From: dpp@athena.com (David Pollak)
Subject: Re:  Solid Value, Rulers, and Copy Protection (long)
Reply-To: dpp@athena.com (David Pollak)
Organization: Athena Design, Inc.
Date: Thu, 13 Aug 1992 17:04:29 GMT

In article <Bsvsvr.7MA@atherton.com> mcgregor@netcom.com (Scott L.  
McGregor) writes:
> 
> I think that the basis of this debate is the difference in perspective  
of the  
> company and of individuals. A lot has been said about how it appears  
from the  
> individual side, but perhaps it may be useful to also look at it from  
the  
> company's side.
> 
> Many company's have either private or venture financing.  These funds  
were  
> acquired with the explicit goal of achieving a certain return on the  
> investments.  For instance, a goal of $20+ Million in annual revenue is  
common,  
> since below this amount it is difficult for the stock to go public and  
for the  
> investors to recoup their investment through the sale of their stock.
> 
> (The point about investor expectations is important to note, because at  
many VC  
> and privately funded companies the founders hold very little of the  
stock and  
> don't have control any more. It's not just enough for them to "make  
enough to  
> pay their rent". They have to meet the investor's goals or they will be  
> replaced by someone else who will make them more central. Remember,  
companies  
> are only individuals in the legal fiction sense.  It is not a faceless  
company  
> that is greedy, it is the investors who put their money in that are.   
And if  
> you have ever put your money in a variable rate bank account, money fund  
or  
> mutual fund--and later pulled it out because the return was lower than  
you  
> expected, then you are acting just the way investors who fund these  
companies  
> do).
> 
> Now consider what this means in a large market (like the PC market) vs.  
a small  
> market (like the NeXT market).  There  over 10 Million copies of MS  
Windows  
> were sold last year. So, if you write an application such as a check  
book  
> program like Quicken, and you sell it on Windows Platforms, you can sell  
it for  
> $20 each and still meet your $20M goal, even if you only sell to 10% of  
that  
> market.
> 
> Now consider the NeXT market: there are about 50K systems out there now.   
> Probably some of those are used for academic or corporation use only,  
but lets  
> assume they aren't and that EVERYONE would buy the checkbook program.   
How much  
> would it have to cost for the company to meet their $20M goal?  With a  
little  
> mathematics we find that it is $400.  And had we assumed only the same  
10%  
> penetration rate we would have got $4000. 
> 
> Now from the customer's perspective, it is check book balancing is  
relatively  
> the same benefit whether done manually by an accountant, done on a NeXT,  
or  
> done by Quicken under windows. So from the customer's standpoint the  
price  
> "ought" to be the same.  When it isn't, especially when it is  
significantly  
> higher priced the customer may be mystified, or worse frustrated.  The  
customer  
> sees that if the prices were more "in line" they would be more willing  
to buy  
> and the company would make more sales.  But the customer doesn't see  
that the  
> total revenue might decline faster than the unit volume props it up.  At  
a  
> $400/copy there might be many people who still would not buy it and that  
would  
> undermine the company's (and their investor's) goals.  But there might  
well be  
> a set of very wealthy, relatively price insensitive customers who would  
pay the  
> $4000 willingly for the convenience of not buying a PC. And those  
customers  
> alone (if say they were 10% or the market) might help the company meet  
its  
> magic $20M goal.  But dropping the price to $400 might only get twice as  
many  
> more customers even though it cut unit price by a factor of 10.  
> 
> Also, unfortunately, if you offer your checkbook program on NeXT at $20,  
not  
> only will you be limited to making only $2M tops (10% of the goal  
mentioned  
> above), but that matching price on NeXT and similar functionality is not  
likely  
> to be enough draw by itself to cause NeXT sales to climb to 10 Million  
> overnight. This reality can lead to less investment (and consequent less  
> choice) in niche markets like NeXT.  It can also mean the companies that  
are  
> there are smaller and have smaller sales expectations, and less ability  
to  
> support and distribute compared to their mass market bretheren.  I think  
you  
> can see this is in fact true of the NeXT market where smaller companies  
like  
> Lighthouse Design and RightBrain are more common than companies like  
Microsoft  
> and Borland.
> 
> This is the pricing/ROI dilemna that company's face in small niche  
markets. It  
> would be great if companies could find some way to segment their product  
sales  
> the way airlines do, offering higher priced "seats" to business and  
wealthier  
> individuals, while offering lower priced "seats" to individuals and  
students.   
> I've seen a few effort here to offer such separate pricing schemes for  
> software, but in general it is hard to keep the all the higher priced  
sales  
> from migrating to the lower priced copies, undermining the multi-tier  
pricing  
> strategy.  
> 
> Of course, the actual situation is even more complex and messy than  
this.  But,  
> if you want to understand why companies act the way they do, it is  
useful to  
> put yourself in their shoes for a bit.  Once you see it from their  
perspective,  
> you may be able to suggest alternatives that help them meet their goals  
as well  
> as your own.
> 

I have to really disagree with the above post.  I am going to start with  
the premise that the great stuff in the industry comes from people who put  
their heart and soul into the project, and don't worry as much about the  
money.

Microsoft was not a venture funded company.  Lotus was funded (during its  
first round) out of the pockets of a few people.  I don't know how much  
Borland received first round, but it probably was not based on a business  
plan of $20M annual revenue.

