Richter Scale^® Articles

(This column first appeared in the New Hampshire Business Review during the Fall, 1995)

One day, New Hampshire could truly become the Software State, providing we realize both the importance of software to our state's economy and how we can capitalize on software industry growth here in New Hampshire.

One day, New Hampshire could truly become the Software State, providing we realize both the importance of software to our state's economy and how we can capitalize on software industry growth here in New Hampshire.

New Hampshire started its business existence as a manufacturing state, and the mill buildings in Manchester and Nashua provide a constant reminder of this. However, in recent years, traditional manufacturing in New Hampshire has seen a drastic downturn. This could perhaps be attributed to a number of economic factors, including the recession we've all experienced, greater competition from off-shore manufacturing facilities, not to mention the demise of major high technology companies who were too slow to adapt to today's PC market and post-Cold War era.

Instead of fighting these changes, it's better to try and use State resources to build new industries and markets which will take New Hampshire successfully into the 21st century.

Why Software?

Simply said, software development has consistently been one of the fastest growing industries. The biggest differentiator from other industries is that software developers are portable. Software developers don't have major infrastructures, manufacturing overhead, heavy equipment, etc. At the simplest level, a software developer needs just a phone and a computer. This means that software developers, if given enough incentive, can pack up and move to a better location.

One might ask why it's important to get software developers to move somewhere else. Software developers, while not necessarily manufacturers themselves, often require sizeable external support structures, which don't necessarily have to be local, but if they are, the community in which the software developer resides benefits.

These support structures include services like diskette sales and duplication, computer stores, legal services (contracts and intellectual property), marketing, printing, utilities (phone, water, electric), office space, take out food, travel, and more. Obviously, the local community also benefits from taxes that software companies pay.

And, if enough software companies are located in a given area, new services, such as conventions, trade shows, and conferences will start appearing there as well, leading to increased community revenues from travel and tourism.

On the flip side, software development requires very little direct community support, other than a decent local educational system (actually a benefit). A software developer's greatest expense tends to be research and development. Plus, software is perhaps one of the most environmentally friendly industries there is.

Eco-conciousness, along with the fierce independence which allows software developers to survive, seem to be a good fit with what I would call the "New Hampshire way".

Software Company Incentives

We're not going to be able to incentivize software organizations to move to the state and operate from here without a number of enhancements to our current business and academic environments, however.

There are several areas where the state needs improvement in order to attract software companies, including education, communications, financing, sales assistance, software services, and networking. But, at the same time, it's important to strike a balance between government and the private sector in terms of contributions to making New Hampshire attractive for the software industry. After all, we don't want to add to government bureaucracy and turn out like our neighbor to the south.

Let's look at each of the major categories of possible enhancement.

Education

The software industry needs people trained and skilled in the use of the same technology that it uses, and such training starts in the classrooms. I'm encouraged when I see the latest course circulars from area colleges and universities, but I think more needs to be done to modernize the whole computer educational process. Many of today's collegiate course should be taught in grade schools and high schools. Also, these courses should be taught on personal computers and not on antiquated minicomputers and mainframes. PCs have revolutionized the entire world, and are at the point where virtually everyone can afford one (and many families have at least one), but very few people really know how to program them and adapt them to a variety of tasks.

As a start, among the courses I'd like to see offered more broadly are: "C" Programming, Object Oriented Programming (separate from C programming), Database programming, Using CASE and RAD tools, Windows Application programming, Multimedia Development, Graphics Programming, Problem Solving and Debugging, Network Programming, Multi- threaded Software Implementation, Software Design Theory and Practice, Product Development Cycles, and Software Quality Control.

Granted, some of these topics are rather heady, and there are many more detailed course I didn't list, but we have an opportunity here to bring our computer-related educational offerings into the next century, before the next century.

To achieve this next level of computer education, private industry needs to help out, by contributing both software and hardware to classrooms, and skilled individuals need to share their time to help teach these classes.

Somewhat related to education of our residents is the education of visitors to our State. At this time, New Hampshire has no large convention/conference facility in which we could host events which would attract the attention of national or international attendees. It would be wonderful if we could hold a conference like Software Development here. But, in order to accomplish that, we'd need the necessary facilities and accommodations to deal with 20,000+ visitors. Some may consider an influx of people in this quantity to a single city to be undesirable for the state and our general way of life, and they may be right. However, if it help put New Hampshire on the technological map...

