From: mccall@mksol.dseg.ti.com (fred j mccall 575-3539)
Subject: Re: Bundling Networks, OS/2 v. NT
Organization: Texas Instruments Inc
Date: Tue, 13 Oct 1992 16:01:22 GMT

In <1992Oct13.062712.10777@microsoft.com> petesk@microsoft.com (Pete Skelly) writes:

>In article <1992Oct12.211315.28385@mksol.dseg.ti.com> mccall@mksol.dseg.ti.com wrote:
>> In <1992Oct11.093615.7205@microsoft.com> petesk@microsoft.com (Pete Skelly) writes:
>> 
>> >Let X be the cost of development per unit sold.
>> >Let Y be the price per unit per unit sold.
>> 
>> >To make a profit, X < Y.
>> 
>> >Now, who ever said that Y = f(X).  
>> 
>> If it isn't, you are not in a competitive environment and hence should
>> be a regulated monopoly.

>I think not exactly.

>Let's say that Z is the price people are willing to pay for the product.

>Y = f(Z), in most cases, Y = Z.

>Z, I would say, is based on the prices of what competitors products are,
>among other things, and not so much on how much it takes to develop the
>software.  There are psychological factors involved.  If you lower the
>price too much below what people expect, they think that it's not as good
>of a product.

Not so much, or not, Pete?  Z had better be based at least in part on
what the costs are, because it a competetive environment you either
wind up pricing close to cost or you have implicit collusion among the
providers to keep prices high.

>> 
>> >More to the point, Y is not necessarily based on the value of X, more than
>> >it should be more than X to make a profit.  Y is based on what the market
>> >will pay for the product.  Simple economics.
>> 
>> Yeah.  simple economics, indeed.  It seems you should have taken
>> Einstein's advice with regard to simplicity on this one; make things
>> as simple as possible, but no simpler.

>Y is based on what the market expects to pay for the product.  Sorry I left
>that part out.  Also, remember that the market knows or cares little about
>X.  

No, but all the PROVIDERS sure as hell know about X, and if I am the
little guy in the market I will undercut you.  Then the next guy up
will drop his price, and so on.  For prices not to come down requires
that there either be implicit collusion among producers or that there
be one producer who can exert what amounts to monopoly power in
holding prices artificially high (because people will buy the higher
priced product, for whatever reasons).  Microsoft, or at least Pete,
seem to think that this is the case and that it is an all right thing.
It may be the case, but if it is, then you should be a regulated
monopoly. 

>> 
>> >> 
>> >> >>So in asking to remove networking, you are asking to raise the price of
>> >> >the networking version, and not lower the price of the non-networked
>> >> >version.
>> >> 
>> >> No you are lowering the price of the non-networking version.  The costs didn't
>> >> go into that version and so the company can't honestly claim that the
>> >> pdevelopment price is just as much.
>> 
>> >The price for the Non-networked version will be what people will pay for it.
>> >People, like yourself, will not pay more for the networked version.
>> >So, if networks are shipped with all versions, then to sell it to you,
>> >the price should be the same as the price you would have paid for a 
>> >non-networked version.  What's wront if the price is the same for the
>> >networked and non-networked versions.  
>> 
>> Because you have increased your value of X above (that floor price
>> below which there is no profit in selling the thing) because now some
>> proportion of the network stuff costs must be included in X.  In a
>> competetive environment, Y (selling price) most generally is a
>> function of X (development plus production costs, maintenance, etc.).
>> If your Y is *NOT* some sort of function of X, expected sales, market
>> competition, etc., then you are operating from a monopoly position and
>> should probably be regulated.

>I would argue that this is not really that true in many goods that are 
>information based.  (Products with little cost of manufacture and goods).
>Any Econ folks out there to shed more light on this?

Uh, Pete, I *am* an 'Econ folk'.  Is it your contention that there is
no cost in the accumulation of information or in the production of
software (including all development and maintenance costs)?  If you
are in a business where your prices bear no relationship at all to
your costs, it is only a matter of time until someone comes along to
provide what you are providing at lower prices.  Then you either go
out of business or you lower your prices.  Economic forces will tend
to move prices down to cost of production (this includes all
development, necessary research, fixed investment, etc.) plus a
reasonable return to cover the cost of capital.

For this economic tendency to not occur requires forces to be in
existence to stop it from happening; implicit collusion among
producers, high entry costs, monopoly power, etc.

>> 
>> >Then MS is eating the cost
>> >of network development, so to speak.  Would you still complain.
>> 
>> Right.  I can see them doing that.  NOT!

>how many people regularly use edlin right now.  Why do they ship it still.

Because ONCE IT IS DEVELOPED it doesn't cost much of anything to throw
in.  They've gotten the money for EDLIN back long ago, and when was
the last time any work was done on it?  But we're not talking about
legacy code here -- we're talking about the development and
maintenance of a TCP/IP suite.  Who is going to eat those costs, Pete? 

>> 
>> >If not, then why not ship everyone the networked version, at the 
>> >cost you would have paid for the non-networked version.
>> >Would it not then be possible that the development costs of the network
>> >be made up by the extra sales of people who would buy NT because it
>> >is a good networking deal.
>> 
>> It is possible, but it all rather depends on the mix of people.  After
>> all, people who want to use NT for networking would still have to buy
>> NT, even if the networking were separate.  It all depends on what
>> percentage of prospective NT customers Microsoft expects to want the
>> networking stuff (as opposed to folks who don't want it, folks who
>> prefer to buy some 3rd party product that comes bundled with something
>> else that they need, etc.).  
>> 
>> What the current strategy does is reinforce the idea that NT is for
>> NETWORK SERVERS ONLY.  A few people might install it on
>> workstation-class machines that aren't networked, but that's not real
>> likely in most cases.  MS seems to be saying that that market isn't
>> large enough to be important.

>Go read the marketing info on NT again.  I don't get this impression.

Pete, I get that impression from what you are saying here.  It has
nothing to do with 'marketing information', which I've always found to
be basically useless insofar as information content goes, anyway.  

Why is your solution when you don't have an adequate answer always to
try to send the other person off as if they are 'forgetting
something'?  I guess that I, in a similar vein, will recommend that
you learn a bit more about economics before you start touting yourself
as an expert.

-- 
"Insisting on perfect safety is for people who don't have the balls to live
 in the real world."   -- Mary Shafer, NASA Ames Dryden
------------------------------------------------------------------------------
Fred.McCall@dseg.ti.com - I don't speak for others and they don't speak for me.
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