Software Companies Brace for Price War : Computers: The competition should be good for consumers. But for manufacturers, it means learning to live with thinner profit margins.
Brutal price wars have become a fact of life for personal computer manufacturers. Now the battle seems to be spreading to their brethren in the software business, which is bracing for a similar competitive struggle.
Software programs with a list price of $500 or $600--which usually means a price of $300 to $400 on retailers’ shelves--have plummeted to $100 or less in some cases.
On Monday, industry heavyweight Microsoft Corp. fanned the fire at the Comdex trade show here by unveiling its long-awaited Access program for managing large amounts of data. The program carries a list price of $495, but the company plans to offer it for $99 in a three-month introductory offer. The higher price may not stick over the long run.
There is also widespread speculation here that the makers of popular products, such as the Lotus 1-2-3 financial spreadsheet and the WordPerfect word-processing program, will soon drop prices of those programs far below their current $500 level.
Already, a growing number of consumer software titles, costing just $50 to $75, are performing many of the tasks that used to require far more expensive programs.
This looming price war should be good news for consumers, although it will require them to be more vigilant about comparing the features of various software programs and their prices. Software companies, for their part, will have to run their businesses more efficiently and learn to cope with much thinner profit margins.
“Software prices are totally artificial,” said Robert S. Leff, co-chairman of Merisel, a Los Angeles company that is a major distributor of personal computers and software.
Indeed, the additional cost of manufacturing software once the program is written is negligible. “Clearly, software companies could be run profitably on much lower margins then they have now,” Leff said.
Price-cutting in the software business is not an entirely new phenomenon. Several years ago, Borland International pioneered the “competitive upgrade,” in which owners of Lotus 1-2-3 were offered Borland’s competing product, Quattro Pro, for $100.
But the runaway success of Microsoft’s Windows operating system, combined with the price-driven boom in sales of PCs, has changed the dynamics of the business.
Windows, which controls the basic functions of the PC, has effectively created a new market, and software companies are eager to use any means necessary to establish a strong position. And the PC industry’s new customers, those who spend $1,000 or $1,500 for a PC in a department store, typically are unwilling to spend an additional $400 or $500 for one program.
Companies are responding with special packages in which a customer either gets some software pre-installed on the machine for a low price, or buys a package of discount programs. Lotus, for example, is offering a combination package that includes 1-2-3, the Ami Pro word processor and a graphics program, all for a list price of $700--which means a store price of $400 to $500.
“The effect of all of these things is a substantial and steady decline in the average unit price of a software program,” said Robert P. Schechter, a senior vice president at Lotus. He said Lotus does not plan any dramatic price cuts any time soon.
Borland Chairman Philippe Kahn said Microsoft, with the Access database announcement, might be launching a broad price war in the Windows software business. “There could be a whole scaling down” of industry prices, he said.
Steve Ballmer, Microsoft’s executive vice president, denied that the company plans extensive price cuts and said he expects the Access product to sell for $495 after the three-month promotion ends.
A broad price war would probably help the larger players in the industry, especially Microsoft, and force smaller firms to concentrate on developing innovative new products.
