CityEconomist

THE NYC SOFTWARE/IT INDUSTRY
How NYC Can Compete More Effectively in Information Technology
April 1999
Office of the Comptroller
City of New York, Alan G. Hevesi, Comptroller

First Deputy Comptroller: Steve Newman
Deputy Comptroller for Budget: Jacques Jiha
Chief Economist: John Tepper Marlin
Director of Economic Development: Joan Firestone
Staff Economists: Farid Heydarpour, Janine Berg, Michael Zhang
Consultant on Science Policy: Henry Etzkowitz
                                                                            

Download entire report in Adobe:     Part I ( 315  KB)             Part II (373 KB)  
     

                                                          EXECUTIVE SUMMARY

This report seeks to measure and evaluate the growth of the software and information-technology (IT) industry in New York City (NYC), to compare NYC with other cities, and to compare NY State with other states. It also identifies obstacles to the industry’s growth and how NYC and NY State institutions can ameliorate them.

The software industry represents a source of new jobs and not incidentally a revolution in the workplace. The invention of movable type (credited to Gutenberg in 1447) meant that one person could communicate with virtually unlimited numbers of other people, but at a significant printing cost. Other inventions (such as those of Morse in 1837 and Marconi in 1895) made possible communication with virtually no marginal transmission cost, ushering in the radio and television broadcasting industries. Now, software is at the center of the latest Information Revolution, transforming the way we live and work. When the Internet fulfills its promise, people will be able to work anywhere.

"Software" describes the codes people write to instruct computer "hardware" (physical devices for computing) to do tasks people need them to do. Software tells computers how to collect, sort, and exchange data, whether in the form of words, numbers, drawings, or photographs. Businesses use software to manage their employees and production facilities, and to take orders and obtain payment from their customers.

In this report, the software industry is defined to include information-technology (IT) functions, i.e., all people employed in the "computer-services" category, except for those working on the hardware functions of leasing and repair. The industry is therefore defined as made up of firms (including units of larger companies) in one of the nine Standard Industrial Classification (SIC) codes 7371 through 7379, less the two hardware-related codes 7377 and 7378.

So defined, this report concludes, the software/IT industry has been growing rapidly in the United States, and that NYC had, as of 1992, lagged seriously behind Silicon Valley and the Boston/Route 128 area. But it also concludes that NYC has in recent years been sharing strongly in the growth of the software/IT industry and has carved out several important areas (notably Internet-related commerce) where it has become a leader.

The report’s analysis and conclusions are subject to the following caveats: 

• This study, like the software/IT industry itself, is a work in progress.
• Its focus is on the City and State, not on non-NY State parts of the NYC region, nor on national or international software developments.
• Many software industry data classifications are obsolete as the industry changes.
• Software-industry job data are self-reported and depend on judgments made by individuals designated by reporting firms to file unemployment insurance forms.
• Jobs in new firms tend to be under-reported.
• Employees in software activities at non-software companies are not included. They may add from double to five times the number of workers in self-identified software companies.

The Software/IT Industry in NY: Firms, Employees, and Wages. After losing ground within NY State in 1980-1992, NYC made important gains in 1992-1997. NY State had 7,446 software firms in 1997, following a fairly steady average annual increase between 11 and 12 percent (11.4 percent since 1980 and 11.8 percent since 1992). Of the NY State firms, 41 percent (3,013) were in NYC. The number of software/IT firms grew an average of about 10 percent since 1980, and a much faster 13 percent since 1992. Nearly one-third of the firms (32 percent) were in the NYC suburban counties, which experienced an average annual increase of about 12 percent in 1980-1997 and a much slower 9 percent in 1992-1997. The remaining one-fourth (28 percent) of the firms in 1997 were in the upstate counties. (See Summary Table.)

Summary Table. The Software Industry in NY State, NYC, and NYC Suburbs, 1992 and 1997

* "Firms" include multiple locations within companies that report unemployment insurance separately.

** Wage rates for 1992 are inflation-adjusted, i.e., they are in 1997 dollars.

Source: NY State Department of Labor, unpublished data from ES-202 unemployment-insurance filings (which under-report new start-up firms) for the 4-digit SIC codes 7371-7376 and 7379.

Number of Employees. NY State had 73,597 employees working for software companies in 1997, up by an average annual rate of about 7 percent over 1980. NY City had 29,550 employees, 40 percent of the employees in the State, up by an average annual rate of 6 percent over 1980. NYC’s suburban counties had 17,056 employees, up by an average annual rate of 6 percent over 1980.

