rcd@ico.isc.com (Dick Dunn) (08/29/90)
In an article following up on looking for good prices on 386ish UNIX, calhoun@usaos.UUCP (Warren D. Calhoun) writes about finding a good deal on SCO software... > ...Considering that even at ~$400.00, there is still more than a > 100% profit margin (discounting R&D), this is still not a bad deal for SCO or > for the reseller... My first reaction to the parenthetical note was to recall physics courses where we were always searching for the right simplifying assumption...we joked about "frictionless elephants whose mass can be neglected..." You can't discount the R&D cost, or the analysis won't make sense. Now, I certainly don't mean to flame Mr. Calhoun--it's a common belief that soft- ware should be very cheap because the production costs are so small. But I'd like to take the occasion of his comment to talk about (and perhaps get a discussion going about) what an OS package really costs, and why. I think the idea that the OS should be pretty cheap is based on a couple of points: - The hardware is *so* cheap in our world. If you don't want a window system, a pretty comfortable machine for one or two people costs $2K or under. A really hot machine is $4-5K. Moreover, the prices drop weekly...DRAM and disk are as volatile as beef or lettuce. - The 386 community is accustomed to thinking high-volume. There's a sense that everything is commodity-market, here meaning that the price is mostly determined by production costs. The trouble with this thinking is that the numbers for 386 UNIX systems don't yet work right for a commodity market. Obviously, one important number is quantity; the other one that gets overlooked is time between releases. Even if you could neglect your initial R&D cost (which you can't!), if you're going to stay in business, you have to recoup the cost of a release during its lifetime--which is on the order of a year or two. You don't have a cycle where you're intensively designing/implementing/ testing followed by a quiet period of raking in cash. Instead, the development is nearly continuous, which means current sales have to support a full-time development staff as well as the usual maintenance, support, marketing, sales... Now, figure that developers cost you $1.5-2 M per dozen per year...and trust me, you need several dozen developers these days. Take a guess at the staff you're supporting, postulate a believable margin, and you can figure how many systems you've got to sell to stay afloat. You might be surprised how high it is. In vague, hand-wavy terms, if the margin per system is on the order of a couple hundred bucks, you need to move > thousands of systems per month. Another factor, which I find painful but is nonetheless true, is that the cost of development is monotonically increasing. Why? 'Cause the size of the software is monotonically increasing. With each new release you have to support 90%+ of the stuff from the previous release, plus all the new goodies. (Personally, I think it's unfortunate that we've got such feature wars going on. It costs all of us--software cost, performance, relia- bility--more than we know.) The continuous flow of new "stuff" makes it hard to settle down and get a series of stable releases that keep getting better and cheaper. BTW, I'm not writing this to cry on anyone's shoulder. I don't know what the detailed numbers for ISC are, and I'm not in the Product division any- way. These are just the BoE calculations anyone can make. Can 386 UNIX get to the "commodity market"? Depends on a lot of stuff. In the past, we've been on the wrong side of a positive-feedback loop: Prices are too high, so people don't buy; the quantities stay too low to get the prices down enough. Comments? -- Dick Dunn rcd@ico.isc.com -or- ico!rcd Boulder, CO (303)449-2870 ...I'm not cynical - just experienced.
calhoun@usaos.UUCP (Warren D. Calhoun) (08/29/90)
In article <1990Aug28.182758.29036@ico.isc.com>, rcd@ico.isc.com (Dick Dunn) writes: * In an article following up on looking for good prices on 386ish UNIX, * calhoun@usaos.UUCP (Warren D. Calhoun) writes about finding a good deal on * SCO software... * * * ...Considering that even at ~$400.00, there is still more than a * * 100% profit margin (discounting R&D), this is still not a bad deal for * * SCO or for the reseller... * * My first reaction to the parenthetical note was to recall physics courses * where we were always searching for the right simplifying assumption...we * joked about "frictionless elephants whose mass can be neglected..." * * You can't discount the R&D cost, or the analysis won't make sense. Now, I * certainly don't mean to flame Mr. Calhoun--it's a common belief that soft- * ware should be very cheap because the production costs are so small. But * I'd like to take the occasion of his comment to talk about (and perhaps get * a discussion going about) what an OS package really costs, and why. As I should have known, what I deemed a casual remark managed to strike a nerve. This was really not my intent. My comment about discounting the R&D costs was not meant the way it was apparently interpreted. What I did mean was that I am not qualified to judge the R&D costs. I know that they are high and that they most definitely figure in to the overall cost of a product ESPECIALLY software. The 100% I spoke of was "profit" above and beyond the "material costs" (i.e. disks, documentation, packaging, etc.). The point that I was trying to make is that whatever SCO gets, it must be some amount that they figure will enable them to recoup their costs over the life of the product and still make a profit. This figure is apparently low enough that a VAR can set a price of ~$400.00 and still see a profit themselves. Apologies for seeming to view the R&D aspect as trivial. -- | SSG W.D. Calhoun | UUCP: ...!uunet!usaos!calhoun | | Gas Turbine Engine (52F) Branch | INTERNET: calhoun%usaos@uunet.uu.net | | The U.S. Army Ordnance School | CompUServe: 76336.2212@compuserve.com | | Fort Belvoir, Virginia 22060 | Voice: (703) 664-3396/3595 |
