THE PC PRICE WARS ARE SWEEPING INTO SOFTWARE
Learning new software can be bothersome. So much so that once customers know one package, they're reluctant to switch and spend hours learning a new brand. This stubborn fact makes being first to market vital. And it keeps programs such as Lotus 1-2-3, WordPerfect, and dBASE firmly entrenched, even if the companies that created them stumble.
That was before Windows, however. The Microsoft Corp. software makes IBM-compatible PCs easier to use, but it also requires new applications programs that are tailored for the Windows graphical format. In effect, that means the 10 million PC users who have adopted Windows since 1990 are up for grabs. And companies that snag those buyers now could wind up with the kind of money-minting dominance that Lotus Development Corp. enjoyed with 1-2-3.
Voila: Time for a price war. As software makers scramble for a piece of the new market, discounting is rampant. Most list prices haven't budged, but there are all kinds of incentives to get PC owners to switch brands as they install Windows. And to lure influential corporate buyers, suppliers are pulling out the stops. They're quietly offering as much as 85% off list. And for an annual fee, Borland International Inc. and others will provide routine software upgrades to groups of corporate users. Says Paul Brainerd, president of publishing software leader Aldus Corp.: "There is the myth of the retail price and the reality of what major customers pay."
The first casualty of the price war has been Lotus' stock. In late June, Lotus cited pricing pressures and soft foreign sales when it warned that profits for the June quarter would not meet analysts' estimates. Already spooked by the free fall in PC-hardware prices, investors trimmed 26% from Lotus' market value in two days. Only a few days later, Software Publishing Corp. issued a similar warning, sending its stock to a new 52-week low. In between, shares in Microsoft and Borland also dipped.
"The suppliers are taking a beating, but we customers love it," says Christine Leatz, manager of office technologies at industrial-equipment manufacturer FMC Corp. An FMC unit in San Jose, Calif., for instance, switched from Lotus 1-2-3 to Microsoft's Excel spreadsheet for Windows, paying on average less than $100 per copy for software that lists for $495. Negotiating helps. "I always tell vendors that I talk to their competitors," she says. "Then, they're willing to deal."
The price wars in PC hardware are also driving down software prices. The latest cuts by Compaq Computer Corp. and Dell Computer Corp. are making it all but impossible to command the prices of yesteryear. In the past, an application was perhaps 15% to 20% of the cost of the computer, says Ben Z. Rose, an analyst at Hancock Institutional Equity Services Inc. With PCs now under $1,000, "who is going to spend $400 to $500 for each package?" asks Rose.
STEADY STREAM. The deepest cuts are in the biggest categories: spreadsheets and word processing. For the average PC buyer, "these products are getting to be like commodities," says Sanjay Kumar, senior vice-president for planning at Computer Associates International Inc. CA is one of the few software companies to actually reduce list prices, slashing the price of its Windows word processing package from $249 to $99 for the next 90 days.
Selling bundles is another way to wage the price war. Lotus and Microsoft now sell "suites" of software for one low price. The four Windows programs in Lotus' SmartSuite carry list prices totaling $1,800. But for buyers switching from Microsoft or an older Lotus package, the price can be as low as $319. Lotus Senior Vice-President Robert K. Weiler says that retains key customers. "These are not crazy deals as much as a fundamental change in the average selling prices." To keep up, Borland and WordPerfect Corp. are negotiating to co-market their own "suite" of products: WordPerfect's word processing and electronic-mail packages with Borland's data-base and spreadsheet programs.
For some suppliers, today's painful cuts may eventually lead to fat profits. As customers settle in with their favorite Windows programs, software makers will collect a steady stream of upgrade fees. But right now, the only one making hay is Microsoft. Partly because it began selling Windows programs first, the company has a big chunk of the market: 72% in spreadsheets, 44% in word processing, and 16% in presentation graphics, according to InfoCorp. But before long, the old rule will set in. As more and more customers master these new Windows programs, it will become harder and harder for rivals to get them to switch. Regardless of the price.Gary McWilliams in Boston, with Kathy Rebello in San Francisco and Evan I. Schwartz in New York