Communications

Communications, especially electronic communications, are vital to growth in the software business. At my company, for example, over 70% of on-going customer communication is performed via electronic mail. Bluntly put, we can't live without e-mail.

While New Hampshire's phone systems generally provide reasonable service in terms of voice and FAX usage, New Hampshire is still behind the times when it comes to electronic communication. ISDN service (affordable high- speed digital lines) needs to be available throughout the state and not just in some of the cities. Some cities are also bound by unreasonable toll rates to virtually any other neighboring town, preventing affordable use of public data access numbers for nationwide systems like CompuServe. Internet access should be available throughout the state without having to sacrifice live savings (ironically, a small private provider seems to be doing a much better job of this than large companies like NYNEX - the New Hampshire way?).

Here's where a little governmental pressure on our state's phone companies to get their technological and pricing acts into line with the requirements of the future.

Financial Considerations

As with any new company, software start-ups need financing. Because software is a low-overhead business, the amount of such financing is not great, but necessary nonetheless.

Normally, businesses get funding from their founders (it's what second mortgages are for, right?), the Small Business Administration (SBA), bank loans, private placements, or even venture capital. For SBA and bank loans, normal companies can leverage inventory and hard assets. A software company's inventory consists of diskettes and manuals, and hard assets might include PCs. Neither are considered valid collateral by the SBA or banks, putting software businesses at a serious disadvantage, even though they have something potentially more valuable, namely intellectual property.

Intellectual property (IP) includes ideas, software, trademarks, patents, and more, and none of it is worth diddly to a lending institution because these institutions have no expertise or policy to deal with IP valuation. This is not necessarily something we can fix only at the state level - it's a nationwide malady, but we can raise awareness of this lack of support for the industry of the future.

Other ways we can help out is by publishing lists of local venture capital firms and "angels", or if that's too much of an invasion, at least setting up regional "funding clubs" to review business plans and provide funding assistance.

On the positive side of financial considerations, New Hampshire does offer an almost taxless existence. I would add, though, that for New Hampshire based software corporations, a state R&D credit would be a useful tax incentive.

Sales Assistance

There's perhaps only one area that the State itself might need to commit actual financial resources, and that's in the area of sales assistance. Software companies, especially small ones who don't have deep pockets, are always in need of help when it comes to selling their product, even more so when it comes to having an international presence.

Currently, the state a few establishes trade missions to other states and countries, but the cost of entry for these missions is still quite high from the perspective of a small company. One way to reduce costs is to leverage volume, in this case the large number of New Hampshire software developers.

Suggested venues would include New Hampshire booths or pavilions at various domestic and international tradeshows pertinent to software developers, including Software Development, PC Expo, COMDEX, and CeBIT. Both of these latter shows currently offer regional pavilions, where a company can get a smaller, less expensive booth space, partially subsidized by the region representing them. California and Maryland are among the states I've seen do this at CeBIT in Germany, while Hawaii has a booth block at COMDEX in Las Vegas every year. These regional booth blocks help promote the state as well as the companies located in the state, which in turn may be a way to attract more companies to do business here. Costs can be reduced for this sort of effort by negotiating preferred air fares and hotel rates for attending companies. Remember, volume reduces costs.

This concept could be extended to actually having a business development office in Europe, where New Hampshire companies could build their European sales channels from.

Another thing that would be enormously helpful would be better access to our country's biggest customer, and New Hampshire neighbor, Canada. There's a certain irony in the fact that while we abut Canada, you can't get a commercial flight to Montreal or Toronto from our largest airport.

Finally, we need to make the world aware of New Hampshire's natural software resources. Every software package developed in New Hampshire should carry some sort of state-developed "Made in New Hampshire" logo. We shouldn't even limit the logo to just software either. Put the logo on all New Hampshire goods. Maybe this will get the rest of the U.S. population to stop asking "What state is New Hampshire in?". And, to add to the promotional benefit of a state logo, we could publish a "Made in New Hampshire" catalog (possibly broken up by various categories of product: Software, hardware, tools, etc.).

