Richter Scale^® Articles

(This column first appeared in the January 16, 1996 issue of PC Graphics Report)

Last week, Electronic Engineering Times "scooped" the rest of the publishing world by reporting on a secretive in-house project at Microsoft called the Simply Interactive PC. According to a press release issued by EE Times, the publication had obtained internal Microsoft documents detailing the development of this new product, which is touted as a streamlined Windows-based information appliance, envisioned as "the best platform for entertainment, Internet access and communications" (their quotes, not mine).

The press release goes on to state that the "Simple Interactive PC" could steal the spotlight from the much ballyhooed $500 Internet terminal written about virtually everywhere in recent months. As if that weren't enough, the release includes a quote from Carl Stork, a technical Microsoft spokesperson known well to all those that attend the annual WinHEC conference. To quote a quote:

"Simply Interactive PC is a theme that is guiding our investment in Windows, to deliver more interactivity," said Carl Stork, a director of Microsoft's personal systems division. However, he noted that Microsoft has not formally discussed the technology. "Anything we do until we say it publicly is highly speculative," he said. "We reserve the right to change our mind."

Here, in a nutshell, Microsoft has said absolutely nothing, implying everything. Back in the old days, you'd replace the name Microsoft with IBM and call the result FUD (Fear, Uncertainty, and Doubt). The conveniently leaked product plan, combined with the implication that Microsoft is pursuing the project, but with the caveat that nothing may ever come of it is questionable at best. However, all of a sudden the potential of a sub-$500 Internet terminal which attaches to your TV set has a shadow cast over it because Microsoft may be doing something better. What better way to diminish the threat of a device that many (including myself) perceive to be a major threat to Microsoft's OS dominance than to sneakily sow the seeds of FUD among the masses?

I recall a similar turn of events when I started the VAGI committee at VESA to design a public domain 3-D API. Microsoft came to one of the initial meetings, told everyone to give them their ideas and thoughts on what they want in a 3-D interface, and Microsoft would conveniently analyze all the input, and produce something (which Microsoft would control - none of those pesky industry committees to muck with). Hence, according to Microsoft's implied reasoning, no need for VAGI or any other non-Microsoft 3-D API effort (since it wouldn't be controllable by Microsoft). Here we are, well over 2 years later, and the thing Microsoft promised to develop and provide to all of us as the 3-D API panacea (sorry) is still evolving and still not here. And, to hear certain game developers grousing about it, far bulkier and slower than it should be. FUD is an effective marketing tool alright.

Will the same thing happen to the sub-$500 Internet terminal now? Will Microsoft's unofficial, non-committal announcement derail the Internet terminal train? Or will the unofficial disclosure of the Simply Interactive PC simply be ignored as yet more vaporware, as it should be? As with all such things, time will tell.

(This column first appeared in the January 2, 1996 issue of PC Graphics Report)

I read an interesting article in the Wall Street Journal last week, which stated that 16-bit console game sales were almost as strong this last Christmas than the year before, while the newer, costlier 32-bit and 64-bit console systems had a tough time competing. To underscore this point, Atari even permanently slashed the price of the Jaguar 64 to a mere $99 to try and be more competitive with yesterday's platforms. The WSJ article claims that almost 4 million 16-bit consoles were sold in 1995, most of them in December, and several hundred thousand more could have been sold if the supply hadn't temporarily run out. That's compared to under a million units sold of the Sega Saturn and Sony Playstation combined. This also means that Nintendo's delay in coming out with the Ultra 64 seems to have hurt them less than analysts predicted when Sega and Sony started shipping their next generation systems.

Looking at Sega's strategy, for example, it's plain to see that while they are pushing their new Sega Saturn system, they are also not neglecting the old and new owners of the more common Sega Genesis 16-bit console, with new games like Vectorman, which includes 3-D like features.

So why are 16-bit games and consoles still so much more popular that the obviously better and sexier new systems? The best indication seems to be one of price/performance. Many users are quite happy with the broad range of games available to them on the much less expensive 16-bit systems. In PC terms, this could be deemed a resistance to upgrades.

The next question is, will this attitude carry forward into the PC market, and more particularly, will it have an effect on the up and coming 3-D graphics board market? Will users be content to continue running games like Doom, Hexen, Terminator, and others which simulate 3-D entirely in software, at low resolutions? I predict many will be content with today's software only 3-D technology, and won't feel a need to shell out more money for 3-D hardware acceleration. As I see it, the potential consumer 3-D market will be split into two categories: 3-D upgrades and new 3-D systems.

The first category includes people who already have systems they are reasonably content with, or who purchase new systems which don't have innate 3-D ability - either because of cost or because they are not on the leading edge. My guess is that many of these people will not be willing to part with $200-400 in 1996 just to get 3-D hardware acceleration, being more likely to spend such money on increasing CPU speed.

