Subject: Re: "I've got more programmers than you"
From: Bernard Lang <Bernard.Lang@inria.fr>
Date: Sat, 6 Oct 2001 07:30:54 +0200

I should know but I do not

Does anyone have quick definitions, or pointers, to get the exact
meaning of various terms:

Revenue  :  (I guess it is all the money that comes in)
Gross Margin:
R&D  : research & development
S&M  :
G&A  :
Operating Margin:
Net Income:  (is that before, or after paying taxes ?)

MS :  that I know :-)

Thanks

Bernard

On Fri, Oct 05, 2001 at 05:10:55PM -0700, Larry Augustin wrote:
> In order to understand free software business models, we first have to
> understand business models.  Let's look at the business models for two
> mature, successful companies in the services and software businesses.
> Here are the business models for EDS and Microsoft:
> 
> 			 EDS		Microsoft
> Revenue		100.0%	   100.0%
> Gross Margin	 18.5%	    86.9%
> 
> R&D			  0.0%	    16.4%
> S&M			  4.6%	    18.0%
> G&A			  4.5%           4.6%
> 
> Operating Margin	  9.4%	    47.9%
> 
> Net Income		  5.5%	    41.0%
> 
> These are June 30, 2000 fiscal year end numbers.
>  
> MS's gross margins are typical of a large, successful software company.
> 90% is a good rule of thumb.  MS is a little bit below 90% because they
> have some non-software businesses mixed in with that.  MS spends 16.4%
> on R&D, and 18.0% on S&M.  Both numbers are a bit below what most
> software companies spend.  MS can get away with that because they are so
> big and so dominant.  It wouldn't be unusual for those numbers to be 10%
> higher (each) in a smaller software company (e.g. I think Autodesk or
> Oracle is about 10 points higher in each category).  MS has a 47.9%
> operating margin, which is huge.  A 20% operating margin is considered
> good.  Most software companies would be lower in the 20% to 30% range.
> 
> EDS is a great example of a pure services play.  EDS does a lot of IT
> outsourcing, managed services, support, etc.  EDS is what I would
> imagine a free software services business to look like.  Gross margins
> are 18.5%, low in general, but not unusual for an IT services consulting
> business.  EDS spends nothing on R&D (they don't have a product).  4.6%
> goes to S&M, and EDS returns 9.4% in operating margin.
> 
> One of the things to take away from this is that EDS has very thin gross
> and operating margins.  Further, if a free software business based on
> services wants to do some development and contribute back, that R&D line
> is going to have to go up to at least 1% or 2%.  That's going to reduce
> operating margins to 7.4%.  At 7.4%, investors are going to be tough to
> attract.  Remember, that's operating margin.  Net income is going to be
> 3% to 5%.  Double tax-free municipal bonds are 5%.  Why would an
> investor put money into a company (where there is risk), when they could
> put that money into low-risk munis and get the same or better return???
> Further, why invest in a business like EDS at all when MS returns 41%
> net income?  This is why MS is a much more valuable company.
> 
> Dell, BTW, has a model similar to EDS except that R&D is 2% and G&A is
> less than 1%.  Dell can lower G&A costs because they don't have the
> overhead of managing all those bodies that an EDS has.  The result (for
> Dell) is a low gross margin business that works with about 10% operating
> margins.  But if Dell were to invest more in R&D (for example, by
> directly supporting Linux development), Dell would be less profitable,
> possibly to the point where investors would walk away.  This implies
> that Dell is unlikely to invest in Linux development, since that
> investment would lower their profitability to the point where investors
> would walk away.
> 
> This makes for an interesting point.  Companies like Dell and EDS that
> are the most likely supporters of free software (because it does not
> compete with them) are also the least likely to have money to invest in
> free software R&D.  Proprietary software companies like Microsoft have
> lots of margin to invest in R&D, but are unlikely to invest in free
> software.  :-)
> 
> Any discussion of free software businesses has to happen around the
> business model.  What gross margin are people willing to pay?  What are
> the costs in R&D, S&M, and G&A associated with running that business?
> Is the bottom line return large enough that people will invest in that
> business?  Answer those questions about any proposed free software
> business and we'll be a lot closer to understanding how to build one.
> 
> Larry
> 
> Larry M. Augustin, CEO, VA Linux
> Tel: +1.510.687.7029      Fax: +1.510.683.8680
> Web: http://www.valinux.com
> 
>  
> 
> > -----Original Message-----
> > From: Karsten M. Self [mailto:kmself@ix.netcom.com]
> > Sent: Friday, October 05, 2001 10:03 AM
> > To: fsb@crynwr.com
> > Subject: Re: "I've got more programmers than you"
> > 
> > on Fri, Oct 05, 2001 at 07:07:47PM +0900, Stephen J. Turnbull
> > (turnbull@sk.tsukuba.ac.jp) wrote:
> > 
> > >     Zimran> software world could you gripe about a 20%
> > >     Zimran> margin being slim. Most industries would kill for
> > >     Zimran> margins that fat.
> > >
> > > Most industries also don't have to worry about a Finnish college kid
> > > with no financial backing at all kicking their whole raison d'etre
> out
> > > from under them.  A 20% margin on products that make it to market is
> > > nowhere near good enough in software development, any more than it
> is
> > > in drug development.  That margin has to pay for all the failures
> you
> > > never admit even got started (not to mention the ones that got
> > > announced and you blew a wad on marketing before they got killed).
> > 
> > ...which is fine if you're arguing his words, and well considered.
> > 
> > The facts though are that Microsoft tends to get about a 30% profit on
> > all operations.  Margin on product is likely higher.
> > 
> > Peace.
> > 
> > --
> > Karsten M. Self <kmself@ix.netcom.com>
> > http://kmself.home.netcom.com/
> >  What part of "Gestalt" don't you understand?              Home of the
> > brave
> >   http://gestalt-system.sourceforge.net/                    Land of
> the
> > free
> >    Free Dmitry! Boycott Adobe! Repeal the DMCA!
> > http://www.freesklyarov.org
> > Geek for Hire
> > http://kmself.home.netcom.com/resume.html

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