cws@janus.Quotron.com (Craig W. Shaver) (08/30/90)
In article <1990Aug28.182758.29036@ico.isc.com>, rcd@ico.isc.com (Dick Dunn) writes: > In an article following up on looking for good prices on 386ish UNIX, ... > > Can 386 UNIX get to the "commodity market"? Depends on a lot of stuff. > In the past, we've been on the wrong side of a positive-feedback loop: > Prices are too high, so people don't buy; the quantities stay too low to > get the prices down enough. > > Comments? > -- When the micro started out in the late 70's and early 80's it was mainly sold to hobbyists. These people developed incredible things on very primative equipment, but it took a while for the mass market to catch on. When itty bitty machine company introduced the "pc" business use caught on big and the mass market started to generate good momentum. The stories of big money (lotus, microstuff, etal) brought more people in and BOOM. I can smell the hackers out there with their own full blown UNIX system at a cheap price hacking away. I can also sense the lure that UNIX is posing to DOSOIDS that have tapped out the 640k segmented (demented) architechture and want to build some REAL software. UNIX offers more to these hackers, but is a tough hill to climb for someone used to DOS programming. However, the UNIX market is somewhat different. It is in competition with the mini's and mainframes on the one hand, with workstations on another, and to a small degree with pc's. But, the people in the business now want to charge and get what the market will bear. That means less volume and poor software. That will change in the next 2 years. As more hackers rev up their 386's, 486's and get some cheap UNIX going they will start to spit out some decent software. This will be low overhead software and they will be content just to recover some costs. Some of this stuff will be fantastic, maybe one or two will become blockbusters. It may take a little longer than DOS/pc's to get this out because of the learning curve for (good) UNIX development. What can we do to accelerate this? Buy ESIX because it is cheap and they have a dialog on the net. Try to use ESIX in more business situations. If ESIX is successful because they have a low price and good software then SCO and ISC will be forced to follow. I also think that all the 386 UNIX vendors should be more open with non-ATT parts of the code. I mean the drivers. Put out source on these things and let the hackers at em. You will see some pretty good drivers that have been tested on quite a bit of equipment and probably see some nifty innovations. The UNIX shops could probably reduce their staff quite a bit on that one. more comments? Craig W. Shaver ================================================================ Quotron Systems Inc. | Phone: (213) 302-4247 5454 Beethoven Street | uucp: hacgate!janus!cws Post Office Box 66914 | craig@tradr2.quotron.com Los Angeles, CA 90066 | ================================================================
rcd@ico.isc.com (Dick Dunn) (08/30/90)
I'd taken Warren Calhoun's article about good prices as a jumping-off point; I started with a statement about not disregarding the R&D costs. In response, he said: > As I should have known, what I deemed a casual remark managed to strike a > nerve. This was really not my intent... Perhaps I should have started a completely separate article. It's not that he struck a nerve so much as he gave a good point to start thinking/talking about OS costs in our little world here (386, UNIX) and try to make some sense of them. >...My comment about discounting the > R&D costs was not meant the way it was apparently interpreted. What I did > mean was that I am not qualified to judge the R&D costs... Sometimes I wonder if the vendors are either! It's a hard problem...not so much that it's hard to judge the R&D costs _per_se_ as that it's hard to see just how they should figure into the product cost. (The suits under- stand this better than I do, but they still have some unpleasant guesswork to do.) > The point that I was trying to make is that whatever SCO gets, it must be > some amount that they figure will enable them to recoup their costs over the > life of the product and still make a profit... Perhaps, but not necessarily. I doubt that they intend to take a big loss on it (!) but there is such a thing as taking a slight loss to get yourself established in a market. (I have *absolutely no* idea whether this is the case. I'm just rambling about possibilities.) Also, the question of whether they'll recoup the R&D depends on how many they sell, of course, and that may not be easy to guess. In a rapidly-changing market, fore- casting even with the best of information is risky. -- Dick Dunn rcd@ico.isc.com -or- ico!rcd Boulder, CO (303)449-2870 ...I'm not cynical - just experienced.
