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Let's Crunch Some Numbers

Okay, I'm going to jump way ahead of myself here in a brazen attempt to grab your attention. If you agree with this analysis, I'm sure you'll summon the strength to trudge through the more deliberate development of the argument that follows.

It's 1997. You call up the 800 number to order another computer, and after you've chosen between the Alpha-III and the Octium chip and the 15 and 30 gigabyte hard drive, the salesperson tells you that the machine comes with the ``Basic Package'' of Windows NT, Word, Excel, Access, Money, and Multimedia Producer, and asks if you'd like to turn on any additional software at the time. You request Project, Designer, and Visual C++, and they're enabled also. In any case, you're told, ``it's all on the CD-ROM, so you don't have to decide right now''.

The computer shows up, and you start using it. Late one night you decide you really need the German language spelling checker add-on for Word, so you put in the CD-ROM, call Microsoft's 800 number to order it on your credit card, and get back the code you enter to turn it on in your smart card. Or if your computer has a modem, you can do it just by clicking the mouse.

Basic costs you $10 per month. ``Premium'' programs range from $.75 to as much as $100 per month for exotic niche applications. Every month you get your ``Microsoft Bill'' itemising everything you subscribe to and what it costs. Most folks just have it paid automatically from their credit card, generally 6 months at a time. If you don't pay, you don't get the new authorisations for your smart card and the program stops working. So you pay. Every now and then a new CD-ROM shows up with all the latest updates and upgrades and new products, each with its ``try me, buy me!'' demo you can run right away. As long as you have Basic, the CD-ROMs come automatically in the mail every 3 months.

  Now let's look into the other end of the binoculars; from Bill Gates' chair rather than his customers'. Today, there more than 125 million MS-DOS personal computers installed. Given the rapid adoption of Windows and sustained high sales rate of new machines driven by price performance improvements in new chips, I believe it conservative to   expect that 100 million Windows NT machines will be installed 4 years from today, most equipped with CD-ROM, multimedia accessories, and contemporary peripherals; some upgraded from current high-end MS-DOS machines, but most new machines of the Pentium/Alpha generation and their successors. Further, let us assume that Microsoft is unsuccessful in selling any software other than the Basic set (I'm sure you'll concede, based on Microsoft's new product success rate, this assumption is conservative). Well, multiply it out. That's 100 million machines times US$10 per month times 12 months per year, and the answer is: US$12 Billion-with-a-B-like-Bill per year of automatic recurring revenue for which the marketing costs are essentially nil and distribution margin is nonexistent since fulfillment is direct.

Now given an utterly reliable, competitively unassailable annual revenue stream of US$12 billion per year, you can invest in fundamental and applied research, technology development, new product development, marketing, and launch at levels no other player can approach. These investments translate directly into additional recurring revenue to the extent the premium products are adopted by the 100 million and growing installed base, and the proceeds fund further development. In this environment, competitors are forced to either cut prices (and thus their margins), or search for a genuine technological edge and rush it to market before the folks who employ more than 50


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Editor: John Walker