Since 1992, NY State’s computer-services job growth has begun to catch up with the nation’s growth, as the State recovered from one of its worst-ever recessions. In 1980-1997, NY State’s 3.2-fold increase in these jobs was well behind the national 4.6-fold increase. But for the industry in 1992-1997, the 1.6-fold increase in NY State was close to the national 1.7-fold increase.

The same pattern holds true for NYC. From 1980 to 1992, software jobs in NYC grew by an average of 2.4 percent a year, well below the national increase in computer-services jobs of an average of 8.8 percent a year. Since then, NYC’s software jobs have grown by an extraordinary average of 15.5 percent a year, compared with 11.1 percent a year for the nation, 10 percent a year for NY State, 8.3 percent a year for upstate NY, and only 5.3 percent a year for suburban NYC. The growth of the software industry in NYC is evident whether one uses a broad or a narrow definition of the industry.

Average Wage. The average software-employee wage is $59,745 in NY State. The average wage in 1997 was up in real (inflation-adjusted) dollars an average of 2.6 percent a year over 1980. In 1980-1992, real wage growth of computer-services employees in NY State was 2.3 percent, slower than the nation’s 2.6 percent. But in 1992-1997, real wage growth of these employees in NY State was 2.8 percent, ahead of the nation’s 2.3 percent.

In NYC, overall, the average software-company wage was $69,247 in 1997, second only to the Finance, Insurance, and Real Estate (FIRE) category, up 60.7 percent in real dollars since 1980, or an average of 2.8 percent. However, software wages were unchanged in real dollars since 1992, because from 1992 to 1997, average wages grew only 2.7 percent a year and inflation also averaged 2.7 percent a year. The average wage in suburban NYC is $67,771, an increase in real dollars of a remarkable 84.7 percent over 1980. While average software wages in NYC in nominal terms grew 7.5 percent a year from 1980 to 1997, most of the growth was in the 1980-1992 period, when it averaged 9.4 percent a year.

NYC’s software sub-sectors show interesting differences in the 1992-1997 period. Two categories show very rapid growth in employees, i.e., computer-programming services (consulting firms that write customized programs for clients, SIC Code 7371) and information-retrieval services (firms that write software to select information from databases, Code 7375). These two categories also show flat or even declining average wages, suggesting that the average wage may have been depressed by the intake of many entry-level or non-technical supporting employees. The prepackaged software category (firms that prepare software for duplication and sale, SIC Code 7372) shows slower growth, but a 1996-1997 spike, in the average wage of its suburban NYC companies. In the case of the "all other" computer-related services category (SIC Code 7379), all measures are growing rapidly - firms, employees, and salaries - suggesting that this is an important SIC code for aggressive software companies that are hard to pin down to one of the other classifications.

The Software/IT Industry in NYC Compared with Other Cities/Areas. Because detailed data for many counties are not available for 1997, the analysis relies on 1996 county data for the 3-digit SIC code 737 (i.e., the sum of the nine 4-digit codes ending 71 through 79). Moreover, because comparative data are available only at the 3-digit level, the two hardware-related codes ending in 77 and 78 are included for inter-city comparisons. NYC had 2,560 computer-services firms (i.e., "establishments," including multiple branches of large firms), fourth in the nation and just below LA County, which has a population of 8.9 million compared with NYC’s 7.3 million. The top-ranked cities/areas were Silicon Valley, CA (Santa Clara County and four counties north of it) and the four-county Boston/Route 128 area.

NYC had the sixth largest number of computer-services jobs, 25,716. Silicon Valley was in first place with 86,129 jobs, 4 percent of all private-sector jobs in the area. It was followed by Boston/128 with 55,956 jobs, 3.4 percent of private jobs. Los Angeles had 32,294 (1 percent), Dallas 31,892 (2.8 percent) and Seattle 28,955 (3.3 percent; this includes Microsoft’s headquarters in nearby Redmond, WA).

Seattle, Dallas, and Atlanta all have an average of 21 employees per software firm. NYC has about half as many, 10. Average wages are highest in Seattle, $113,970, the next two highest are Silicon Valley at $77,392 and Newark (Essex County) at $67,856. NYC ranks fourth at $64,551, followed by Boston/Route 128 at $63,825 and Chicago at $57,703.