richard@pegasus.com (Richard Foulk) (08/30/90)
> >The trouble with this thinking is that the numbers for 386 UNIX systems >don't yet work right for a commodity market. Obviously, one important >number is quantity; [...] Don't forget; the selling price of the OS could have a lot to do with demand and hence quantity. Especially in a market where the software is currently approaching the cost of the hardware. Guessing the optimal price is perhaps a marketeers most difficult job. But there's always the possibility that if you reduce your price by 50% you'll increase your sales by 200%. With no way to prove it except to try it. It is my distinct impression that ISC and SCO are erroring on the high side. -- Richard Foulk richard@pegasus.com
jes@mbio.med.upenn.edu (Joe Smith) (08/30/90)
Dick Dunn: > ... Instead, the development is nearly continuous, which means > current sales have to support a full-time development staff as well > as the usual maintenance, support, marketing, sales... Now, figure > that developers cost you $1.5-2 M per dozen per year...and trust me, > you need several dozen developers these days. While I don't doubt for a minute that this is currently true, doesn't this strike anyone else as completely outrageous? I mean, think about how many developers are employed by 386-Unix vendors (and AT&T!), and compare it to the number of developers required to support DOS*. It must be at least 10:1, maybe even 100:1. Why does Unix require such huge development-support costs? If Unix is ever going to 'mature' as a product, it's got to shed the need for intensive system hacking, and the needless duplication of effort on the part of vendors (how many developers are working on competing sysadmin and installation schemes?). *) If you don't like the comparison to DOS, choose any other alternative, PC-based OS (esp. OS/2). I don't think the number will change that much. <Joe -- Joe Smith University of Pennsylvania jes@mbio.med.upenn.edu Dept. of Biochemistry and Biophysics (215) 898-8348 Philadelphia, PA 19104-6059
rcd@ico.isc.com (Dick Dunn) (08/31/90)
In response to my whining about ongoing development staff... > > ... Instead, the development is nearly continuous, which means > > current sales have to support a full-time development staff... ...jes@mbio.med.upenn.edu (Joe Smith) writes: > While I don't doubt for a minute that this is currently true, doesn't > this strike anyone else as completely outrageous?... Yeah...as a matter of fact, it does! It contributes to the end-user cost of the product in a big way. I would argue that the market is forcing this level of development, in two ways: demand for support for new hardware, and "feature madness." The need to support new hardware will always be there, and will always require a certain ongoing development cost. We might be starting to level out a bit...it's not like in the earlier days of PCish UNIX where only a few devices were supported. At least we've got a reasonable set now. The additions are more in the class of "would like" and "should have" than "must have." What about the feature madness? It looks to me like the system producers (the folks responsible for generating the various source bases) are con- stantly trying to one-up each other. How do we get out of that mode? It's an important question, because it bears on Joe's next point: > ... If Unix is > ever going to 'mature' as a product, it's got to shed the need for > intensive system hacking, and the needless duplication of effort on > the part of vendors ... As the systems keep adding features and keep growing, it gets harder and harder to maintain them, let alone add anything. Everything interacts. That's a formula for less-stable (i.e., "immature") software. Trouble is, people see UNIX (but not DOS or OS/2) as the platform for future develop- ment. A lot of ideas get tried out on it, and some of them stay. Not all of the ones that stay belong there, but that's the way it goes. Beyond that, just enough of the new features are of general interest/need that people clamor for them and they get rushed into "production" releases. I'd sure like to see a way out of that, somehow decoupling experiments from commercial systems. -- Dick Dunn rcd@ico.isc.com -or- ico!rcd Boulder, CO (303)449-2870 ...I'm not cynical - just experienced.
pcg@cs.aber.ac.uk (Piercarlo Grandi) (09/01/90)
On 30 Aug 90 03:23:04 GMT, richard@pegasus.com (Richard Foulk) said: richard> Guessing the optimal price is perhaps a marketeers most richard> difficult job. But there's always the possibility that if you richard> reduce your price by 50% you'll increase your sales by 200%. richard> With no way to prove it except to try it. richard> It is my distinct impression that ISC and SCO are erroring on richard> the high side. It is my impression is that they are trying very hard to limit sales, and thus will strive to keep the price as high as they can. In case this sounds crazy to you, sales must be backed by capital; if you are short of capital, the best way to increase absolute net income is not to increase sales, but price; this will reduce sales and thus the demand for capital. For manufacturing companies this is counteracted by economies of scale, and by the fact that once capital has got invested into fixed equipment you want to maximize revenue, not margin, because the bulk of your capital has already been sunk. This is the reason why foreign distributors normally try hard to sell as little as possible of the products they import at as high a price as they can; sales to them are just a bother, and they do not have the incentive a manufactuer has to spread the initial fixed investment on as large a volume of sales as they can. To them more volume means more trouble. This is also true for software companies, especially those, like SCO and ISC, which are in market that is growing very fast on its own on the demand side, and where the supply of capital, in the form of competent system programmers, is very scarce. ESIX and Microport are betting on different economics: they bet they can provide a product for people that does not put a lot of demand on their capital resources, and they can just resell AT&T's product as a bookseller would do. Not exactly cash and carry, but... -- Piercarlo "Peter" Grandi | ARPA: pcg%uk.ac.aber.cs@nsfnet-relay.ac.uk Dept of CS, UCW Aberystwyth | UUCP: ...!mcsun!ukc!aber-cs!pcg Penglais, Aberystwyth SY23 3BZ, UK | INET: pcg@cs.aber.ac.uk