The second category covers those people who buy leading edge systems which include consumer-grade 3-D hardware. This group will, by nature, be significantly smaller than the former.

All in all, the people who are most likely to buy 3-D graphics hardware in 1996 are early adopters - either those upgrading, or those buying new leading edge systems. The whole 3-D hardware game then comes down to the question, how many early adopters will surface in 1996?

Perhaps Christmas 1996 will spike the curve a little more, but I think it's really too soon to tell.

Busted!

On a separate note, some of you may have been following the controversy surrounding Synchronys Softcorp, and their hot-selling SoftRAM 95 product. SoftRAM 95 is touted as a RAM doubler that will help boost system performance and memory utilization under both Windows 3.1 and Windows 95. A press release from the company on December 20th touts SoftRAM 95 as receiving the top honor from Multimedia World - an All-Star Award - in the January 1996 issue. Well, I certainly would not want to be in the shoes of Multimedia World. Shortly after this press release was issued, Synchronys admitted that they were being investigated by the Federal Trade Commission because of complaints that their software didn't do anything at all for Windows 95, despite claims by the company to the contrary.

Apparently, when reports that the software did nothing for Windows 95 first surfaced, the company starting putting stickers on the package that stated the software only worked with Windows 3.1, removing any mention of Windows 95. Even then, some experts claimed the software wouldn't even help under Windows 3.1. Things got even worse for Synchronys when Microsoft said SoftRAM 95 did not pass the necessary certification to use the "Designed for Windows 95" logo, which the software had on the box. To top it off, PC Magazine found that part of the code used in SoftRAM 95 was lifted from shareware, and Andrew Schulman, noted Windows 95 critic, documented where a chunk of SoftRAM 95 code was virtually identical to the PAGESWAP.ASM code found in the Windows 3.1 DDK. Synchronys officials finally admitted the product was basically a placebo.

The culmination of this sordid tale is that Synchronys followed up the Multimedia World press release with an announcement that they would refund customers the price paid for SoftRAM 95, with proof of purchase, no questions asked. If you are among the masses that has SoftRAM 95 and proof of purchase you can apply for a full refund from Syncronys at Syncronys SoftCorp, c/o Starpack, Inc., P.O. Box 12130, Greeley, Colorado, 80631.

I question how something like this could have gone as far as it did. Was it greed? Was it stupidity? Only time will tell. One lesson that this does teach, though, and that's not to try to snow your customers by selling them a cure that doesn't even come close to working.

(First published in the CAD++ Newsletter in early 1996)

Last month I went over some of the safer ways to start a business, either by moonlighting or contracting or both. However, unless you're doing your own very private thing and don't want to communicate with the outside world, you'll need to establish a valid, legal business presence.

This presence is necessary for two reasons. The first is that you want to establish an identity and image for your new business so that your potential clients have something they can get comfortable with. Image and identity are vital for building a business, but I won't really cover that in this column, since I wrote a multi-part column on the same topic last year. You can find the column in CAD++ (contact XYZ Publishing for details on obtaining back issues).

The second reason is a combination of legal and accounting issues - both of these are unfortunately intertwined. In any event, they form the basis for this month's column.

The Business Structure

There are a number of different business entities (each with its own structure) you could establish: a sole proprietorship, a DBA, a subchapter S corporation, a subchapter C corporation, an LLC, a partnership, etc. Note that the distinctions made here apply primarily to U.S. business entities, and entities in other countries may vary.

Sole Proprietorship

A sole proprietorship is a business that you own and run, and frequently it shares your name, i.e. John Smith Consulting. It has very little legal structure, and also don't have very much liability protection. The business's income/loss is applied via your personal 1040 Schedule C, meaning profits are taxed at your normal tax rate. As a sole proprietor, you may employ others, as well as yourself, or you could pay yourself via a "draw" - giving yourself whatever funds you need and the business can spare whenever convenient for both. Note that all profit for a sole proprietorship is potentially subject to FICA tax (also known as social security or self-employment tax), which amounts to just over 15%. This frequently comes as a shock to people, but is something every employee and employer have been paying all along - the amount is split between the two, each paying half, up to a certain amount per year. If you run your own business, you're responsible for both halves. Another issue with a sole proprietorship is that you can't have multiple owners. If that's a need, you need to look at partnerships or corporations.

DBA

A DBA, which stands for Doing Business As, is just another form of a sole proprietorship, wherein you legally register a legal business name for your venture. The governmental body you need to register the name with (and this may be necessary even for sole proprietorships that use the owner's name) varies from state to state. In New York State, for example, you register with the town or city you're in. In Massachusetts and New Hampshire, you register with the respective Secretary of State. Check with your town or city clerk for details.