Software Services

Just as I think we should have a "Made in New Hampshire" campaign, I believe we need a "Buy in New Hampshire" effort. Software companies shouldn't have to go out of state to buy components they need, like diskettes, development tools, and hardware, or find services like color printing, diskette and CD-ROM duplication, advertising layout, production, software fulfillment, legal services, testing and quality assurance, etc. Sometimes the necessary products and services are just not available here, and sometimes they are, but are too expensive.

There's no reason this should be the case. Again, I think that volume is the answer. By leveraging the volume of software development and publishing this state is capable of, we should be able to use a software consortium to buy the necessary goods and services we need at a reasonable price, while paying New Hampshire companies instead of out of state organizations.

We could even go a step further and offer tax incentives to New Hampshire companies which help out other New Hampshire companies. For example, Peterborough hosts a wide range of international computer publications. What about an advertising discount through these companies?

In any event, reducing the cost of doing business for New Hampshire companies while increasing revenues to local support businesses makes our entire State more competitive. The possibilities here are wide open, and depend primarily on cooperation. Perhaps this could be an area where the newly formed Software Association of New Hampshire could provide a valuable service.

Networking

Most businesses are built on relationships. In the '90s we've termed the establishing of relationships to be "networking". The software industry is no different.

Networking is one area where we've done very well, with organizations such as the Greater Nashua Software Entrepreneur's Group (GNSEG), the New Hampshire High Technology Council (NHHTC), the new Software Association of New Hampshire (SwANH). All three of these organizations, as well as a few other smaller regional groups, provide a forum for meeting peers, as well as learning from them. I've been involved with all three organizations in the last couple of years, and have discovered many new people and approaches to running my software company. At the same time, working with these various groups has brought to my attention how much more New Hampshire could possibly offer to the software industry, and in turn, how much the future of New Hampshire could be affected if it ignores the potential of growing a local software industry.

Conclusion

New Hampshire has a lot to offer in terms of scenery and environment, ranging from numerous ski areas, ocean front activities, a general lack of taxes, a well run State government, and friendly natives. Proximity to Boston is a benefit as well, especially for those who occasionally need to visit a large city in order to realize how great a State we live in.

New Hampshire has the potential of being the premiere State for Software Developers, but if it wants to accomplish that goal in order to secure its financial future, a lot has to be done. Other states, including Hawaii and Alaska are in the process of implementing programs to attract high technology companies to their states, which adds pressure to have New Hampshire move quickly to solidify its offerings to software companies.

(First published in the CAD++ Newsletter in late 1995)

A curious thing happened to me while I was on my way to write my next Garage Entrepreneur column... I suddenly gained the freedom to start a new career.

As some of you may recall, the company I started back in 1988 was acquired by another company earlier this year. (I'm leaving company names out of this column to save everyone on my end some grief.) As time went on, it became apparent that there were increasingly greater philosophical differences between myself and the new management on how to manage the company. Well, after a couple months of wrangling, we came to a mutual agreement, part of which involved my leaving the employment of both the company I had founded, and the new parent company, and becoming a short-term consultant to them to help smoothly transition things over.

Freedom is a Mixed Blessing

Now, after over 7 years of building a company, and being involved in day to day corporate operations, managing around a dozen employees, I'm a free man. It's kind of a weird feeling - a little sad, like something's missing, and a little happy because countless opportunities await.

For years I've been giving out free advice on being entrepreneurial, and now I have a chance to take new advantage of my own advice, and start a new entrepreneurial venture. I should point out that I've chosen the route of entrepreneurialism instead of looking for a "real job" because one thing has become eminently clear to me in the last few months: I make a lousy employee. I need to be my own boss, and control my own destiny.

The Garage Entrepreneur Revisited

Most of my previous columns have assumed that readers have already started their own businesses, either on a full time or part time basis. My recent emancipation makes it clear to me that many of you may not have taken the big step yet, and so, the next few columns I write will try to cover the basics of starting a business from scratch, much as I and my wife are doing now, again.

For those of you who already have businesses established, some of what I'll be writing about may be old news, but I'm willing to bet that I will bring up new aspects of old things you never considered (or knew about), so stay tuned.

Why Start A Business?

