Resolve and Fortitude : Microsoft's ''SECRET POWER BROKER'' breaks his silence by Kempin Joachim

Author:Kempin, Joachim [Kempin, Joachim]
Language: eng
Format: epub, mobi, azw3
ISBN: 9781479732029
Publisher: Xlibris
Published: 2012-10-28T23:00:00+00:00

PRICE WARS

By 1998, the trend toward radically lower PC prices became reality. Consequences for Windows? A passionately debated topic inside the company. We received $55 on average per Windows-powered PCs, selling typically between $500–$1,500. Our percentage of the total system price therefore varied from 3 percent on the high end to over 10 percent on the low end. For hardware companies, not exactly devoted software fans, paying higher percentages for software was worth resisting. They took to victimized posturing. I had to defend my current prices inside and outside the company. Bill and Steve argued for reductions, potentially eroding shareholders’ values overnight. The most favored and intensely debated idea was to tie royalties to PC prices. Good in theory only! I could not find any correlation between hardware and software prices! If anything, producing new versions of Windows with added features resulting in expansive code needed extra programmers paid for with inflation-driven salaries. There were production efficiencies and gains through integration available for hardware design, not so for software code. Any correlation you ever find will probably be negative, meaning as hardware cost comes down, software cost goes up. The only factor offsetting this trend was a substantial increase in PC units—yet not always enough, as we extended ever larger discounts to the most successful shippers.

What my bosses did not know: we had tried a similar pricing model once with Philips, the large Netherlands-based consumer electronics company. She had dabbled in the PC business early on but eventually shut down as the margins grew thinner. When she tried a second time, opening a manufacturing plant in Canada, we negotiated a royalty agreement with a sliding scale correlating with the suggested retail prices of her PCs. We entered into the deal with the objective of learning if such a model could work. Philips was the right experimental partner for us: her volume was low, and being located in Canada, we did not expect the news to travel fast and far.

I was skeptical, but we took the risk with a DRI threat looming. The deal rapidly spiraled into the abyss. Customarily, PCs sold together with monitors. After the crafty Dutch separated them from their systems, the average price dropped 15 percent to 20 percent at once. As we cycled merrily along, old inventory was sold off at huge discounts, making room for newer technology, temporarily reducing royalties as much as 30 percent. Philips then decided to drop her high-end lines, and the bottom fell out of our calculated average assumption. Stripping keyboards from PCs gained another reduction. As the one-year deal ran out, Philips came up with the idea of basing royalties on production cost. This time I did not bite.

Remembering our brief flirtation with a scalable model, I firmly stood my ground. In my opinion, Windows was doing basically an identical job on low-end or high-end PCs. There was no need to charge a substantially different price beyond what we had once introduced when slightly differentiating its price according to the CPU used.

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