THE 2001 SOFT-LETTER 100.

[CHARTS AND TABLES OMITTED]

When we published our first Soft-letter 100 rankings back in February 1984, the "personal computer software" category was easy to define: Inexpensive, mass-market programs that ran on stand-alone desktop machines like the IBM PC, the Apple II, and various CP/M devices. The entrepreneurs who jumped into this market were mostly bootstrapped; they peddled software out of the trunks of their car, answered support calls, and struggled (not always successfully) to meet payroll. Ken Wasch, who'd just founded the Software Publishers Association, pointed out that the whole PC software business in those days was "smaller than the gourmet popcorn industry."

We're not sure what happened to gourmet popcorn (and we'd rather not know, thanks), but PC software has certainly grown up fast. The scrappy little companies that survived the shakeouts of the early 1980s are now a major economic force; personal computers--vastly more powerful than any early developer could imagine--now sit in just about every office and more than half of all homes. And instead of a stand-alone PC, the default platform is now a machine connected to both a local area network and the Internet.

Over the years, the industry's basic business models have changed almost as radically. The retail channel has imploded; in its place, more companies now focus on "enterprise" sales and niche markets, often relying on the Web as a direct sales channel. Prices have simultaneously crashed for consumer titles and escalated to new highs for professional products. And many more PC software companies now earn a hefty percentage of their income from professional services--just like their "legacy" counterparts who sell mainframe and server-based applications.

All of this turmoil leaves us with a tough question: Is there still such a creature as "personal computer software"? We've wrestled with this question often over the past few years as we try to redefine The Soft-letter 100 to reflect new software marketplace conditions. In the end, however, the question of what qualifies as "personal" software begins to feel like a murky theological debate that tells us nothing about the real world. In fact, many of the most interesting new PC applications--CRM, Web development and analysis tools, data storage utilities--exist to support individual users, but are so server-centric that the individual desktop user hardly matters.

Meanwhile, there's the Microsoft phenomenon. When we published our first rankings, Microsoft was a not-insignificant player that ranked #2 on our list after MicroPro International, the developer of WordStar (see page 4). For many years, Microsoft's size was roughly comparable to companies like Lotus, Ashton-Tate, and WordPerfect. At the time, revenue and market share were widely accepted as measures of corporate success, and our rankings were a useful way for companies to benchmark their performance against the industry as a whole.

Now, of course, Microsoft looms so large that the whole notion of revenue-based rankings seems almost quixotic. The top hundred independent companies on this year's list generated $34.553 billion in revenues (up 9% from last year's $31.809 billion)--but Microsoft by itself brought in 69% of that total. The nearest runner-ups on our list--Adobe, Novell, and Intuit--managed to break the billion-dollar mark during 2000, and another 18 companies each pushed beyond the magic $100 million level; but sadly, these major accomplishments seem almost trivial if we use Microsoft as an industry yardstick. (Another statistic that makes the same point: Great Plains Software, the tenth largest company on our list, had revenues that amounted to just one percent of Microsoft's year 2000 sales--and has just become a Microsoft subsidiary.)

Clearly, it's time to rethink revenue rankings and personal computer software as the basis for a publication that has sometimes been called "the software industry's annual report." It's never easy to pull the plug on an institution like The Soft-letter 100, but we've decided that this year's rankings are the final episode in the 18-year history of The Soft-letter 100. It's been a fascinating and often-enlightening project, and now it's time to go back to the drawing board.

(For those who are curious, we're working on a replacement report that will identify an annual group of "benchmark" companies based on productivity, profitability, and growth. Stay tuned for details.)

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Last year, the collapse of so many venture-funded dot-coms was a handy reminder that traditional software companies (however we might define them) are far from obsolete. The hundred companies on our list qualified because they have real revenues and real customers, not just bushels of cash that they spend on public relations. Some of our top hundred are less than healthy, but the overall median growth rate for The Soft-letter 100 was a respectable 22%. These hundred companies also tend to score well on productivity, with a median sales-per-employee ratio of $155,207. Moreover, there are still a fair number of high- performers on our list (see page 2) that achieved year-to-year growth rates of more than 100% and productivity in excess of $250,000 per employee.

At the same time, this is the third year in a row when at least a quarter of the companies on our list dropped out (see page 5). Roughly a third of these departures were the result of acquisitions, reflecting an ongoing industry consolidation trend in larger market segments, especially accounting and consumer software. (As an interesting side note, many of the acquirers in recent years have been European software companies like Sage, Havas, and Infogrames.)

It's worth pointing out that being acquired may remove a company from The Soft-letter 100 without diminishing its ongoing presence in the marketplace. That's particularly important in consumer software, where there are now hardly any independent publishers left that primarily serve PC owners. What our rankings don't show is that these companies (and the revenues they generate) have become part of hybrid entertainment companies (such as Electronic Arts and Disney) that treat software as part of a diversified portfolio that may include videogames, magazines, movies, Web sites, and other digital content. Software publishers may vanish, but their products and their markets certainly live on.

It's also important to note that there's been a continuous upwelling of new companies that take the place of the departures. Some of these newcomers dominate rather esoteric niches--satellite design, plastic molding, criminology--that are often dismissed as unimportant "vertical" markets. It's not always easy to find these companies, but we suspect they now make up a substantial part of the total software universe. Moreover, these niche developers are some of the healthiest players in the industry, largely because they face relatively little competition in either pricing or technology.