Online Praxis 1996 April/OP4_96.ISO/surfen/astro/earthv/programs.doc

Text File | 1996-08-16 | 34KB | 626 lines

                        Programs Are Programs
              How To Make Money In the Software Business

                by John Walker -- [e-mail]
                           June 14th, 1993

WORLD WAR FOUR
==============

In late 1989 I spent some time thinking about what was then called the
"emerging new world order", and began  to  rough  out  a  think  piece
titled  "World  War  Four".  I scribbled an introduction in January of
1990, but since I'd already discussed the gist of the message verbally
with  just  about everybody who was likely to read such a paper, I put
it aside and never completed it.

The essence of "World War Four" was the argument that amidst  all  the
optimism  and triumph engendered by the collapse of communism--the end
of World  War  Three  (the  Cold  War,  1945-1990),  we  were  in  all
likelihood  at the threshold of World War Four (1990-????).  World War
Three, a relatively bloodless war which nonetheless consumed far  more
wealth  than  any  of  its  predecessors, was about which economic and
political system was appropriate  for  large  industrialised  nations.
That's pretty much been settled now.  World War Four was, I predicted,
going to be centred on the essential definition of a  nation  and  the
appropriate  size and scale of political entities.  I went on to argue
that 45 years of bipolar confrontation had simply put a lid  on  these
issues,  which  have been at the heart of the overwhelming majority of
all modern wars, and that we were probably entering into an era  where
borders were going to be redrawn all around the world.

Well,  of  course,  if  I'd  finished  the piece and managed to get it
published anywhere, I'd probably be spending all my time on  the  talk
shows as the Political Prophet of the Nineties, so it's just as well I
didn't.  But I stand by my 1990 predictions, including  the  one  that
there  will  be  a serious secession movement by one or more states of
the U.S. before the end of this decade.

So what does this have to do with the title of  *this*  paper?   Well,
nothing  really  other than the fact that I've put everything aside to
finish this paper because I have the feeling  that  if  I  don't  it's
going  to  suffer the same awful fate as "World War Four"--namely come
true and  be  considered  totally  obvious  before  I  get  around  to
predicting  it.  I've been developing the ideas in this paper over the
last 14 months--ever since the idea  popped  into  my  head  during  a
conversation  with  Bill  Gates--and  as  I've explored it and thought
further it seems more and more compelling.  I know  for  a  fact  that
Gates is thinking in this direction as well, because I asked  him  and
he  said,  "Yes".   Until recently I didn't think, however, he had the
whole idea put together as cleanly as I did.  Recent  events  make  me
suspect he's way ahead of everybody.

As  with "World War Four", I've discussed aspects of this with many of
you.  Because I've tended to focus on one aspect  or  another  of  the
whole picture, and because my views have been evolving, in part due to
your valuable comments, I'd urge you to read this document  anyway  to
make sure you see how all the pieces fit together.

BACKGROUND--IS SOFTWARE A BUSINESS?
===================================

In  a  world  where  Microsoft  is  worth  more than IBM, it's hard to
imagine that less  than  10  years  ago  a  substantial  part  of  the
financial   and  venture  capital  community  were  skeptical  of  the
fundamental  viability  of  the  software  business--in  fact  it  was
fashionable to ask whether software was really a "business" at all, in
the conventional sense.

Certainly, in 1983 and 1984, one could point to Microsoft, Lotus,  and
Ashton-Tate as profitable, rapidly growing companies, but rare was the
company which broadened an initial, seemingly random  success  into  a
consistently  successful  product  line.   Further, a software company
seemed threatened from all sides--from piracy, from next-to-zero-price
competition, and from an unsettled distribution  environment.   Rarely
was software even mentioned in reviews of trade shows, and people like
me who argued that software drove hardware successes--that the Apple 2
was  successful  *because*  of  Visi-Calc  and the IBM PC *because* of
Lotus 1-2-3 were considered more than a little daft.

And yet today, in a world where software companies post profit margins
unheard  of  in  most  legitimate  businesses, the old doubt about the
viability of the software business remains, but in another guise.   In
1983  they  asked,  "Can  you  really  make  money, long term, selling
software?".  In 1993, they ask, "Can anybody other than Microsoft make
money, long term, selling software?".

