This must be "hammer on Mr. Baggett" day for Abdul.

> It seems to me that this is a very serious misunderstanding of margin.
> Margin does not include development cost, nor does it include support.
> Rather, margin would generally refer to the difference between sale price
> and unit cost, expressed as a percentage of sale price, which with
software
> is very low. Microsoft's profit, after considering development costs and
> support costs, is much much less than what Mr. Bagget would imply.

I've been in business since 1991, selling niche hardware and consulting
design services.  I think I know how to calculate margin by now.  As far as
I am concerned, my only possible point of error in this matter is not
knowing how the article I mentioned estimated Microsoft's margin.  In other
words, my conclusion is only as good as their data input.

> If, in
> fact, their profit were what he thinks, there would be hordes of vultures
> circling. Yes, they have tremendous profit, just not what he thinks.

The vultures always seem to get shot down when MS changes their file formats
and breaks the import translators of competing products.  Let me ask you, if
there were vultures circling around you, and you had a Gatlin gun with a
million rounds of ammo, would you feel threatened?

> This does not mean, of course, that they are not predatory monopolists....

So why should we cut them any slack?

> >And to add insult to injury, many of the software jobs are being
> >moved to low wage countries, such as India.  Why doesn't the price of the
> >software go down when that happens?
>
> Good question. But being able to ask a question that may be difficult to
> answer does not prove anything. It's a common delusion that if you can ask
> a question that your opponent in a debate cannot answer, your own position
> is therefore correct.

It was a rhetorical question.  I know why the price of the software doesn't
go down.  The cost savings from cheap labor goes into more profits for the
company, and/or bigger pay for the top executives.  Rarely do the
stockholders actually benefit, as most tech stocks don't pay dividends
anyway.  Stockholders might benefit when the increased profits cause the
stock price to rise, but that is all based on opinion and speculation, and
benefits cannot be realized until the shares are sold.  So much of modern
investing is based on the "bigger fool" theory, which is where you buy a
stock without regard to how good or bad the company's product or service
actually is, but only because you think you can sell it to someone else
later at a higher price than you paid for it.  With the bigger fool theory,
dividends don't matter.

I'll give you another amusing joke, which you will no doubt find erroneous:

1) Guy #2 is walking down the street, and Guy #1 offers him a can of
sardines for $1:
2) "Why would I want to buy this can of sardines from you?"
3) "They are a hot commodity right now, you can trade them for a profit as
their value goes up."
4) "OK, I'll buy it."
5) The next day, Guy #2 is walking down the street and offers to sell his
sardines to a Guy #3.  The sale is made using the same pitch.  This time the
sale price is $2
6) The next day, Guy #3 sells his sardines to Guy #4, for twice the price
Guy #3 paid.
7) In the following days, Guy #n sell his sardines to Guy#(n+1), each
transaction is twice the amount of the preceeding transation.
8) One day, Guy #n is sitting in his house, thinking about how hungry he is.
He goes to his fridge, and sees that it's nearly empty, there's nothing to
eat.  He thinks about the sardines he bought yesterday for $128.  "I should
really go to the store and buy some food.  No, I spent all my money on these
sardines.  I guess I'll eat the sardines."
9) He opens up the can of sardines, grabs one and eats it.  They are
spoiled, and he spits them out.
10) Enraged, he finds Guy#(n-1) on the street and demands his money back.
"These sardines you sold me are rotten, I wan't my money back!".
11) Guy#(n-1) says "You idiot!  Those sardines aren't for eating!  They are
for trading!"

> But the question
> here is not whether or not mass-market software is full of bugs, it is.
> However, it still costs money to find those bugs and fix them, and, until
> the market demands better software, the companies are disincentived to
> improve it. Such software would cost more, there is no doubt about it.
> Would we pay it?

How is the market supposed to demand better software?  By offering to pay
more for it?  Some of the most expensive software in the world is also the
buggiest!  I demand better software by griping and pointing out the flaws in
the current software market.  But I can't stop using what exists now.  If I
did, I couldn't be in this business.  So maybe I should quit and be a
bartender (that would probably be my profession of choice if I wasn't an
EE).  Oops, can't do that, most of the POS terminals in bars run on Windows
too.  OK, maybe I could be an auto mechanic.  Naw, the garage manager
software runs on Windows.  Video game tester?  No, I'm too old for that, and
the games run on Windows...

So my ability to apply leverage to the market is very limited.  Right now it
consists of NOT buying any new Windows licenses, getting by with what I
already have, and converting over to Linux whereever possible.