Conclusions. The message conveyed by the data is that NYC and NY State were slow to gear up for the growth of software/IT jobs in the 1980s, and lost ground in the 1989-1992 recession, but since 1992 both NYC and NY State have seen a rapid growth in software jobs.

Of the many lessons of this report, the most important one may be the dependence of the Information Revolution on creating economic value through sheer brainpower. The need in the Industrial Revolution was for physical capital to set up factories and buy raw materials. Today’s needs still include physical aspects—not just needs for transmission wiring and computer hardware, but continuing physical needs related to the physical delivery of products bought and sold over the Internet. However, the critical need in this Information Revolution is now for human capital, i.e., basic intellect applied to high-level problem solving in cyberspace.

The City and State are catching up to the national leaders in this industry. The City has unique attractions, for example, its availability of public transportation and the breadth of its cultural life. It has a uniquely creative work force and access to markets, communications, and global finance. But obstacles remain in the way of a stronger software industry in the City and State. They relate to the costs of doing business (which in turn relate to taxation and the physical and regulatory infrastructure), the educational infrastructure, availability of start-up financing, and regional (including university-industry) partnerships.

Recommendations for Strengthening NYC’s Software/IT Industry. Cities with an interest in attracting or keeping a particular industry have been able to influence the climate within which companies get started and grow. An aggressive and coordinated approach by the City and State, in conjunction with business and academic institutions, will allow NYC to consolidate its existing strengths and build a base for becoming a leader in information technology. The City and State need to pay more attention to the industry and take actions to improve the climate for software companies in each of four critical areas: costs (especially of communications and space), education, finance, and regional partnerships and consortia.

Cost of Business: Communications and Space. Among the most serious challenges faced by start-up software firms are wiring and connections for high-bandwidth communications, obtaining affordable 7-day, 24-hour space, keeping down other costs, and dealing with tax laws and other government regulations. Many small businesses find it difficult coping with the complex tax laws and regulations at the same time as they are attempting to compete in delivering a product. City and State officials could help with these problems in the following ways:

• Identify and seek to ameliorate physical obstacles to software-industry growth, such as finding new wired space for software firms. The City-supported Plug n Go program of the Downtown Alliance, featuring small-footprint pre-wiring and short leases, has been a successful innovation.
• Experiment with incubators or "technology parks," expressly for high-tech start-up companies, in less expensive areas of NYC?such as in the neighborhood around some of the City’s colleges. Incubator space provides start-ups the benefits of reduced-cost facilities and access to high-speed communications.
• The City should consider ways in which it can help to keep down costs for start-up firms, by providing access to low-interest mortgages or tax credits.
• Encourage the NY State Public Service Commission to maximize competition in the telecommunications industry for small companies. Work with Bell Atlantic and telecommunications companies to assist start-up companies with their telecommunications needs (e.g., faster installation of high-bandwidth T1 and T3 lines and ADSL technology). We should also attempt to obtain for small Internet-related businesses the lower telephone rates now enjoyed by large companies.
• Evaluate the costs and benefits of lowering the sales tax on telephone usage in return for lower local message rates or other charges.
• Work with cable television companies on facilitating widespread introduction of cable modems to open up interactivity to those with cable access.
• Encourage competition among electricity companies in the NYC area to reduce electrical rates for small companies. Con Edison’s average rates per kilowatt-hour are half again higher than the national average and a multiple of the rates of utilities serving software companies in some competitive regions. As the Comptroller has urged before, the Public Service Commission should be encouraged to increase competition and lower electricity rates as quickly as possible so that NY State will remain competitive in this area. A potential inducement to lower rates that needs to be evaluated is a reduction in the State’s gross receipts tax on utilities.
• Work with the software/IT industry to identify tax burdens that impede its development. Specifically, jointly propose legislative recommendations that would reduce (perhaps by raising the threshold) or phase out unique taxes such as the Unincorporated Business Tax, the commercial rent tax (already scheduled for elimination), and the alternative tax on shareholders of Subchapter C Corporations.
• The City should recognize the flow-through tax privileges of Subchapter S Corporations.

