Modern products are heavily advertised in a wide variety of media, and are available through a multitude of distribution channels. By contrast, Autodesk is committed to reducing the number of outlets where a customer can purchase AutoCAD. Again, one must ask whether this policy, adopted with the goal of protecting the dealer channel which has been responsible for a large part of Autodesk's success in the 1980s, will in the long-term, benefit Autodesk or its dealers.
Our policy, ``AutoCAD is sold by authorised dealers'' has been in effect for so many years and has been defended with such vehemence that sometimes we forget that we never planned it that way. When we started the company, software distributors and publisher/distributors were seen as the primary channels through which software developers would move their products, with sales occurring either directly by the distributors or through local retail computer stores who bought products at wholesale from them. At the same time, retail chains such as ComputerLand, MicroAge, and later Businessland were negotiating corporate arrangements with software vendors to buy centrally for their stores. Finally, many of the computer companies then jumping in to compete with IBM in the burgeoning PC market, including Texas Instruments, NCR, Victor, Wang, NEC, AT&T, Zenith, and Fujitsu were building software distribution channels alongside their hardware sales network (recall that this was years before the ``clone'' market emerged, so special versions of each software product had to be prepared for each of these computers).
As we were gearing up to launch AutoCAD, we were developing contacts in these three primary channels: distributors, retail chains, and computer manufacturers. After we announced the product, only the manufacturers seemed interested. The distributors and chains didn't see enough volume in an odd ``vertical market engineering package'' to justify carrying it, but many of the manufacturers saw AutoCAD as a product that would showcase the better graphics and greater speed their machines offered compared to the IBM PC.
And then a funny thing happened; the phone started to ring. After the first couple of articles about AutoCAD appeared in the PC press, customers started walking into computer stores and asking for it. The stores called us. We signed them up and called them ``Authorised AutoCAD Dealers.'' As our dealer channel continued to grow, principally through individual dealers taking the initiative to contact us, we continued pursuing the manufacturers with some success and the chains and distributors with next to none.
Finally, a few years later, the chains and distributors started coming to us, having discovered that many of their stores had signed up directly with Autodesk as AutoCAD dealers. We looked long and hard at the deals they were proposing and did business with some of them, but essentially what they were looking for was a cut on the AutoCAD volume their customers were already selling. We didn't see much benefit in this either for Autodesk or for the dealers who were already selling our product so, in most cases, we declined such distribution deals. (The whole story of the twists and turns as Autodesk evolved its reseller strategy is far more complicated than I can relate here. I've tried to capture the main flavour of it, and hope those whose favourite milestones I've omitted will understand.)
By 1985, a structure much like the present one was in place, with Authorised Dealers selling most of the product, a Fortune 500 program getting underway, and a thriving grey market in AutoCAD that we were trying to stamp out in every way we could manage. And there it has pretty much stayed until now, with relatively minor adjustments through time.
The association of AutoCAD with dealers wasn't something we planned. It just happened, to the great benefit of both Autodesk and our dealers. In retrospect we can see why. In the early days of AutoCAD, just collecting the pieces of hardware needed to run AutoCAD, getting them all to work together, installing AutoCAD on the system and tweaking it to deliver acceptable performance on machines that ran anywhere from 10 to 50 times slower that the typical AutoCAD platform today took a great deal of knowledge and no small amount of work. The drafting plotters that can be bought by calling a toll-free number today were, in those days, sold as specialty items by Hewlett-Packard offices; retail distribution for such hardware had never been contemplated. So it was also for large digitising tablets, high resolution graphics boards, and large monitors.
In order to assemble a working AutoCAD system from scratch a user would have had to become, in a real sense, a computer expert. Far better, especially for a person seeking only increased productivity in drawing, to pay a dealer to put all the pieces together, shake it down into a working tool, and install it along with training to bring the user up to speed. All these tasks the dealer did for the user constituted the ``value added'' by the dealer, for which the customer paid when he purchased AutoCAD and the hardware at retail, rather than the dealer price.
To a lesser extent, the same could have been said about all other PC applications at the time. Today it might seem absurd to need professional help getting a word processing system running, but only by people who've forgotten some of the horrors that were sold as printers in the early 1980s, or who think of a hard disc as something you can rely on day in and day out. Those days, computer stores helped ordinary people, unskilled in the strange ways of computers, put computers to work in their homes, offices, and workshops.