There are several possible reasons that someone might want to start a new business. Here are the ones I've seen:

Opportunity. They think they see or have a great new opportunity and want to pursue it.

Self-Management. They don't like working at someone else's beck and call, and think that running their own business will give them the freedom to do what they want, when they want.

Emancipation. They have lost their job for one reason or another, possibly having quite a nice severance package, and think "What the heck, let's try something new."

Pride. They want to prove to a particular person or group of people that they can be successful on their own.

Naivete. "If he/she/it can create a successful business, how hard can it be?"

Wealth. They think that it's a great way to get rich quickly.

Adventure. They are sick of doing what they are currently doing, and want to try something new.

As you should be able to tell, some of these reasons imply that the person doing the reasoning may not quite grasp reality. However, most entrepreneurs I know usually combine a few of the reasons above to give them their drive and determination to succeed.

For example, when I started my previous company, Opportunity, Self-Management, Pride, and Wealth were my basis for venturing forth on my own. I thought I saw a great market opportunity (consulting/programming for high end PC graphics boards). The market existed, but after about 9 months, I realized that I wasn't going to achieve Wealth by just consulting, and hence we (I had hired someone by then) determined that we'd need products to sell to make more money on a regular basis. Self-management and pride provided determination, but would have been useless with Opportunity.

Self-Management soon proved to be a misnomer. I worked longer, harder hours, with less freedom from responsibility, in the company I had started than I had as an employee. So, keep in mind, unless properly executed (virtually impossible unless you can afford not to spend all your free time working), Self-Management is a trap.

For my new company, Emancipation is the dominant one (I don't have a job anymore), with Self-Management being a driving force behind it (I don't want to be employed by anyone, and I can afford to take it a little easy, so it's not a trap, I hope). In my particular case, I'm fortunate, in that I have time to try to figure out what my Opportunity is, but I wouldn't recommend that anyone normally go out and start a new business without some Opportunity being present.

Next Month

That's about all the space I have this month. Next month, I'll cover the necessary traits an individual must have to survive as an entrepreneur, as well as safe ways to start a business without a whole lot of risk or exposure.

(This column first appeared in the July 11, 1995 issue of PC Graphics Report)

Most, if not all, of you are in the hardware business. And, hopefully you realize that without software, your hardware is close to useless. Software is the fuel that makes hardware go. The bigger and unwieldier the software, the bigger and more expensive the hardware needed to make it run properly.

It's a cycle, of course. Hardware improves in capabilities, which results in existing software being revised with more features and bulk to suck up the extra bandwidth the new hardware provides. That in turn helps drive the creation of even faster and more capable hardware, which creates even bulkier and feature laden software. And so on, and so on...

However intertwined hardware and software are, certain undeniable sales differences exist. A given user only needs one clump of hardware to run a multitude of different software packages, but as the SPA is quick to point out, a fair number of users don't pay for those software packages. But, they have to pay for the hardware regardless, because it can't be easily pirated.

Of course, both hardware and software companies make a significant part of their revenue by selling users newer versions of what the users already have. The percentages between new sales and upgrade sales differ between hardware and software, but not significantly on the whole.

The Cycle Wobbles

The perpetual upgrade cycle to have the latest and greatest hardware and software is starting to wobble a bit. Many users, especially in the corporate world, are increasingly resisting the purchase of upgrades to hardware and software solely for the sake of the upgrade. The bulk of today's hardware and software sales appear to be coming from the consumer market, which has newly rediscovered the value of having a home PC.

Upgrade resistance is borne of a number of factors. On the software side, software companies have over the years made their offerings so feature rich and powerful that new upgrades appeal to an ever smaller, more specialized segment of the market, leaving the larger part of the market unenthused. Several examples include:

• Word processing - most people using word processing software didn't come close to using all the features their old word processing software had (some of us dinosaurs even still use, gasp!, the DOS versions of popular WP software);
• Desktop publishing - the greatest volume of DTP usage is still black and white, since full color reproduction is still rather costly in comparison, but leading DTP software companies have run out of truly useful black and white features to add to their software, and are instead adding more and more full color manipulation and output support to new versions of their software.
• CAD - All the big names are adding, almost exclusively, 3D capabilities galore to their upgraded CAD packages, even though the majority of CAD users are still 2D oriented.