This  is  not  a  facetious question; when company after company which
were once pillars of the industry: Ashton-Tate,  Software  Publishing,
Borland,  one  after  another  collapses,  is gobbled up, or is on the
ropes against deadly price-cutting competition, one  cannot  help  but
ask  whether  any  software  company  can  truly consider its position
secure as long as there is a well funded competitor willing to sell at
close to the marginal cost of goods in order to gain market share.

I  believe  we  are  in  the  midst  of a fundamental shift in the way
software is distributed--a transformation in the relationship  between
software  vendors  and  their  customers  fully  as significant as the
emergence of  computer  retailing,  spurred  by  the  nascent  desktop
computer.   Companies  which anticipate this transition, who encourage
it and  prepare  to  benefit  from  it,  may  find  themselves  in  as
unassailable  a  market  position  as any company in this century--the
"natural monopolies" of the next.

IT'S A PROGRAM, STUPID
======================

How odd it is, that every day we use the word "program" to talk  about
the  products we create and sell in the software business, and also to
describe the information and entertainment we watch on the  television
and hear on the radio.  And even though the word "software" has become
commonly used to describe video cassettes, compact  discs,  and  other
non-computer  material,  rarely  do  software  executives  see  a link
between the "programs" they sell and the "programs" they watch.   Many
managers  in  the  computer  software  business, and most analysts who
follow it, came from a hardware or turnkey systems background; thus it
is  inevitable  that  they often think of software as a product like a
television, rather than an ongoing service  like  the  "programs"  the
television delivers.

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% of the research people in the field stumble onto it.

DOES THIS SOUND FAMILIAR?  1
============================

Well,  Walker's  gone  right  off  the  deep  end  again, without even
bothering  to  fill  the  pool  this  time?   Smart  cards,   CD-ROMs,
expiration  of programs, blah, blah, blah.  He's made up a whole fairy
castle industry out of thin air without the slightest  proof  that  it
could even be viable.

And  yet,  there  is  something about it that seems oddly familiar....
Let's see....  Aha!!!

Programs are programs.  So let's start by looking  at  what's  on  the
television.    No,  not  the  pap  on  the  screen,  what's  *on*  the
television--not the bloody  penguin  but  the  little  black  box  the
penguin's  standing  on.  Today, not far out in the distant 1997 I was
talking about, more than a hundred million people in Europe and  North
America  buy  programs--television programs--on a monthly basis.  They
buy them from a cable television operator or, if they live outside  an
area  with cable service or wish a wider selection, by subscription to
a satellite broadcasting system.  (Satellite broadcasting still  seems
a  little exotic in the U.S., though that is rapidly changing with the
Hughes-Thomson-RCA DirecTV system;  In  Europe  it's  everywhere--it's
hard  to find a home in Britain without an Astra dish--satellites work
better in Europe and Japan because they aren't as *big* as the U.S.--a
2  foot  dish works just fine, and you can buy the whole rig for about
US$300).  If you use a satellite dish, your receiver has a little slot
where you put in a  smart  card.   If  you  decide,  for  example,  to
subscribe  to  Turner  All-Colourised  Movies, just pick up the phone,
call the toll-free number, give your subscriber ID from the smartcard,
and zap-flash in 30 seconds you're watching Bogey in living -- well --
pasty colour.  This technology is  off-the-shelf  stuff  available  in
every Radio Shack in the U.S. and any T.V. store in Europe.

Most  cable  television  subscribers  pay  US$5 to US$10 per month for
Basic and monthly fees for Premium services like:

    Low rent cable channels (A&E, BRAVO, etc.)   US$0.79 -  1.00/month
    Network packages (Denver 5 or Primetime 24)  US$4.00 -  5.00/month
    Premium Channels (Disney, HBO, TMC, etc.)    US$7.00 - 10.00/month

and the typical satellite user (who receives all the channels included
in  Basic  cable for free) pays between US$150 and US$300 per year for
premium services.  Of course there are  ultra-premium  niche  services
such  as real-time stock and commodity quotes, etc., for which one may
pay up to US$100 per month.

You  do  not  *buy* your television programs, you *subscribe* to them,
and the revenue flows back through the chain to those who  manufacture
them  (have  you  noticed  how  often  you see "An HBO Picture" in the
titles in the theatres?).  And if folks pay $150 a year  or  more  for
television programs, is it absurd to suppose they will pay $120 a year
for  computer  programs, especially when the cost is in little monthly
nibbles rather than $495 up-front the way we do it today, and when you
can  always  rationalise  a  purchase  by  saying, "Well, I can always
cancel it if I don't like it"?

