Martin Banks, Personal Computer World 12/84 - checked

December 1984

A few weeks ago, a friend of mine in the computer industry came up with a fascinating but inconsequential fact. In 1983, IBM made $2.50 profit for every second of my 80-year-old uncle's life. At first I thought that this was the most irrelevant piece of information I had ever heard (unless I was IBM's bank manager, of course), but I played with some numbers and found that in the first quarter's trading this year, the jolly blue giant had made around $1 profit for every second he has been alive.

This is all quite stunning, but so what? Then I thought: 'Billions of dollars' just sounds like a hell of a lot of money when you say it out loud. Consider it in terms of an equivalent, such as seconds of life, and you realise just how much of a hell of a lot it really is.

If, therefore, IBM can make that much money out of the computer business, why are so many other companies going under?

There are, of course, significant reasons why IBM is such a success. It started by being in the right place at the right time when the computer industry first took off. It pursued its sales and marketing objectives with a zeal that still borders on religious mania. It became the name in computers: for many people computing means IBM, and that includes other computer manufacturers.

But why has it succeeded while others have failed? One possible reason for such success was recently brought to my attention. I visited a software company that had done well out of addressing a vertical slice of the software market place, and was due to launch its latest product. Its target was the legal profession, a business well known - in folklore if not always fact - to be one of the most remunerative ways of earning a living.

The package was introduced and explained, and the price was mentioned in passing; at which point I felt the urge to seek a little clarification on the indelicate point of the price tag. What, I wondered, did one get for the £2000-plus that had been mentioned? If it was an all-up price, including the hardware, then it looked like a reasonable deal.

'Ah, no,' I was informed. 'That's just the price of the software package.'

Just the price of the software package? Good God. There are companies up and down the country who could - probably are - writing programs as complex for under £500.

It was then that the thought struck me. I've seen several software product catalogues from distributors and individual product announcements from software companies that reveal a great divide in the software business. Place your company in a nicely defined vertical market and you can charge what you like for the product. If the punters want it, they'll beat a path to your door, no matter what the price.

If, however, your product is of a more general nature with potential applicability across a wide range of user sectors, then the price must be low, competitive and aggressive. The related logic is quite straightforward: general-purpose applications packages will theoretically be sellable to a wide range of customers across a wide range of user sectors.

There is, therefore, the potential for high volume sales which justify an aggressive price. Such a price will also be needed to generate sales in the first place, because other software companies will be fighting for the same general-purpose data processing markets. They will all be selling word processors, database managers, spreadsheets et al. What will primarily distinguish the various packages will be price, unless the features of one are so stupendous as to be unbelievable, or so appalling as to be laughable.

Even the prices will be broadly similar, with each new entrant to the market attempting to provide more facilities than the current leading product in any sector at a lower price.

Yet, as has been found many times before (the latest being the home computer hardware market), there's only ever room for two or three successful products in any category and, once these market leaders are, by whatever process, defined, the other contenders are doomed to either struggle or suffer an ignominious failure. That is unless they can offer the user something different, or better.

Then they find that they can even charge for it. They may not sell as many units as the market leaders, but their profitability will often be greater in percentage terms. Such companies are now making the transition towards addressing vertical markets, where they may well find that the pressures are slightly more bearable and the problems slightly less.

As can be seen from the catalogue of software distributors, pick the right vertical market and you can name your own price. Something for the legal profession perhaps, or the building trade - anywhere that's used to shelling out money in large dollops for its product purchases. These are the markets to go for.

You could spend less time and effort developing a package in those fields than in developing a word processor. You could come up with a package that had seventeen times more the power of WordStar, could run immediately on any machine with more than 16k of memory and cost just £25 and it still wouldn't sell. With a well-defined vertical market product you're almost guaranteed business. I've heard of customers buying such products, often several copies, just for evaluation purposes, to 'find out what it's capable of.'

At vertical market prices, that can be good business; in the general purpose applications business, it can mean bankruptcy.

You may not become a millionaire or reach IBM's enviable financial status but there's good money to be had making the icing for The Big Blue One's extremely fulsome cake.

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