Educational and Recruiting Needs. While software jobs have been growing, they have not be growing as fast as they would if a larger volume of trained, employable programmers and computer-science graduates were flowing into the work force. While NYC produces more computer-science and engineering graduates than any other area, neither the quantity nor the quality is keeping up with demand by software companies. NYC needs at least one world-class software/IT center; this might be Brooklyn Polytechnic. As the demand for first-rate software developers grows, NYC area schools and universities need better equipment, instruction, research-grant money and direction:

• NYC needs a strong base for technical education, starting in the elementary schools.
• Existing employees need to have their skills upgraded continually through graduate-level adult-education courses.
• The NYC area universities need to work more closely with schools in upgrading the technical education of teachers. Steps in this direction include Columbia’s Institute for Learning Technologies (with programs in 42 high schools) and NYU’s Center for Advanced Technology, which has for years, in its Innovative Telecommunications Program, been focusing on training students for new media positions.
• CUNY needs to evaluate the creation of a CUNY-wide School of Computer Science. It could be partially supported with research funds. The City and State may need to invest in such an endeavor.
• Most urgent of all, the City’s public and private universities should work together in coordinating their computer-science resources through consortia that include computer-science faculties, engineering schools, and business schools.

Financial Needs. New Yorkers sometimes seem to take the attitude that because Wall Street is located in Manhattan, NYC businesses have access to all the financing they need. That is not the case. Most Wall Street investment bankers are looking mainly at middle-sized or large companies, usually to make them larger through mergers or new public offerings. Start-up technology firms require a venture-capital firm willing to look at companies at a very early state of development?without evidence of a final product, of a stream of revenues, or of any of the other usual requirements of an initial public offering. Because Silicon Valley has become the center of software-technology innovation, the venture capitalists with an interest in software are concentrated there. They are consequently much better organized than their NYC counterparts. To become more competitive, the following steps are recommended:

• To increase the visibility of the NY software industry among investors, a promotional office in the City or State should be established. Funding for the office might be on the basis that the City and State would each or together match private contributions for it.
• The "Angel" investor groups that have been created in other cities seem to be effective in sharing the due diligence tasks of investors. The possibility of a group of this type in NYC should be considered.
• The City and State should have a larger presence at software fairs (in state or beyond), such as the annual "Alley to the Valley" conference, as a forum for recruiting companies and staff to come to NYC.
• Similar networking conferences and groups within NYC also deserve City encouragement.
• The NYC pension funds have set aside funds for "alternative investments" that include venture capital for technology industries in NYC. Investments in the software and IT industries, with potentially high returns, deserve consideration for a share of these funds on a priority basis.
• The NY City Council enacted a proposal for a $25 million loan program for technology-oriented industries. This later became a Loan Guarantee Fund to be implemented in conjunction with the NYC Partnership and NYC Investment Fund. This fund should be activated and implemented as soon as possible.

Regional Models. Universities, industries and governments need to work together to ensure a competitive environment. This suggests moving away from a company-based economic strategy to an industry-based one.

• NYC needs more entrepreneurial-university experiments of the kind initiated at Stanford, MIT, and SUNY at Stony Brook, involving computer-science programs and engineering schools and adding to them interested business schools, which have a long track record of working with business on an ongoing basis.
• NYC needs places where trainees can work with people who are actually developing new software. MIT, Stanford, and SUNY at Stony Brook have business-university partnerships that should be emulated in NYC. This focus should extend to technical training programs, high schools, and continuing education programs of local universities. Software experts and their professional associations should be encouraged to share what they know by teaching, as volunteers or as adjuncts, in the CUNY or private universities and at lower educational levels, as a way of bridging the time lapse between what is known and how quickly it is taught. One of the great strengths of Silicon Valley is the collective willingness of its companies?beyond their legal rights?to allow their employees to share their knowledge, in the interest of keeping the area in the forefront of innovation. This information-sharing attitude may be dubbed the Linux Strategy, after the open-code operating system that is emerging as an alternative to proprietary operating systems.
• NYC and NY State public educational institutions should cooperate with industry job fairs to recruit the nation’s best available software educators and researchers.
• The City could also work with the Congressional and State delegations to ensure that the immigration doors remain open for skilled software personnel from other countries and spur a more active role in developing new intellectual-property rules to extend copyrights to the Internet.
• To support its educational and recruitment efforts, NYC needs a stronger research presence in the form of university-connected technology centers with concentrations of start-up companies.
• Governments can be important players in building regional partnerships. They can help bring together financial resources, technical skills, and political support to fund research that might help a growing industry.
• NY State should consider a Small Business Innovation Research program for software development in the region.