just the way it worked in the software business—at least during the boom years.

The reason these overestimates were harmful was that many companies failed to set up contingency reserves, which not only save taxes but also furnish a cushion to soften the impact of downturns in the industry (and it must be remembered that this was an industry in which the word downturn was seldom publicly mentioned before Atari introduced it).

Furthermore, many of the early software companies tended to believe the fantasies about our business that we and the media had created, and to act accordingly. Outsiders, viewing the mouth-watering “make a fortune and have fun” fantasy, wanted to be a part of it. Some of them joined and helped glut the market.

When companies discover that they are in trouble, they sometimes look for a single solution to their problems—the “big score.” In the microcomputer world, that usually meant one gigantic contract with one of the hardware vendors, a million-dollar deal that would magically turn red ink to black ink and restore the dream. This is the final reason many companies failed—they counted on the big score, and the major partner failed to deliver. Sometimes it was because the major partner backed out of the market, like Texas Instruments. Sometimes the partner had troubles of its own, as did Atari. Sometimes the software companies had unrealistic expectations of what these major players would do for them.

Synapse counted on Atari to provide a good deal of Synapse’s revenues and ended up being disappointed when Atari failed to pay for millions of dollars’ worth of software that it had purchased from Synapse. Broderbund signed a contract with Texas Instruments that might have provided millions in revenues. When TI pulled out of the market, we considered ourselves lucky to recover our out-of-pocket costs.

The shakeout will probably continue through 1985, but as the word implies, it is just the end of an era in which everybody seemed to flourish—not the end of the industry. After the next chapter I’ll take a look at a few of the directions software and software publishing are likely to take in the future. But first, I’d like to introduce you to another software industry, one that has striking parallels with the software world I’ve been describing, and equally striking differences.

Although the personal computer revolution began in the United States, it has become a global phenomenon. In fact, in Japan a hobbyist community has evolved into a full-scale industry, a process that has been similar in some ways to the growth of the microcomputer software business in the United States. This chapter is probably the first word to come to many people regarding the Japanese software milieu, but I can guarantee that it won’t be the last. Japanese software doesn’t sell in the United States. But neither did Japanese steel, automobiles, cameras, or electronics ... at first.

My first encounter with the software people of Japan took place in the very early days of Brøderbund, and the wholly circumstantial nature of the meeting is a prime example of the importance of the random factor: Our company’s business relationship with the Japanese software industry and my personal friendships with many software people in Japan began casually, when one of the occupants of the microbooth next to ours at the 1980 West Coast Computer Faire borrowed Brøderbund’s Apple to demonstrate some new game programs.

That software was from a Tokyo company called Star Craft and was so popular that after we returned to Eugene Gary and I made an agreement with one of our booth-neighbors at the Faire, a man named Mioshi, who was representing Star Craft at the time, to sell those programs ourselves. As it turned out, that chance meeting helped ensure the survival of our young company, for Gary and I ended up selling more and more of those game programs in the early months of Broderbund’s existence. Moreover, that encounter eventually led to our introduction into a whole network of Japanese microcomputer entrepreneurs.

Of course, long before this encounter took place, a part of the Japanese software community had influenced the microcomputer industry in the United States for several years, particularly in the days of the video game machines that preceded microcomputers. Although arcade games were not computers because they could not be programmed by the people who used them, they contained microprocessor chips, and that meant that the most important element in the video game systems was the software that instructed each chip to play the game designed for it. The arcade game business brought young programmers into the Japanese electronics industry before microcomputer hobbyist communities surfaced in either the United States or Japan.

The size of the computer hobbyist culture in Japan—the network of technically sophisticated enthusiasts who put together their own hardware and create their own programs for microprocessor-based computers—may be twice as large now as it was in the United States during the homebrewers’ heyday, even though Japan’s total population is half that of this country. Although the hobbyist population in both countries is a small fraction of the total computer-using populations, the hobbyists have exerted a disproportionate influence on the software industry. Just as Microsoft, Apple, and other microcomputer companies in this country were started by intense young hobbyists, a very significant part of the Japanese software industry was created by similar enthusiasts.

It was these hobbyists’ predecessors, however, who were Japan’s first software people—the young programmers whose video games were instantly popular with and enormously profitable to the Japanese hardware manufacturers of arcade game systems. These programmers were also culture-free in a strange way: Handling a joystick and shooting down alien invaders with bolts of purple lightning appears to be an equally hypnotic experience in Scandinavia and Indonesia, L.A., and Yokohama. A significant fraction of the world’s coinage began to flow through these addictive, hypnotic new devices. Indeed, the Japanese arcade game industry was most responsible for triggering the video game craze in the United States when the Japanese exported Space Invaders —the original “shoot-’em-up” game—and followed it with dozens of other arcade hits, including the phenomenally successful Pac-Man.