I believe that soon we're not going to *buy* computer programs either,
we're going to *subscribe* to them.  Programs are programs.

DOES THIS SOUND FAMILIAR?  2
============================

What  companies  stand  out  as  the  huge  unassailable (for a while)
monoliths of this century?  In the United States I'd list:

    American Telephone & Telegraph    1875-1980
    IBM                               1930-1970
    Xerox                             1960-1970

Now consider that during the time that each of these companies was  in
a position of total dominance of its market, it delivered its product,
which was fundamentally a piece of hardware, as  a  *service*,  almost
entirely  on  a  rental  or subscription basis.  This, combined with a
dominant  market  share  obtained  either  by  getting   there   first
(AT&T/Xerox)  or  by  blowing  away  less-serious  competitors  with a
massive sales organisation (IBM  in  computers  after  1948),  largely
insulated  the  base  revenue  stream of these companies from business
cycles and competitive threats.  The  annuity-like  revenue  base,  in
turn,  allowed them to make large, long-term investments in technology
relevant to their business (Bell Labs, IBM Research Labs, Xerox  PARC)
and in product development aimed at further distancing them from their
competitors.

Note that in each of these cases the subscription/rental nature of the
revenue  stream  allowed  these companies to subordinate technological
progress to the needs of the business.   Unlike  a  free-for-all  like
today's  RAM  chip or hard disc market, where product generation times
are measured in months, AT&T could introduce  direct  dialing,  direct
long  distance  dialing,  electronic  switching  systems,  etc.   on a
decades-long plan geared to optimising their  profits.   IBM  was  not
forced  to  rush  out  the  7094  or  360 under the gun by competitive
fears--they could switch their rental base to a new  generation  at  a
time of IBM's choosing, when the technology was ripe to increase their
revenues and earnings.  In short, when a  company  achieves  a  stable
subscription  base,  *it* calls the technological shots in the market.
Of course if a company is complacent, it will  eventually  be  knocked
out,  but  you  have  to  be  awfully complacent and/or incompetent to
nullify the benefit of a 10 to 1 advantage in product development  and
marketing  resources  (Xerox, of course, demonstrates that it *can* be
done, but in the other cases it took  government  action  or  fear  of
government action to displace the dominant player).

DOES THIS SOUND FAMILIAR?  3
============================

Redmond,  Washington,  March  20, 1992.  Transcript of meeting of John
Walker and John Forbes of Autodesk and Bill Gates and Todd Needham  of
Microsoft.

WALKER:     So let me see if I understand where you're going with
            this, Bill.  What you'd really like is  if  in,  say,
            five   years,   everybody  with  a  computer  gets  a
            Microsoft bill every month,  just  like  a  telephone
            bill, for each product they use.

GATES:      Precisely.

DOES THIS SOUND FAMILIAR?  4
============================

Have  you  heard  of the "Microsoft Developer Network"?  I'm a member.
Walk around and ask random programmers if they  are  as  well  (either
company-paid or on their own account).  There are 45,000 members as of
the last time I looked, and I suspect the ranks are swelling  rapidly.
If  you're  a  remotely  serious  Windows developer, you simply cannot
afford not to join, because it's the only  effective  way  to  receive
massive amounts of source code, internal technical documentation, beta
copies of soon to be released Microsoft products, special development,
debugging, and authoring tools, etc., etc.

How  does  it  work?   Well,  it's a, er, *subscription*.  I mail in a
check for US$200 per year, and every 90 days they send  me  this,  er,
CD-ROM  filled  with  600  megabytes of ever-changing goodies.  And as
long as my subscription is current, the bits just keep on coming.

DOES THIS SOUND FAMILIAR?  5
============================

Have you noticed how Microsoft  update  marketing  works  these  days?
They've  pretty  much  dropped  even  the  pretense of running updates
through the distribution channel except for mega-million blowouts like
Windows  3.1  or DOS 6.  No, as long as you've registered the product,
right about the time the new release hits the cover  of  PC  World,  a
little letter from Bill shows up with their little blue OCR form.  You
just tick the box and attach your check or credit card  number  for  a
readily-digestible  fee  (usually US$30 through US$150) and bung it in
the post.  A week later the update shows up at your door.   For  those
who  update  faithfully  this  way (and I won't get into the many ways
Microsoft forces you to stay current or  pay  a  heavy  price--they're
masters  at  it),  this  amounts  almost  to  a subscription--not on a
consolidated basis like cable or satellite TV, but to a product,  like
a  magazine subscription.  And the economic dynamics strongly resemble
those of magazine subscriptions.