Most users don't care to spend the additional $500, $100, or even $50 an upgrade costs, because they can't justify the expense based on features they won't be using.

PC hardware is suffering similarly in markets where such hardware has existed for long periods of time (i.e. the corporate world), which is why sales of Pentium systems in such markets are a shadow of those into the new, booming consumer market. Users (and even some noted columnists) have been quoted in various national publications as finding the performance of their 486DX2/66 systems as adequate for their needs. It logically follows that since the overall system performance impact of the newest graphics technologies is minor when compared to the previous generation, that graphics hardware sales may suffer as well from the "upgrade apathy". The only saving grace for hardware sales is that hardware will fail sooner or later and need to be replaced. Software can pretty much run forever under normal use, and therefore doesn't benefit from failure.

In both cases, one obvious way to reverse the downward upgrade trend would be to significantly increase the benefit to the user of the upgrade, but this is the course that software companies have been trying to follow until now, without significant success. There is more hope for the display hardware industry however, with the increasing demand for real-time, high resolution digital video playback and the anticipated market for 3D - new features that aren't truly satisfied by existing hardware capabilities.

Another way to increase upgrades is to obsolete the current implementation, usually in the form of OS-specific support. This minimizes the options a user has in adding necessary components to his system as his or her computer use expands. With no support for such expansion, the user is forced to have to upgrade his software, and frequently the operating environment. Alas, not too many companies can accomplish this entirely by themselves. There's only one company that has enough clout to do this by itself, and that's Microsoft. And the latest effort at getting those valuable software upgrade revenues is called Windows 95. Already we're starting to see 32-bit applications being announced which will not run on previous PC operating systems, as well as hints that current PC OSes will be phased out of the channel eventually. Where other companies have helped is by hopping on the bandwagon and developing Win32 applications which have no hope of running on Windows 3.1x.

The most ideal model for software companies would be to have "disposable" or "consumable" software, which would require users to repurchase software on a regular basis, as the previous software purchase gets used up. A variant of this is software that has a naturally limited life, like a tax package targeted at a specific year, a virus checker, or an annual compendium of current events. However, without something which expires tied to software, this model is impossible to achieve. Or is it...?

What's Old is New

Back in the days of mainframes, software companies used to license software over a period of time. Software packages would be licensed annually, with a hefty advance payment. This practice was justified by virtue of the hundreds of users that might all be using the same software, as well as the on-going development that was frequently required to adapt a huge general purpose package to a company's specific needs. There was also significantly less competition at the time.

With single user systems and an exploding software market, the mainframe licensing model went out of style rather rapidly, but now, some companies are bringing variants back.

First, one of the more innovative licensing models I've seen announced comes from Graphisoft, with their ArchiCAD product. ArchiCAD is one of many products in the higher end PC CAD market, selling for just under $5000. Since ArchiCAD has such a high price of entry, the company was apparently finding it difficult to attract as many new users as they would have liked. So, how do you sell a costly software package affordably without cheapening the product like CADKEY, another competitor did when it dropped its price from over $3000 to less than $500?

Graphisoft's answer was to rent out the software in a program they call "Pay per use". For a setup fee of $795, which covers administrative and materials costs and training, Graphisoft will send a customer a full ArchiCAD package, along with a special hardware lock. This hardware lock meters the use of the software, and is good for 50 hours of active use. The cost of using ArchiCAD works out to be $3.83/hour. When the hardware lock is used up, another needs to be purchased.

While Graphisoft's solution is a very good one, it could be significantly improved if it did away with the added cost of the hardware locks, and instead offered monthly electronic billing, with the computer automatically dialing in to a central accounting office on a regular basis, much in the way that the pay-per-view feature works on the new breed of digital satellite systems (DSS) for TV. (I spoke with Graphisoft, and they indicated that they are working in this direction, as well as on a functional metering approach, which may charge different at different hourly rates for various program functions - rendering might incur a lower cost because it's more machine dependent, while a vertical market specific function might cost more.)

