Business Case

Dan Lavin

As painful as it is for long-time NeXT partisans like myself, the demise of NeXT's hardware was a necessary step for achieving both the idealistic and business goals of the company.

The idealistic goal behind NeXT's seven-year odyssey has been to fundamentally change the way people work. Unfortunately, 20,000 units a year hardly makes a ripple in the world. Even with projected increases in hardware sales, NeXT users would have remained in a technological ghetto. To have a chance of really changing the world, NeXT needs hundreds of thousands of mainstream business users. Let's look at the business case behind NeXT's software-only strategy.

The average revenue to NeXT from a sale of NeXTSTEP might be about $600, versus an average of about $6000 per sale on a complete NeXT machine. On the face of it, this looks like NeXT would make only ten percent as much money. Increased sales and higher profit margins on software, however, more than make up for that.

First, a sale for one-tenth the ticket price is much easier to make. A 100-unit sale becomes a five-figure decision for middle management, while a 100-unit hardware commitment is a million-dollar purchase needing approval from corporate capital-planning commissars. Yes, the customer needs an Intel machine, but corporations are already buying '486s by the boatload.

Second, NeXT doesn't need to generate equal revenues to make equal profits: Using rough industry benchmarks of an 80-percent gross margin on software (versus 40 percent for hardware), NeXT needs to increase its unit sales by a factor of five to match its 1992 profit figures.

This assumes that NeXT's cost structure will remain the same, but it will not. Through layoffs and other cost savings, NeXT plans to reduce its overhead by 30 percent to 40 percent, so it would only need to double the number of unit sales to achieve the same break-even point.

And NeXT can do considerably better than break even; doubling sales is conservative. An average field sales rep in the systems-software industry sells several million dollars worth of product a year. That's several thousand seats of NeXTSTEP per salesperson, as opposed to about 200 seats in 1992. For now, NeXT has had to reduce the number of reps dramatically, but any new reps will boost the installed base in meaningful leaps.

This is just the direct-sales force, which will call only on companies in the Fortune 200 range. Without the anchor of black hardware, the software-distribution channel of dealers, VARs, and systems integrators will come into meaningful play for the first time.

Beyond direct and channel sales, other computer manufacturers now have an incentive to provide NeXTSTEP as an option, which could result in major additional sales that were impossible as long as NeXT sold hardware.

Taken together, reaching a base of several hundred thousand units before Taligent or Cairo sell their first copies is an achievable goal. A solid $30-million software company will deliver more than double the number of changed users than a shaky $120-million hardware company.

The fact is that NeXT had little choice but to make these changes or risk losing it all. With the high overhead and thin margins of hardware, a bad quarter could have had dire consequences. With the new strategy, NeXT reduces that risk and boosts the potential up side.

As difficult as the change is for all of us, especially those directly affected, more seats serve NeXT's business goals by providing higher profits for stockholders. The changes also serve NeXT's idealism by bringing the advantages of NeXTSTEP to a much wider audience. And that's why we're all here, isn't it?

Dan Lavin comments on business issues in NeXT Ink.