Magazine subscriptions are  typically  sold  through  retail  channels
and/or highly discounted for an initial subscription; publishers don't
usually make money on initial subscriptions.  Renewals,  however,  are
handled  by  direct  marketing  and  all the recurring revenue for the
subsequent years goes right into the  publisher's  pocket.   It's  the
same for Microsoft Word; Gates has every incentive to discount initial
sales of Word as much as possible to gain market  share  against  Word
Perfect,  and to grant all kinds of incentives to his channels as long
as he believes that each initial  sale  plugs  him  into  a  virtually
guaranteed  revenue  stream of, say, $50 per copy per year.  Of course
to realise that revenue he has to keep the updates coming and  provide
enough  added  value  in  each one so people continue to stay current.
But since I've never seen a wish list get  shorter  for  any  software
product  I've  worked  on,  I hardly think that's a problem as long as
you're willing to invest in development.

DOES THIS SOUND FAMILIAR?  6
============================

        Microsoft, 2 Cable Giants Weigh Interactive TV Venture

                           By John Markoff
                        New York Times Service

         International Herald Tribune, Monday, June 14, 1993

    NEW   YORK--Three   dominant   technology  and  entertainment
    companies are on the verge of joining forces  to  create  the
    equivalent  of  software  for cable television--a system that
    would combine the worlds  of  computing  and  television  and
    perhaps shape how much of popular culture is delivered.

    Time   Warner   Inc.,   the  largest  entertainment  company,
    Tele-Communications  Inc.,  the  largest   cable   television
    company,  and  Microsoft  Corp., the largest software company
    are expected to announce by the end of the  month  that  they
    will  form  a  company,  tentatively  called  Cablesoft.  The
    companies  hope  the  new  venture  will  lead  the  way   in
    establishing  a  standard  for  the  transmission of a coming
    generation of interactive programs.

    At stake is control of the unobtrusive cable  box  that  sits
    atop  many  television  sets.   In  recent months the box has
    become a battleground  for  computer,  telephone,  and  cable
    companies.
                               ...

    Last  month,  for  example,  Intel Corp., the world's largest
    chipmaker, Microsoft, and General Instrument Corp.  announced
    plans to develop a cable converter that would have a built-in
    personal computer.  Last Monday Time  Warner  announced  that
    Silicon  Graphics  Inc., a Silicon Valley computer maker, and
    Scientific Atlanta, a supplier of cable boxes,  would  supply
    hardware  and  software  for  its digital television trial in
    Orlando, Florida, which is scheduled for next  year.   A  day
    before that announcement, Kaleida, a joint venture of IBM and
    Apple Computer, said it was joining with Motorola  Inc.   and
    Scientific Atlanta to develop a similar futuristic television
    controller.
                                   ...


Need I point out that just as soon as your cable  box  talks  to  your
computer  in  almost  any  fashion whatsoever, the technological means
exist  to  make  subscription  software  as  secure  as   subscription
television.   And  the  pirate  TV decoder business seems to have been
roundly wiped out.

The Time  Warner/Tele-Communications/Microsoft  deal  is,  of  course,
something  that's  looking  out  a  few  years  and probably genuinely
focused on interactive television.   But  purely  as  a  side  effect,
something  that  just  falls  out,  is  the  means  to  distribute and
authorise subscription software world-wide.  Controlled by  Microsoft.
This could have implications outside the entertainment world.

GETTING THERE
=============

Ever  since  1985  when  I  first I proposed the "AutoCAD Professional
Subscription"  as  a  means  of  finding  the  holy grail of recurring
revenue, I have been following the evolution of the software  business
from a retail sales model to a subscription/service base.  When I look
at the convergence of the trends and events I've noted above, I cannot
help  but  believe we are, if not already in that era, at least on its
threshold.

Emerging from this period of transition  with  a  large,  stable,  and
growing  subscription  base  will  render  the  companies  who succeed
formidable, almost invincible,  competitors  compared  to  firms  with
smaller  market  share  forced to generate their revenue entirely from
new sales.  Reinvestment of a stable revenue base can, if done wisely,
further widen the gap between the dominant firm and the dwarves.