Microsoft has entered the market with a new license model as well, namely the software subscription. Microsoft started this with its developers, via the Microsoft Developer's Network, where, for an annual fee, you get 4 quarterly releases of CDs containing lots of valuable software resources, if you're a developer. The license applies to a single named individual, and is not supposed to be shared among developers, but Microsoft currently has no way to verify or ensure that this requirement is being observed at all companies which have one or more subscribers to MSDN. However, the subscription does successfully create a significant annual revenue stream for Microsoft, something which under a traditional upgrade model would be less likely (and more of an administrative headache).

Microsoft has taken the subscription model to an application recently as well, namely its Visual C++ compiler. The subscription guarantees several updates to the compiler per year, which is important to developers, as Visual C++ is a moving target of sorts. The benefits to Microsoft are the steady revenue stream, as well as the ability to make changes and bug fixes as needed and update its active customer base, with that customer base paying for such fixes and enhancement.

Finally, Microsoft has promised to use a similar mechanism for Windows 95, although the general scuttlebutt is that this is to allow Microsoft to provide regular bug fixes under the auspice of "Update Packs", all with customers paying for the privilege of getting a product that some say is not ready for retail sale. Whether the latter is true or not, I suspect we'll start seeing more and more companies ship product earlier than it should be and use the "Update Pack" subscription strategy to correct any problems in the software at a later date.

By the way, for those of you that didn't see the Cringely column in InfoWorld a couple of weeks ago, there's an unconfirmed rumor floating around that Microsoft will put a hardware lock on each copy of Windows 95. I think it's unlikely, but stranger things have happened.

The Future of Software Licensing

Both Graphisoft and Microsoft are pointing to the future of software licensing. The missing component to make it all work better, though, is global (or at least nation-wide) networking. I envision that within a couple of year's time, you'll be able to automatically download the latest version of your word processor in the background off the Net, under a combined subscription and metered license plan. For applications you use infrequently, more of a metering approach would make the most sense - only pay for when you use it, while for indispensable applications, you'd use a subscription service (or at least hope that your several-year old application works in some sort of compatibility mode).

A few more years down the road, and you'll start using applications remotely in real time and be metered that way, and we'll be back to the mainframe days, albeit with distributed processing in place.

You'll definitely have some interest problems arise along the way though. First, once a large number of people are connected to the Net on a regular basis, software piracy will become more carefully monitored and hunted down, because the operating system (or at least the network connection) will in all probability allow the client software to peruse your system and see what you have installed, and report it back to some monitoring agency (or the actual software company whose software you've got installed). This will lead to the commercialization of local firewalls that prevent such utilities from detecting everything on your system, and we'll be back to the whole vicious hack-crack-protect cycle again.

You may think that this is all just a tinge of paranoia, which, of course, brings us back to the present, and a thing called Microsoft Network. A recent issue of a major industry weekly described how the Microsoft Network connection software that is part of the Windows 95 Beta, and supposed to be part of the release version of Win95 if the Justice Department permits it, examines your system's hard drive to locate all Microsoft applications installed on your system. This list of applications is quietly reported back to Microsoft electronically as part of the on-line registration process. Microsoft officials were quoted as saying that the MSN software is only doing what Microsoft would ask users to provide on a registration card anyway. This invasive procedure is only the start of what might come down the pike in terms of system software monitoring, stuff that wouldn't be possible without a network connection (or modem). It will help software companies curb piracy though, which probably is a good thing (there's a theory that some piracy actually increases legitimate software sales).

In any event, in exchange for the immense resources the proverbial Net provides, you will give up some system privacy.

What This Means To You

In the home, and in many offices, these software licensing changes and increased networking capabilities mean that the PC will become more like the phone or cable TV box or DSS dish in terms of billing. Users will just get a monthly bill for software services provided to them. This also more than likely means that they will spend much more on software annually than they have in the past (but for more variety), which may mean less of a budget for hardware, unless the software company which receives the largest monthly software revenues decides to loan/lease/rent PCs to consumers so that they can suck up more software (just like in the Cable world with set-top boxes). It's all back to the Gillette approach - give away the razors to sell more razor blades.

Either way, it calls for more standardization of base hardware platforms so that a common set of features can be depended on for a minimum configuration. The next year or two will cause that base configuration to freeze, so get your dibs in now with the best 3D and video playback technology you can, and don't forget to start looking at high speed communications technologies to integrate with your devices.