Then, as the years passed, computers improved. Not only did the absolute price of computers fall while their performance grew, they became more reliable and manufacturers learned to tailor them better to the needs of specific target markets. In addition, the IBM PC clone emerged as an industry standard architecture. This eliminated many of the compatibility problems that bedeviled the industry previously, especially in software. Now it really was possible to take a computer out of the box, load up WordStar or Lotus 1-2-3, and get right to work.
Inevitably, it wasn't long before customers began to ask themselves, ``If all it takes is opening the box and plugging it in, why am I paying this guy at the computer store a thousand bucks to do it?'' And soon the first headlines about computer stores going out of business began to appear in the industry press. The customer shopping for a PC or software could readily compare the prices quoted by the mail-order merchants who advertised in the back of all the computer magazines with the stickers at the computer store and, since the products involved had become commodities with reputations based upon their manufacturer's position in the industry rather than the recommendation of a local dealer, saw no reason to pay the premium demanded by the local dealer.
Over the last few years the local computer store, as envisioned in the early 1980s and common in the middle of the decade, has largely vanished. Computers are still sold locally, but frequently much in the same manner as televisions and other electronic appliances, with less markup for the reseller. With constant competition from nationwide mail-order distributors, there's little room for the local retailer to increase his price. Software distribution has changed as well. If hardware has become a commodity, so even more has software. A dealer can add value by unpacking a computer, installing the operating system, adding memory chips, and so on, but each copy of Excel 3.0 is just like every other. Since they're interchangeable, and software installation these days usually consists of ``stick the little square thing in the slot and type A:SETUP,'' there isn't any reason to pay a penny more than necessary for the product. Consequently, the prices charged for software by direct marketers, discount retailers such as Egghead, and other volume channels are remarkably similar and represent a small margin compared to that of a dealer selling at retail a few years ago.
Once the value added by a reseller begins to disappear, what does a manufacturer gain by restricting the distribution of his product to those resellers? Clearly, withholding the product from mass distribution protects the resellers and helps to maintain the dominance of the product within that channel. By preserving a local sales and service network, the need for direct customer support is reduced, lowering the manufacturer's overhead. Finally, a dealer network, properly supported and directed, can act as a nationwide sales organisation for the manufacturer--one that doesn't come out of his marketing and sales budget.
These are powerful arguments, and Autodesk's success has demonstrated the importance of local presence through dealers. But, as with every other aspect of our business, we must periodically inquire as to the health of our dealer network, and whether Autodesk and the dealers who sell its products can continue to prosper in the coming years as we have in the past.
Here I find serious causes for concern. Compared to the typical desktop computer, an AutoCAD machine is bigger, more complicated, and harder to install and optimise, and the same can be said for AutoCAD compared to most other software. But, just as the passage of time and the evolution of the industry eliminated the need for special skills to get a simple PC running, today they are doing the same for CAD. One can turn to an advertisement and order, with a single toll-free telephone call, a ready-to-run CAD system composed of nationally marketed and serviced components, a system one can fully expect to work as soon as it is plugged in. What then is the value added by an AutoCAD dealer?
I think the shrinking margin between the price at which Autodesk sells AutoCAD to its dealers and the price dealers are able to obtain for it from customers (the so-called ``street price'') reflects the perception on the part of AutoCAD buyers that many dealers are doing little more than passing the product through their hands, and thus deserve only a small markup. In such a situation, trying to raise the average retail price by limiting distribution and pursuing ``grey marketeers'' is like trying to stop the tide with a teaspoon and a sponge; it's setting yourself against the judgement of the market, and it never works, at least not for very long.
A product becomes a commodity when purchasers discover it meets the definition of one: interchangeable, readily available, and sold at approximately the same price by all vendors. Once these conditions are met, there's nothing the manufacturer can do to change the situation. Nothing, that is, that doesn't harm himself. For what possible benefit could there be in making the product harder to obtain, more difficult to put into service, of unpredictable composition, or capriciously priced? Even if a manufacturer succeeded in driving up the retail price by curtailing supply, the effects would, in all likelihood, be short-lived since a sudden, steep rise in the price of a popular product, combined with its disappearance from many channels of distribution would send the clearest possible signal to competitors that here was a market begging for a readily available, more affordable alternative.
It's no secret that many of Autodesk's dealers are encountering difficulties at present, problems that in many cases began well before the current economic downturn. AutoCAD is the last major software product to retain dealer sales as its only channel of distribution. If the problems in the dealer channel are not transient, but instead indicate that dealers can no longer build a profitable business selling AutoCAD, Autodesk could be left in the position of controlling a channel of distribution which was no longer viable. This would leave the field open for other CAD products to establish themselves in the mass market channels where AutoCAD is not for sale.
Editor: John Walker