Money can buy market share, but cannot create a great product.  Great  
products come from the heart and soul of the authors.  Market share will  
erode if the product is not good.  There is example after example of this.   
Wordstar and DBase II owned the CP/M market.  They lost market share in  
the PC world because better programs came along.  Lotus is losing market  
share to Borland and Microsoft because both Quattro Pro and Excel are  
great products, where 1-2-3 for Windows is really poorly done.  As much as  
I hate to say this, Microsoft does very good applications programs.  They  
had many years of pumping out poor quality stuff, but they have refined  
their products over the years.

Money people are looking for safer and safer investments.  They are  
financing later and later and looking for more mainstream products.  This  
is bad for both the money people and the folks who are innovating.  Way  
back in the Apple days, venture folks were so flushed with cash and  
success that they would back just about anything.  Then, the growth slowed  
and funds stopped making 25%+ annual returns.  Some funds are making less  
than T-bills these days.  In typical American business fashion, the fund  
managers get more conservative and look to back companies with more mature  
products and larger market share.  That means that we folks who still  
believe that the teak desks and leased cars come after we've gone public  
have to fund out of our pockets and with the help of friends who believe  
in us.

The business plan for Athena Design calls for a reasonable market  
penetration into a NeXT market that we don't expect to grow by more than  
10% a year.  This yields enough money to pay the bills, give out nice  
bonuses, invest in R&D, and be comfortable.  Sure it would have been nice  
to have a $3 million round a few months ago, but that didn't happen, and  
it no longer needs to happen.  We are a lean organization dedicated to  
putting out a great product, enhancing that product, and standing behind  
that product.  We are in it because it's a great adventure.  Nobody here  
expects or even wants to be the next Bill Gates.  We want to provide great  
software and be able to feed ourselves.

What does this boil down to?  We can be flexible with our licensing  
arrangements because we don't have a bunch of VC guys saying, "you have to  
use the same license that Microsoft uses."  We can offer Mesa at $99 for  
educational folks because I don't have to make anything more this quarter  
than my payroll, advertising, and rent (i.e., I don't have to pay rent on  
money that was given by a bunch of people who want to see results, *NOW*.)

Software companies have a low cost of entry into a marketplace, especially  
one as small as the NeXT marketplace.  I can see charging a premium for  
specialized software that will go into a limited market and have a high  
support cost (i.e., a legal time-billing package).  There is no reason  
that mass market NeXT applications have to cost significantly more than  
mass market PC or Mac applications.

Costs for an application can be split between fixed and variable.   
Variable costs are those that increase with each unit sold.  Fixed costs  
are the rest.

Fixed costs in the NeXT marketplace are product development, marketing,  
rent and utilities.  Variable costs are box and packaging and tech  
support.  I know there are many other costs, but these are the biggies.

Variable costs in the NeXT marketplace are the same as the Mac or PC  
marketplace.  If costs no more to produce 1,000 copies of Mesa than 1,000  
copies of Excel.  Supporting the product may be a little less expensive on  
the NeXT because it is more user friendly than the Mac or PC.  Let's say  
the variable costs are the same.

Fixed costs:
Rent and utilities - this is a little higher in the NeXT market because we  
have to pay to be connected to the Internet.  This cost is to a certain  
degree based on the size of the organization and its values.  We have a  
small organization and we work on folding tables (just like the early days  
of Borland.)  A Mac or PC startup shipping a similar quantity of product  
will have similar costs.

marketing - The NeXT community is so tightly knit that word about products  
gets around very quickly.  Advertising is dirt cheap.  I can buy a full  
page in a publication that goes to a good chunk of NeXT owners for about  
$700 (the AppWrapper.)  It's impossible to spend more than $80,000 a year  
in advertising in this market.  $80,000 would be the minimum monthly  
marketing budget for a Mac or PC software vendor.

R&D - The R&D costs for NeXT products are similar to those of Mac or PC  
products.  Just because companies spend millions to develop a product  
doesn't mean they have to.  I wrote most of Mesa myself in 9 months  
(that's due in large part to the development tools on the NeXT.)   
Microsoft Excel only had 4 people on the team that did 2.2 (a very fine  
product in its day.)  Any software company that has more than 5 people on  
a team developing any software product is stupid, mis-managed and deserves  
to go out of business.  Three great programmers can write any application  
for any personal machine in one year.  This is a total cost (assuming that  
the programmers are willing to take stock) of less than $200,000 for the  
development of any product.

In the NeXT marketplace, a company should be able to go from concept to  
product on less than $500,000.  This is a number too small for any venture  
firm.  It's a figure that would allow the company to run on about $1M a  
year in sales (4,000 units at an average cost of $250), pay its bills, pay  
salary, grow a little, and pay back the investors.

There is very little reason that software on the NeXT should cost much  
more than software on any other mass-market machine.  The marketplace is  
big enough to support a small, well-run software start-up.  Andrew Stone  
claims that this is the last marketplace where people can start in a  
garage.  I don't know if I agree with that, but I do know that we can  
start in garages, produce good stuff, share it with the community and we  
can all be comfortable with the quality and quantity of software and  
revenue.

As a historical note, Ashton-Tate, Lotus, Microsoft, Software Arts, and  
many other companies made their founders and backers very wealthy.  They  
were all playing in a market with roughly the same number of machines as  
are in the NeXT market today.  You don't need $4M in venture and $20M in  
annual sales to win in the software industry.

Cheers,

David

-- 
David Pollak - dpp@athena.com - NeXTMail Compliant
Attorney at Law,
Feeder of the Bears, Athena Design, Inc.
Newsgroups: comp.sys.next.software