Computer Software Prices Tumble Like Computer Hardware
IT is a lasting price cut nobody wants to acknowledge. Computer programs that once sold for $500 or more are now going for around $100. The software industry claims these discounts are temporary, but they look permanent.
"Word-processing, graphics - any sort of homogenous application like that - is considered more or less a commodity," says Charlotte Walker, senior managing director of Martin Simpson, a division of the investment banking firm Reich & Company. "You have price pressure."
"Nobody is out there wanting to pay $200 for their software anymore - not when they bought their computer for $499," adds Kevin O'Leary, president of SoftKey Software Products Inc. "The price of software in two years will be under $10."
That is a bold prediction - one not shared by a majority of analysts or software vendors. But signs are emerging that, just as computer hardware prices continue to spiral downward, so will software prices.
The official price of the leading spreadsheet program - Lotus 1-2-3 - is $495. But anyone who bought a previous version (or any leading competitor's spreadsheet) can get the program for $129. The strategy is known as competitive upgrade and most leading vendors use it. Borland International introduced its new $795 database in February with a 90-day upgrade price of $139.95. When the 90 days ran out, it extended the offer another 90 days. Some of the discounting is just jockeying for position, says Kathry n Roy, director of marketing for Lotus Development Corporation. But "what we've seen is our list prices having less meaning over time."
ANOTHER tactic is to sell a bundle of software at a deep discount. Recently, Borland and WordPerfect Corporation joined forces to market a trio of flagship products: Borland's database and spreadsheet with WordPerfect's word-processing program. Total cost bought separately at list price: $1,785. Special bundle cost: $399.95. The upgrade is only $299.95 if a user has any one of a competitor's spreadsheet, database, or word-processor.
Determining who qualifies for a competitive upgrade can be a lax process. WordPerfect is selling the latest version of its $495 word processor for $129 to anyone who owns a word-processing program. How does it know who owns a word-processing program? Apparently, it does not. The company requires no proof of ownership to qualify for the competitive upgrade, says a company order clerk reached by the Monitor.
Software companies continue to discount because they are making up in volume much of what they lose in margin. Last year, North American software sales jumped 14.1 percent to $5.75 billion, according to the Software Publishers Association. But unit sales leapt 36 percent. "Manufacturers are beginning to realize that with every $10 drop in prices, sales go up exponentially," says Craig Froelich, marketing coordinator for Dustin Discount Software in Woodland Hills, Calif.
"It takes a lot of $99 sales to equal $1 million dollars," adds Alan Henricks, Borland's chief financial officer. But "we can survive this."
Pricing pressures will force some companies to fold or merge, says Ms. Walker of Martin Simpson. Lotus announced June 8 it was acquiring a small database company called Approach Software Corporation. Software companies are also having to pay close attention to how much free support they can afford to offer users who have questions on how to use the software.
Softkey has perhaps the most aggressive pricing stance. The company, which recently announced a reverse takeover of WordStar International, introduced in 1988 a line of software products for $39.95 each. Last year, it offered a new line for $14.95. In January, it launched a third line of programs for $5.99. "It's outrageous that people should have to pay $200 for something that costs $5 to make," SoftKey's Mr. O'Leary says.