For  some  reason,  when  I discuss the subscription model of software
distribution, many people get confused and  think  I'm  talking  about
something  in  the medium to far future--"Well, yes, things may indeed
go that way once we have interactive television/fiber to the home/data
highway/..., but for now....".  But other than the Microsoft cable box
venture,  which  is  interesting  but  unnecessary,  nothing  I   have
discussed  has  any  technological contents whatsoever; it is purely a
question of marketing and  distribution  strategy.   Bucks,  not  Buck
Rogers.

To summarise and demonstrate that all the foundation pieces exist:

    *   Tens  of thousands of people pay Microsoft $200 a year to
        subscribe to Developer Network and receive a CD-ROM every
        90 days.

    *   Silicon  Graphics  distributes  all its software to every
        customer on regularly-issued CD-ROMs.   You  purchase  an
        authorisation code to install and enable it.

    *   Microsoft  does  direct marketing and fulfillment of most
        updates of current products.

    *   More than 50 million  cable  television  subscribers  pay
        US$100  per  year,  some  far  more, for their television
        programs.

Unlike many  major  transitions  in  distribution  strategies,  moving
toward  a  subscription  model can be done, as far as I can tell, with
little or no risk (effort and expense, yes; risk, no).  In a  business
which concentrates primarily on new sales, the installed base is often
an underperforming asset waiting to be discovered.  Moving  to  direct
marketing  of "frequent, cheap" updates and upgrades, as Microsoft has
done, is unlikely to alienate existing channels geared to selling  new
products.  As Autodesk has discovered, as long as we keep new sales of
AutoCAD firmly in the dealer channel,  providing  direct  options  for
"the  little  stuff"  may provoke grumbling, but seldom more grumbling
than we hear about "unprofitable, time wasting update business".

I believe  a  subscription  strategy  can  be  evaluated  and  planned
relatively  simply  once  we  discover  the  answer  to  the following
question:

    How much revenue do we generate, per annum, from the average
    unit of AutoCAD, after its sale?

Now, I don't have the vaguest idea of this number, but  let's  play  a
little  napkin  engineering  and make a wild stab.  The wild and wooly
R12 update generated $22 million in update revenue and the  subsequent
quarter  $13.5 million (Pru-Bache report, May 24, 1993).  Let's assume
we hold the $13.5 million level (which Laura and folks  don't  expect,
but I want to err on the high side).  So we have $63 million in update
revenue, liberally construed, in a year  with  a  blockbuster  update.
Folding  the  napkin and continuing, we have about a million installed
copies,  but  let's  say  they're,  oh,   700,000   "active"   copies,
disregarding  shelfware  and people who haven't upgraded since Version
2.6.  Well, that comes out to about US$90 per year per "active"  copy.
So,  for example, if we could get half our "active" users to subscribe
for, say US$250 per year, we would have  a  recurring  revenue  stream
greater  than  our  biggest update year ever, and without all the push
and cost it takes us to launch an update.   And  given  what  Autodesk
usually charges for updates, many users would probably consider this a
bargain, particularly if it avoided all the hassle currently  involved
in updating a copy of AutoCAD.

It's  also intriguing to divide the Pru-Bache FY 94 estimate of US$430
million by my "active base" of 700,000.  That comes out to US$614  per
active  unit  per  year.   So  were  we,  for  example,  to  move to a
subscription for AutoCAD of about $100 per month  for  new  sales,  we
would  generate,  month after month, year after year, revenue equal to
what we largely derive today only from new sales--again assuming  only
50%  conversion  of  the  already  active  base.   This implies a more
radical change in the way we do business which could be deferred until
experience  with  the  installed base upgrade/update program confirmed
its viability, or simply put off forever, retaining different channels
for  first  sale  and  subscription  as  in  the magazine business and
Microsoft's current practice.

THE ENABLING PREREQUISITE
=========================

If you've made it all the way  through  my  arguments  without  either
getting   lost  in  my  thorny  prose  or  storming  away  in  violent
disagreement with my premises or deductions, you may be  beginning  to
think  I'm  onto  something  here.   But  that  raises  the legitimate
question, "Well, if even Walker's figured it out, why isn't  everybody
in the industry already doing it?".  Indeed, I've wondered quite a bit
about that myself.

