Path: utzoo!utgpu!jarvis.csri.toronto.edu!mailrus!csd4.milw.wisc.edu!bionet!agate!saturn!ucscc.UCSC.EDU!haynes
From: haynes@ucscc.UCSC.EDU (Jim Haynes)
Newsgroups: comp.misc
Subject: Re: Ethics of crippler circuitry
Message-ID: <6567@saturn.ucsc.edu>
Date: 3 Mar 89 05:37:32 GMT
References: <176@ucl-cs.UUCP> <1989Mar2.193443.17196@sq.com>
Sender: usenet@saturn.ucsc.edu
Reply-To: haynes@ucscc.UCSC.EDU (Jim Haynes)
Organization: California State Home for the Weird
Lines: 64

In article <1989Mar2.193443.17196@sq.com> msb@sq.com (Mark Brader) writes:
>
>If the fast version of the machine sells for $B (B for Big Number), and
>the crippled version sells for $S, and the crippling really is done
>simply by adding something (something non-functional and of negligible
>cost) to the fast version, then the manufacturer must be making $(B-X)
>profit on each fast machine and $(S-X) on each crippled one, for some $X.

But the problem is that X is not a constant with time.  Typically the fast
version comes on the market first, when $B is big but $X is also big.
In fact for the first machine produced $X is a lot bigger than $B if you
divide the total development cost by the number produced to-date.  The
vendor makes a guess as to the number that will sell, or that will sell in
the first year, and uses that to compute $X.  So $(B-X) may not be
inordinate for the original value of X.  Also the initial $B is constrained
by what is already in the marketplace; unless you're IBM you can't set
$B higher than the price of machines of similar performance already on
the market.  In fact for a new machine you'll have to set it lower to
attract any business.

If your sales estimate is overly optimistic then $X is higher than you
expected and $(B-X) may indeed be negative.  Think how many companies
entered the computer business over the years, and how many of them exited
without ever showing a profit.

After your machine has been on the market for a while a couple of things
happen.  If sales hold up then $X per unit will go down, both because you
recover the startup cost and because the cost to manufacture goes down
with experience.  Secondly, newer machines are introduced or rumored
which because of advancing technology promise higher performance at the
same or lower cost.  So your machines become less attractive at the
price $B.  But because $X has declined you can afford to sell at some
lower price $S and still make money, which would not have been possible
at time of first introduction.  Here's where the mathematics get tricky,
because you want to maximize total profit.  So you want to sell as many
as you think you can at the original price $B, and sell as many more as
you think you can at some lower price $S that will attract those unwilling
to pay $B.

It's also complicated by asset value of the machines that are out there.
This was probably more true in the past when leasing was much more a
normal way to obtain a computer.  (Remember when you couldn't buy an 
IBM machine at all, you could only lease?)  I don't pretend to know
anything about accounting, but if you put machines out at an initial price
of $B then the owners (you, or the buyer, or a third-party leasing company)
expect to depreciate that figure over a certain length of time and this
is used to set the lease price at something sufficient to pay back the
money you or the buyer or the third-party company borrowed to build the
machines with in the first place.  Now if after a year you simply 
reduce the price of the machine from $B to $S things get messy fast.
Like your lease customers might find it advantageous to return the
machines, terminate the lease, and then lease newer copies of the same
machines for a lower rate based on $S.  By introducing a crippled version
of the machine you hope to destroy the incentive to turn back leased
machines; and also you hope to keep the original depreciation schedule
intact.  Remember when IBM killed Itel by introducing new models well
before the older ones were depreciated?

haynes@ucscc.ucsc.edu
haynes@ucscc.bitnet
..ucbvax!ucscc!haynes

"Any clod can have the facts, but having opinions is an Art."
        Charles McCabe, San Francisco Chronicle