> We could be part of the solution, instead of just complaining about the
> problem.

I'm trying to be part of the solution.  It's just that the first step to a
solution IS identifying and complaining about the problem.  The next steps
aren't easy.  And I encounter much resistance from you, Adbul, in finding
the solution.  For me, it's pretty simple:

Problem:  software is too expensive
Solution:  lower software prices
Problem with the Solution:  I don't set the software prices, others do.  All
I can do is complain and try to avoid buying expensive software.

Best regards,
Ivan Baggett
Bagotronix Inc.
website:  www.bagotronix.com


----- Original Message -----
From: "Abd ul-Rahman Lomax" <[EMAIL PROTECTED]>
To: "Protel EDA Forum" <[EMAIL PROTECTED]>
Sent: Wednesday, October 22, 2003 9:39 PM
Subject: Re: [PEDA] Open source SP7


> Mr. Baggett, one of our fine and helpful writers, here manages to
seriously
> confuse some issues.
>
> At 09:34 AM 10/22/2003, Bagotronix Tech Support wrote:
> > > Don't you think if it were easy (or even possible) to make money -- to
> >stay
> > > in business -- at those prices, that there would be companies doing
it?!?
> >
> >No.  That is the theory of perfect markets.  Which is just ivory tower
> >economics BS.  Observe:
> >
> >An economics graduate student and his professor are walking down the
street.
> >The student sees a $20 bill laying on the ground.  He exclaims "Hey,
look!
> >I found a $20 bill!".  The professor replies "Don't waste your time
bending
> >to pick it up.  It's just an illusion.  If it really existed, it would
have
> >already been picked up by someone else."
> >
> >Perfect markets cannot exist when a monopoly exists.  And MS is a
monopoly.
> >And so is any program that locks your data into a proprietary file format
> >which is undocumented.
>
> The issue is far more complicated. First of all, if a hundred people walk
> down the street looking for $20 bills, no $20 bill that is in plain sight
> is not going to be picked up because of the phony argument. It's a good
> joke and a very bad analogy.
>
> MS is indeed a monopoly of sorts, but the fact remains that it is not easy
> to replace them. To do so would take a huge investment, and the investors
> would want, of course, to make a reasonable or more than reasonable return
> on their investment, commensurate with the risk. And so that software
would
> not be cheap. I see only one way around this, which would be for users to
> organize to cooperatively develop an OS. Not just software engineer users,
> but *all* users. That's not going to happen soon unless something rather
> drastic happens. Not impossible, I am in fact working on a larger problem
> of which this would be a subset, but by no means do I feel assured of
> success. I'd feel better if I saw others working on the same problem, but
I
> don't.
>
> >I read something a while ago that said that MS has a profit margin of 85%
on
> >their office suites.  That's one heck of a margin!  I wish I could make
that
> >margin on hardware sales!  Assuming Office costs $499, they could reduce
> >their price to $75 and still break even.  Probably further than that,
> >really, I bet their margin is even more than 85%.
>
> It seems to me that this is a very serious misunderstanding of margin.
> Margin does not include development cost, nor does it include support.
> Rather, margin would generally refer to the difference between sale price
> and unit cost, expressed as a percentage of sale price, which with
software
> is very low. Microsoft's profit, after considering development costs and
> support costs, is much much less than what Mr. Bagget would imply. If, in
> fact, their profit were what he thinks, there would be hordes of vultures
> circling. Yes, they have tremendous profit, just not what he thinks.
>
> I just looked at one of Microsoft's SEC filings. For 3 months ending
> 9/30/2002, total revenue was about $7.7 billion. "Cost of Revenue" was
$2.0
> billion. The difference is called "gross profit," and that would be, in
> this case, 74%. In another more recent period it is entirely possible that
> the figure could be 85%.
>
> But gross profit and profit are not at all the same thing. If Microsoft
> could double their sales, theoretically, they would increase their profit
> by this gross profit amount. But they have development and other costs,
and
> those costs are steep, more than the "cost of revenue," which would be the
> cost to them of the packages sold, i.e., CDS, Manuals, etc.
>
> For the period mentioned, those other costs were $2.5 billion. That leaves
> an operating income of about $4 billion.
>
> Now, what profit would be reasonable for them? That would depend, surely,
> on what they have invested, on the assets devoted to the business. I'm not
> sure how much the SEC filings can be trusted, but I don't have better
data.
> The total stockholder's equity in the company is $53.5 billion as stated
in
> the filing. Thus their return on investment, if the assets were
> appropriately valued, was about 7.5%. I'm not salivating. That's healthy,
> but not excessive.
>
> This does not mean, of course, that they are not predatory monopolists....
>
> > > Most of the folks on this list are hardware people.  I've been
developing
> >&
