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by James Robertson.
Original Post: Confusing volume with money
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One of the persistent theories you'll see bandied about is this: "You can make up for low prices with volume". This works in one of a few circumstances:
Even with the low price, you are still profitable - i.e., you are willing to trade a level of profit margin for increased market share.
You have enough money that you can afford to take a temporary loss in a business in order to drive out your competitors. You'll then recover by raising prices back into a profitable range
You have a loss leader that drives other (profitable) business. In this case, you are willing to lose money in one area because the gains elsewhere (directly or indirectly driven by the loss leader) are larger than the loss
The key thing is that one of those things has to be true in order for a losing business to make business sense. Microsoft follows a loss leader theory with their development tools, for instance. They really don't care whether they make money from their development tools, so long as their adoption drives sales of Windows (the OS) and Office. IBM uses Eclipse as a loss leader to drive sales of things like WebSphere and their services business. Various airlines have lowered prices dramatically on specific routes in order to drive a competitor out of that space - afterwards, the prices rise back into the profit zone.
And then there's Sun. Sun's business depended (and still depends) on the sale of Sparc based hardware running Solaris. What that means is that anything which commoditizes hardware is a net negative for Sun. This is obvious to anyone who's paying attention - which apparently doesn't include Jonathan Schwartz:
As I've said, I'm a big believer in the idea that volume wins. And we invest (much to the occasional befuddlement of our friends on Wall Street) to support that thesis - most notably in the propagation of our programming platform, Java.
And in the J2ME mobile handset platform, the dividends are beginning to appear - in the form of the single most popular platform those devices have ever seen (as measured, of course, by volume - which happens to be a handy precursor for revenue for every network service imagineable). That volume begets more volume, more licensees, more apps, more infrastructure. And so forth.
There's a reason that the Wall Street crowd is befuddled by Sun's investments - it makes little business sense. Look at what Java has achieved - the platform no longer matters. Want to build an application server? It'll run just as well on commodity intel hardware as it does on Sun's expensive hardware - which leads to a drop in sales volume for that expensive hardware. This is clear as day - commoditizing the platform has been a godsend for IBM, and ruination for Sun. Mobile phones? Is he kidding? First off, the margins on sales of those are tiny, and second, Sun isn't building them. Maybe JVM licenses are profitable there, but only for a much smaller company. Look back at my initial three reasons for selling at a loss:
Is Java leading to higher sales of Sun hardware at lower profit margins? Clearly, so
Is Java causing temporary losses as it drives other companies out of the field? Umm, no. IBM is cleaning up, and Sun has virtually no presence at all in the software (applications) field
Is Java a loss leader? In a sense, yes. Unfortunately, it's a loss for Sun, but the beneficiary is IBM. This isn't a long term help for Sun
Volume really isn't enough, unless it's part of another strategy. For Sun, volume seems to be an end in itself, and that's why Wall Street is unimpressed.
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