Corporations

A corporation is a much more formal and complex business structure, but also has a number of benefits. While a sole proprietorship and DBA are just facets of you as an individual (from a legal sense), corporations are legal entities in their own right. This separate identity can help insulate your personal assets from legal action in the event a product or service your corporation provided is found to be the basis for such action. A corporation may also have stockholders, which means ownership by multiple parties. Finally, corporations have certain tax advantages and disadvantages over sole proprietorships. One of the advantages is to not have to pay FICA on all profits - only on those amounts paid out as salaries. There are several types of corporations, including Subchapter S, Subchapter C, and Limited Liability.

An "S" corporation is designed for the small proprietor who wants incorporation for the sake of increased liability protection, and the option to have multiple owners. For taxation, all profit is split on a prorated basis among all shareholders based on their percentage of ownership. There is a limit on the number of shareholders in "S" corporations, and certain expenses that "C" corporations are entitled to are not available to "S" corporations.

A "C" corporation is the true standalone entity, and all publicly traded companies are "C" corporations. There can be an unlimited number of shareholders, and there is greater leeway in terms of deductible expenses, including R&D credits. R&D credits allow you to deduct some percentage of your product development expenses from your tax bill, and while they have expired, Congress is in the process of reinstating them for use in the 1995 tax year. Also, certain insurance and child care expenses for corporate employees are deductible. A "C" corporation also has its own tax rate, which is lower than an individual's tax rate for low profits, but higher past a certain threshold. Note that if your company can be classified as a professional services corporation (such as a legal firm, accountant, etc.) which solely provides services and does not create things (products, marketing materials, etc.), you do not have the benefit of the lower 15% tax rate on the initial part of your profit.

Limited liability corporations (LLCs) are something of a new concept, combining, as I understand it, the best aspects of an "S" corporation with a sole proprietorship. However, not all states have LLCs, and therefore some of these states do not honor the liability that LLCs can afford you, so it's only a recommended path to take if you will be doing business in states that honor LLCs. For the record, Massachusetts does not have LLCs.

A couple of financial drawbacks of corporations are annual minimum fees payable to your state government (for Massachusetts and New Hampshire, they run around $500), as well as potentially higher corporate state tax rates (compared to personal state tax). One thing that was recently pointed out to me by the IRS is that officers of a company cannot be consultants - they must be employees, which may nix the idea of doing a draw instead of a salary. You also have to register a corporation, which can cost as much as $1500, depending on what route you take. If you're planning on moving to another state, you may also be better off creating a Delaware corporation, and then registering to do business in your state as a "foreign corporation". The paperwork a corporation has to file in terms of taxes, employment taxes, etc., can be onerous.

One tip if you want to create a corporation though, is to pick up a couple copies of the Wall Street Journal and look through the ads for companies which provide incorporation services. These companies can incorporate a Delaware corporation for as little as $99 - Delaware corporations have certain annual fee and liability benefits. By the way, some of these incorporation companies also have Web sites. I'll be going this route in the next few weeks for my company, and will provide some insight on some of the problems and challenges faced in deciding which company to use, and how much to pay.

Partnerships

Partnerships are not really an area I'm altogether familiar with, but basically they provide a means to run a small business with multiple owners, with all sharing potential liabilities.

IRS Section 1706

In the event you're planning on being a consultant or independent contractor, and starting your business based on this, I want to make sure that you're aware that the IRS has guidelines on determining whether an individual is really a contractor or just an employee in disguise - they don't want to miss out on various payroll taxes. One way that helps insulate you from this is to incorporate, and have your corporation provide the services, but then you risk having the corporation being labelled a professional services corporation. If you are consulting, or planning to do so, check out the famous "20 Questions" the IRS uses to determine if a contractor is really an employee. I've posted the list on my Web site.

Conclusion

Several of the basic questions you need to ask yourself in order to determine what type of business entity you want to create are:

• Will you pay yourself on a regular basis, or on a draw (i.e. as you need it, and as the business has money to pay you)? In other words, will you become a regular employee of the business?
  
• Will you have other employees?
  
• Do you currently have health insurance through your normal employer, or a spouse?
  
• Do you plan on having other people own stock in your venture?
  
• What tax bracket are you in personally?
  
• Does the state you reside in not have a personal income tax?
  
• Are you planning on being a consultant or contractor?
  
• Will you have just one client or many?
  
• Do you plan on moving to a different state any time soon?
  
• Will you be spending significant resources developing products?

Once you've answered these questions, consult experts - in particular a lawyer specializing in setting up companies, and your accountant. My descriptions above are meant to make you aware of some of your options, but professionals are the only ones that can help you make the right decisions in how and what type of business entity to establish for your venture.

In case anyone's interested, my company (actually, my wife's), Stroke of Color, was registered as a DBA last year. Due to tax reasons, and some other things we're planning, including joint ownership, we'll be incorporating as a Delaware corporation shortly.