On the speakers platform here at the Agenda personal computer conference, industry luminaries--from Microsoft’s Bill Gates to Viacom CEO Frank Biondi--are waxing meta about The Coming Grand Convergence of Multimedia: cable television merging with telephone networks merging with movies merging with software.
In the hallways, however, people aren’t talking about the promise of new media; they’re talking about price cuts. Price wars as vicious and dramatic as anything you could hope to find in air fares or personal computer hardware have driven the software business for some time now. The entrepreneurs here are squirming like worms on a hot brick. They have seen their future, and it’s really cheap.
Barely a year ago, for example, Borland International Inc. listed its popular Quattro spreadsheet software at $495. Still lagging a distant third in market share behind Lotus Development Corp. and Microsoft Corp., the Scotts Valley, Calif., company then slashed the price to $99.95. Today, the company is peddling its powerful latest version for just $49.95.
Is Borland, like the old Continental Airlines, launching a price war that trashes the profits of an entire industry? Or is something else going on?
“It’s purely a desperation move,” insists Frank Vaughn, an engineering vice president at San Francisco software start-up Nomadic Systems. “They’re daring Microsoft to meet their pricing structure.”
“This is the software Charge of the Light Brigade,” says Roger B. McNamee, a high-technology investor with Integral Capital Partners. “Borland has nothing to lose by cutting the price.”
Actually, notes Heidi Sinclair, Borland vice president of corporate strategy, there is a deliberate method to Borland’s seeming madness. “Personal computer software has historically sold for about 10% of the price of personal computer hardware,” she observes. “As hardware prices have plummeted, many software companies haven’t cut their prices to match. We have, and it’s working very well for us. . . . We are in a market share war.”
Whether the 10% rule has any market validity is pure conjecture. But even Integral’s McNamee acknowledges that with or without Borland, prices for spreadsheets, word processors, databases and other popular programs are going to plummet and profit margins are going to thin.
“The industry is moving from value-based pricing to marginal-cost pricing,” he asserts. In other words, prices are going to better reflect the actual cost of producing an additional disk rather than the company’s desire to charge for the perceived value of the software. Software is becoming as much a commodity as the hardware that runs it.
“By 1996,” McNamee predicts, “single applications like word processors and spreadsheets will sell between $29.95 and $49.95; (bundles) of applications will sell for between $100 and $150.” In other words, the price of top-quality software is approaching the price of a top-quality book.
Forecasts such as McNamee’s may be too conservative. Books That Work, a software start-up that’s trying to blend the contents of books with the interactive qualities of software, has just released a disk package, the Home Survival Toolkit, that offers a comprehensive interactive guide to home repairs. The software will list at $49.95, says publisher Stu Gannes, “but the street price will probably be $29.95.”
The desire to create mass markets for computer software will inevitably lead to top-notch personal software that sells for under $20. Traditional personal software companies will learn to make money burying their spreadsheets and databases beneath useful content. No doubt software like the Home Survival Toolkit and successors in the realms of personal finance and home health care will get advertising sponsorship. That could bring prices down to less than $10. Who knows? At some point, advertising may enable the Borlands and the Microsofts to give away some of their programs.
How about Merrill Lynch bundling in Lotus 1-2-3 with appropriate instructions for its Cash Management Account software? Or Fidelity offering Microsoft Excel spreadsheets with portfolio-tracking software?
Either way, lower software prices are expected to be the kerosene poured on the fires of computer demand. “These prices will help us move from the professional marketplace to the mass markets,” says Borland’s Sinclair. “And that forces us to make our products friendlier and more accessible. We’ll have to design them so that they require less time to learn and less customer support.”
This is terrific news for consumers. Not only will software be getting cheaper, the demands of the mass market--impatient with dense instruction manuals and complex interfaces--will force software designers to streamline and simplify their products. Just as they now do with computer hardware, people are going to get more value for their computer software dollar.
Sure, the industry’s historically lush margins will decline, but software vendors will get something quite valuable in exchange: relentless growth for the foreseeable future. That’s a pretty good deal for everyone.