Bill Gates speaks

Not often Microsoft co-founder Bill Gates does interviews these days, but Japan's Nikkei Business got one. Gates doesn't get anything like a grilling, but -- unusually -- he does mention pricing. "Particularly in Microsoft's case, we price our products so low that unless we get extremely high volume, we lose money. That's the way we spend so much money on R&D and yet, we sell an operating system for US$50 and we sell our office software for way less than just the spreadsheet cost. When 1-2-3 came out, it costs US$495," says Gates. Historically, Microsoft low-balled all its rivals on price, and continued to cut prices even after it dominated the market. It was pretty hard to compete if you were Borland, WordStar, Lotus, or whoever, with a $395-$595 product, and Microsoft launched something with more features at $99. Which Microsoft could do because it had (a) billions in the bank; (b) a steady stream of profits from DOS; and (c) a massive distribution network. It also helps that the gross margins on software are very high, though Microsoft's margins are actually about average for the industry. (As I pointed out below on November 20, Adobe's gross profit margin has slumped recently from 96.8% to 93.6%. Autodesk has just reported a gross profit margin of 89.5%. Microsoft's most recent gross profit margin was 88.4%.)