I think the answer lies in the observation  that  most  companies  who
succeed  in  building  self-sustaining  subscription-based  businesses
start from a position of effective monopoly of their sector.   In  the
case  of  AT&T,  it  was  a  combination  of  technology, patents, and
government grants which conferred the monopoly.  IBM built  its  first
monopoly  in tabulating equipment on the patent of the Hollerith card,
then clawed its way to an  effective  monopoly  in  computers  by  out
marketing  and  out-customer-servicing  Remington Rand, Burroughs, and
others.  Xerox derived its monopoly from the patent on xerography.

Quite simply, to derive enough revenue from a subscription strategy to
make  the  business  run,  you  have  to  have the lion's share of the
market, not a small slice.  To get people to subscribe,  you  have  to
have demonstrated technological leadership that convinces them they'll
get more value by paying you regularly than buying from somebody  else
outright,  then  replacing  the  product  later on.  And of course the
central development engine needs to be big enough to  keep  generating
the  value  that  gives subscribers value for their money, year in and
year out.

Which means that to pull off the transition to  a  subscription  base,
you  have  to  start with a large market share lead, and therefore the
only companies in the software business  well-positioned  to  do  this
today are:

    Microsoft
    Autodesk (in CAD)
    Word Perfect (in word processing, but slipping)
    Lotus (in spreadsheets, perhaps, and slipping quickly)

SUMMARY AND CONCLUSION
======================

Is  software  a  business?  Can a company make money selling software,
consistently and reliably?  In 1983 many  people  doubted  that  these
statements  were  true.   In 1993, we have one great success story but
little  confidence  that  other  sectors  and   companies   are   safe
investments for the long term with predictable chances for growth.

By  2003,  I  believe  that  everybody  will know the answers to these
questions: "Yes, and yes".  Within 10 years the software industry will
have   restructured   itself   from   a   costly   and   unpredictable
bookstore/appliance dealer sale-oriented  model  to  a  cable  TV-like
subscription model.  The companies who emerge from the  turbulence  of
this  transition  will  be the colossi of the industry, no more and no
less inherently risky than television networks,  book  publishers,  or
regional   telephone  companies.   Their  revenues,  measured  in  the
billions to tens of billions will  fund  ongoing  product  development
aimed and increasing their subscription base.

Ironically,  they  may cease to be viewed as "growth stocks"--once the
constant revenue base comes to eclipse the near-term  potential  of  a
new  product  launches,  their performance may appeal to those who buy
utility stocks today.  (But then  when  electricity  use  was  growing
exponentially in the early '50s, utilities were "growth stocks".)

It's  2003.   The  little black box on the top of the TV is hardly big
enough to hold all the logos printed on  it:  Microsoft,  Time-Warner,
Swiss   PTT,   SES/ASTRA,   General  Instrument,  Dolby  Labs,  Intel,
Motorola/Iridium, etc.  A couple of wires hook it to the  TV  and  the
computer,  and  the ubiquitous smart card sticks out the front.  Every
month I get a bill for the programs I subscribe to:

    Astra Basic pack               2.00
    Eutelsat Basic pack            2.00
    HBO                            7.00
    The Dinosaur Channel           0.50
    Canal Plus                     1.25
    TeleCine Romande               4.00
    CNN International              0.75
    Microsoft Basic pack           4.00
    Microsoft Developer Network   10.00
    Microsoft Project              2.00
    Microsoft Visual C+++++        9.00
    Microsoft Producer             4.00
    Autodesk AutoCAD              75.00
    Autodesk Cyberspace Explorer   8.00
    EuroFeed Internet News Link    1.00
    BBC World Service Radio        0.25
    ... about 20 more ...programs are programs

And  since  the  bill gets paid automatically, and it's only about 200
francs a month, I don't look  at  it  too  closely  (other  than  that
AutoCAD  thang--wonder  if  they'll  *ever*  give  me a break!).  Each
little nibble is so small, though, compared to when I had to shell out
US$400  over  the  counter  for some software I didn't know would even
work when I installed it, that I pay and pay and pay.

This document is a work of education, not advocacy.   I  believe  that
wisdom  consists  of  embracing  change,  not  battling it.  We win by
enlisting the slow but inevitable forces of economics on our side, not
by  shoveling  sand  to  halt  the  tide.   All the evidence I can see
convinces me the software business is finally making the transition to
a   recurring  revenue  model  which  will  be  its  salvation.   This
transition will entrench those  companies  who  leverage  their  large
existing market share into a consistent and reliable base of recurring
subscription revenue.

Among major software companies, Microsoft and  Autodesk  (in  the  CAD
sector)  are  uniquely  positioned to lead this transition and benefit
from it.