The Knives Come Out In Europe's Software Market

For Europeans tired of paying huge markups on U.S.-made software for personal computers, the scene at Peugeot last December was welcome relief. Outbidding archrivals Microsoft and Lotus Development, Borland International won a contract to supply Peugeot with 14,000 copies of its latest electronic spreadsheet. The winning bid was under $50 a copy--more than 95% off Borland's list price. "The competition is getting fairly savage," says a gleeful Peugeot executive.

There could be more savagery to come. In late January, Microsoft nudged such behind-the-scenes skirmishes into the open and recognized a recent surge in discounting in Europe. For the first time, Microsoft cut its European list prices for programs that run with its Windows software. The move may set off a price war in Europe if rivals counter with cuts of their own. That could spell trouble for U. S. companies used to fat profit margins in the $9.5 billion European software market.

GOLD MINE. With up to 40% of their sales coming from Europe, American software companies have long relied on big markups in Europe to boost earnings. Claiming higher costs for language translations and other factors, they have charged prices anywhere from 20% to more than 100% over U. S. prices (table).

But as competition heats up and prices fall, profit margins could slide. Prices for such Microsoft programs as word processing and spreadsheets will drop 10% in France and 17% in Germany. What's more, Europe's corporate buyers are in for a major break. Under a new campaign, a big Microsoft customer can pool its orders from across Europe and the world to earn volume discounts of up to 60%. Lotus plans to unveil a similar European scheme with even higher discounts in February. In the Microsoft fiscal year ending in June, the price cuts could reduce sales by 2% and profits by 4%, estimates analyst Rick Sherlund of Goldman, Sachs & Co.

Microsoft is anxious to avoid being seen as pulling the trigger in a price war. It's already under investigation by the U. S. Federal Trade Commission for alleged unfair-trading practices, although no one sees the European price moves as predatory. Microsoft Europe President Bernard Vergnes insists the "price adjustments" are designed to harmonize the huge variances in European prices and offset currency moves. Moreover, he adds, any revenue shortfall will likely be offset by higher volume. "If this were a price war, you would see bigger cuts," Vergnes says.

Whatever you call it, pressure on list prices has been building for months. Ironically, Microsoft's success in marketing Windows has set off the fierce competition. Four million European PC users have adopted Windows since 1990. Microsoft had been cleaning up in Europe, where Windows programs now account for 58% of the market, compared with only 32% in the U. S. But now, competitors are scrambling to overcome Microsoft's lead in selling Windows users on flashy new applications. The suppliers who win those customers could end up with juicy follow-on revenues from upgrade versions for years to come.

BAD PRECEDENT? Microsoft's rivals are coming on strong. Discounting is rampant: The average unit price of programs for Windows is down more than 35% in the past year. Since last summer, Lotus and Microsoft have offered packages of four different programs for less than the price of two. In November, Microsoft invaded Borland's franchise in data-base programs with a limited introductory price of about $185 in France--12% of the going rate. Borland countered with a salvo into Microsoft's spreadsheet stronghold. Nobody knows where it will end. "Once customers see a low price, it's hard to get them to pay more," admits Francois Micol, Borland's European vice-president.

Meanwhile, customers are clamoring for simpler pricing. Fed up with piecemeal purchases country by country, Anglo-Dutch giant Unilever PLC recently pressed Lotus, WordPerfect, and others for a single discount on purchases anywhere in the world. Unilever's savings: at least 30%. Says Mike Johnson, Unilever's head of information technology: "We're changing the rules of the game." When it comes to software in Europe, that game has a new name: hardball.

                                              Premium paid as
                                           percent over U.S. price*
      Product                           U.S.  Britain  Germany  France
      BORLAND PARADOX                  $795      19%       29%    152%
      LOTUS 1-2-3                       495      52        66     103
      MICROSOFT WINDOWS                 149      26        84     101
      WORDPERFECT                       495      53        93      91
      *November, 1992, survey of suggested retail prices
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