PC Software's Great Year

Chris Swenson, NPD's director of software industry analysis, described a "perfect storm of new product releases in 2007." NPD's sales figures account for in-store and online sales for 2007 through the end of October.

The revival is a remarkable turnabout from sales since the turn of the millennium. "The compound annual growth rate [CAGR] for all of PC software from 2000-2006 was -0.5 percent a year in terms of dollar volume growth," Swenson said. "In other words, dollar volume has been flat for several years now. The fact that we're having close to double-digit dollar volume growth is a big, big deal. Retailers are ecstatic."

The big sales driver: Office 2007, which is selling like gangbusters. When comparing Office 2007 sales to version 2003 during the same early sales period, unit sales of the newer productivity suite are about double the older one, according to NPD.

"Office commands 17.4 percent of all PC software dollar volume, including PC games," Swenson said. "When people go to the store to buy software, there's a good chance they'll end up buying Microsoft Office."

The category with biggest year-over-year growth change and highest average selling price is operating systems. There, Windows Vista overwhelming leads the category, which is up nearly 50 percent from 2007. Vista's sales pull is surprising considering lackluster sales comparisons to Windows XP.

"Although shrink-wrapped Windows Vista is selling below shrink-wrapped XP levels in U.S. retail at the same point after its release many years ago, year-over-year retail sales of Windows are up significantly over 2006," Swenson said. He attributed some of the large growth rate to the "sawtooth" effect. "We were at the bottom up of the XP sawtooth last year."

Through October, Windows dollar volume share in the operating system category is 78.2 percent. Mac OS X dollar volume share is 21.3 percent and Linux is 0.5 percent.

"I think the reason why Microsoft's shrink-wrapped OS share isn't larger goes back to the discussion of why people aren't buying more boxed Vista," Swenson said. "Vista's more stringent hardware requirements and the relative lower price for a new PC that ships with Vista—even if it is only Vista Basic."

Even ahead of Vista's launch, Microsoft executives predicted that the operating system's retail sales would be much larger on new PCs than boxed copies.

Swenson took a moment to identify what he believes is an untapped retail Linux opportunity, particularly with Windows sales being stronger on new PCs. "It's interesting that the most consumer-friendly Linux [distribution] out there, Ubuntu, has pretty much written off the retail channel." Granted, it's free. But "there's potential for a low-priced Ubuntu SKU," he said.

Shelf space would help compensate for the lack of advertising and raise awareness for Dell and Panasonic PCs preloaded with Ubuntu, he emphasized.

While Microsoft released products driving sales in the most successful categories—business applications and operating systems—other developers contributed to the "perfect storm."

Swenson described Adobe's Creative Suite 3 as a "huge success story." CS3 unit sales are up more than 80 percent compared to its predecessor during the comparable sales period.

In similar category, Apple's Final Cut Studio risk paid off. Apple eliminated individual SKUs, compelling buyers to purchase the full Studio to get Final Cut. "As a result, not only Studio sales are up, but Final Cut Express sales are up as well," Swenson said. "It looks like a successful decision by Apple. Sometimes decisions like that backfire."

A common thread ties together all four products: Creative Suite 3, Final Cut Studio 2, Office 2007 and Windows Vista. Adobe, Apple and Microsoft all introduced higher-priced versions, and—with CS3, Office 2007 and Vista—more SKUs. The three companies successfully defied the trend of lower average selling prices by offering higher-priced SKUs.

Another trend is worth noting. It's implications are important for Microsoft's "Games for Windows" push and its software plus services strategy. By the numbers, the PC games category is down about 4 percent year over year. However, "our consumer tracker and surveys show that more money is actually being spent on games if you include subscriptions," Swenson said.

No matter how perfect, all storms come to an end.

"Given the product release cycles, I'm expecting a down year in 2008." Swenson said. "Just the natural ebb and flow, not a decision [on the part of consumers] to pull back on software spending per se."