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Scott Redmond

The computer software and services industry is influenced by both Gross Domestic Product and business spending. When the economy is growing, per GDP, demand for software increases. As counter balance, in periods after GDP growth businesses often spend the cash they built up during the prior economic growth. A portion of the money goes to prepare the business for the next economic growth cycle. The last two quarters of 2007 are expected to advance with GDP growing less than 2%, however, business spending of computer software and services is expected to advance at >4%.

Some companies with new products or dominant positions can also gain market share and may grow sales at twice the rate of the industry.

Operating Leverage

Companies have certain costs that it cannot avoid, these may be called 'fixed costs'. Fixed costs are required to maintain a basic level of sales. But, the very next sale may only require a small aditional expense by the company to produce, deliver, and service the sale. Those costs vary as sales increase or decrease and may be called 'variable costs'. As sales increase the corresponding costs to the company become smaller as a percentage of total sales. So profits can increase at a greater rate than sales grow. On the other hand, profits can decrease at a greater rate than sales decline.

Effects on other industries

As Microsoft (MSFT) introduces new products, the new products may require upgrades to Hardware Industry products. For example, Vista requires greater computing power than was previously standard on computers built several years ago. So any person or business wanting to upgrade to Vista would also need to upgrade its computers.