> > > selling software for 20 years, and I can tell you IT AIN'T EASY.
> >Delivering
> > > quality software takes a lot of time and a lot of talent, which = $$$.
> >
> >Dwight, I visited your website.  Your situation is different than what I
am
> >talking about because you make niche market and specialty software.  You
> >don't have a large market to spread development cost against.  But
vendors
> >of OS, office suites, RAD IDEs, compilers, and some CAD apps do.
>
> Of course, and Mr. Baggett's comment is correct, I almost wrote the same
> thing in my response to Dwight myself. But I ended up leaving it out.
>
> Nevertheless, the software business remains quite different from normal
> manufacturing businesses, because the development cost exceeds the unit
> cost even when one is selling millions of units. I think even the music
> business is not so lopsided.
>
> >I write software, as well as design hardware.  The software I write isn't
as
> >big as an OS or office suite.  It's embedded software.  And bugs are not
> >tolerated in embedded software.  A machine control system crashing is
simply
> >not tolerable, especially when it may cause injury.  And embedded
software
> >must be fault tolerant.  Every function I write has to be written with an
> >analysis of how it will behave if given erroneous conditions.  How long
do
> >you think I could stay in business if my embedded software crashed as
often
> >as Windows or some Windows apps (i.e. Protel, Autocad, etc.)?
>
> And, of course, Mr. Baggett is also in a very different business, more
like
> Dwight's business, but possibly less fault-tolerant. And, if so, I expect
> that Mr. Baggett's software is *very* expensive, compared to any
> large-market software of similar code complexity, many orders of magnitude
> more expensive.
>
> >   I see none of
> >the methods of software testing I have read about over the years being
> >applied to desktop apps.  Typical PHB Software Manager says, "Fault
> >simulation, resource monitoring, memory leak checking, bounds checking,
> >regression testing, what's all that fancy stuff?  Never heard of them.
Just
> >write it, click on each menu item and dialog once to make sure they pop
up,
> >and ship it!"
>
> I know that this is definitly not true with Altium.... But the question
> here is not whether or not mass-market software is full of bugs, it is.
> However, it still costs money to find those bugs and fix them, and, until
> the market demands better software, the companies are disincentived to
> improve it. Such software would cost more, there is no doubt about it.
> Would we pay it?
>
> >It's true what you say about quality software taking a lot of time and
> >talent.  But your time investment doesn't vanish after the current
version
> >is delivered.  You have the source code to make improvements on, and add
new
> >features to, for the next version.  So why does software keep going up in
> >price, when all that IP already exists and doesn't have to be rewritten
from
> >scratch?  And to add insult to injury, many of the software jobs are
being
> >moved to low wage countries, such as India.  Why doesn't the price of the
> >software go down when that happens?
>
> Good question. But being able to ask a question that may be difficult to
> answer does not prove anything. It's a common delusion that if you can ask
> a question that your opponent in a debate cannot answer, your own position
> is therefore correct.
>
> There is a problem with software as it becomes more and more complex. Yes,
> there is an accumulation of IP. I think that is already reflected to a
> large degree in the price, the software would cost substantially more if
it
> had to be invented to do the same job from scratch. But using that IP is
> one of the things, I suspect, that leads to bugs. Perhaps a call to a
> routine was prefiltered to remove malformed data, and in the reuse of the
> routine, the prefiltering is omitted, thus creating an opportunity for a
> bug to appear "with a proven subroutine" that had been used by millions of
> people without a problem. A software engineer would be able to discuss
this
> much more intelligently. I just remember reading a Scientific American
> problem on the difficulties of dealing with huge masses of code, the
> exponential possibility of bug creation as complexity grows, etc.
>
> The human brain has been under development for a very long time, and
faults
> are often fatal, and yet there are still plenty of them.... The very
> mechanism that allows for improvement introduces new problems.
>
> Anyway, my own solution to buggy software is to turn the user base into a
> continual test and information-gathering base. Error-reporting software
> should be built in and users given a means to opt into easy, painless
> error-reporting. Windows is doing this now; whenever W2000 runs into a
> problem, I'm asked if a report may be sent to Microsoft. Protel could do
> the same thing, make it trivially easy to report a problem. Right now, it
> is too much trouble for most of us, we just complain later, when we aren't
> working on a project or are blowing off steam.
>
> We could be part of the solution, instead of just complaining about the
> problem.




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