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The five rules for successful stock investing Part 10

The software industry is intensely competitive, but it has economics few industries can match. Although the up - front costs for creating software are huge, production costs are not largely because software can be burned on a compact disc | 19 Software The software industry is intensely competitive but it has economics few industries can match. Although the up-front costs for creating software are huge production costs are not largely because software can be burned on a compact disc or delivered over the Internet for almost nothing. When a company such as Microsoft hits a home run with a product like Windows it can generate operating margins in excess of 40 percent. Established software companies are cash cows too. Working capital management is typically good because software can be stored and shipped electronically. This leads to low inventory and accounts receivable balances. And because little capital is required to build software successful software companies generate tons of free cash flow. Finally software companies have excellent growth prospects. Companies will continue to buy technology that makes business run more smoothly. Software can automate tasks such as accounting and improve relationships with customers. High labor costs encourage the use of software because time-consuming tasks such as budgeting can be reduced and increase Michael Trigg with Pat Dorsey. 2.66 SOFTWARE productivity. And when firms face tough times with falling revenues software can help cut costs. Segments of the Software Industry There are many nooks and crannies in the software industry. But a common theme is that most are oligopolies with only a few controlling the majority of sales. Because technology buyers are inherently conservative and loath to buy products from a vendor that might go out of business and leave them stranded for basic service companies are increasingly buying only from industry leaders. Here are some of the bigger segments of the software industry. Operating System An operating system runs all the other programs on a computer. Tasks include sharing memory between applications and handling directions from external hardware such as printers. There are few opportunities in this market with .