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WSJ Friday July 25 1997
THE FRONT LINES: Analytical Graphics Waits for Windfall From a Freebie
By Thomas Petzinger Jr.
KING OF PRUSSIA, PA. -- WE LAST LEFT Paul Graziani selling a $3 million
piece of satellite-tracking software for $9,999 a copy. My column about him
last year showed how even a scientific marketplace can be stimulated with
Crazy Eddy pricing.
Yet earlier this week, Mr. Graziani outdid even the most outrageous
pitchman. He cut his price to zero.
Plenty of companies give away new software in hopes of dominating markets
quickly. And Gillette still distributes razors for free to sell blades at a
price. But you won't find many companies turning an established, $10,000
revenue producer into a freebie. "It's a bold move," Mr. Graziani says. "It
could easily make or break the company."
First, let's recap last year's column. While working at General Electric in
the Star Wars era, Mr. Graziani helped develop a $3 million product that
turned piles of imponderable data into a two-dimensional view of any
satellite in orbit. GE ultimately killed the product, but Mr. Graziani was
convinced it could sell big at a much lower price. So he formed a company
here called Analytical Graphics Inc., christening his software the
Satellite Tool Kit.
His vision proved prescient. Though limited in number, most satellites have
many users. Government agencies, contractors and commercial operators
purchased the product to help schedule downlinks, site ground stations and
even design satellites. Orders arrived for add-ons and upgrades, including
a popular 3-D animation feature.
As it turns out, these premium products accounted for more than
three-quarters of the company's revenue. A bell rang at company
headquarters with each $10,000 order and a gong for every $100,000 sale,
and by last year the chimes were sounding regularly, with revenue passing
the $7 million mark and budgeted to more than double this year.
YET EVERY first-time sale came at great cost, with trade shows, magazine
ads, regional sales offices and other such efforts consuming 51% of
revenue. "Slugfest selling," Mr. Graziani called it. The obvious way to
draw more customers was a price cut, but even at $10, he figured, people
would think twice about giving up their tools, especially in the jaws of
the government-procurement process.
That left one alternative: giving away the Satellite Tool Kit, inundating
the marketplace and relying on add-ons as the sole revenue source.
Though stunned, Mr. Graziani's directors warily approved the secret plan in
January under the code name Rosebud. But in doing so, they asked that he
put someone else in charge of the campaign so as not to distract him from
his other duties, including work on a possible initial public offering next
year.
Enter Dan Kane. A nuclear engineer and Strategic Defense Initiative veteran
himself (at Lockheed), he had been selling a competing orbitanalysis
program. In February, Mr. Kane agreed to merge his company into Mr.
Graziani's, and was informed of Rosebud. "We're giving away our core
product?" he asked incredulously. He said he'd manage the program anyway.
The concept, he soon realized, wasn't entirely preposterous. Hot new
software often creates its own epidemic, spreading across office cubicles
like a flu, when distributed for free. Moreover, free distribution would
erase long-lingering doubts about the size of the company's potential
market. By capturing data from every registered user, the company would
have hard numbers to show Wall Street. The same data would help target
add-on customers, eliminating the costly "slugfest."
But Rosebud harbored potentially grave perils. The company risked
alienating existing customers who had paid $10,000 for a product that was
suddenly free. Shrewdly, the company created a new, souped-up version of
the Satellite Tool Kit, priced at $15,000 retail, as a gift for those
customers.
BUT THERE was no escaping another problem: the 23% of revenue the company
derived from its basic product would evaporate overnight. Mr. Graziani's
sales staff rebelled. Mr. Kane himself still maintained doubts. "Tensions
are high," Mr. Graziani told me in May.
But in the end, one argument won the day: Whatever the risks, they paled
next to a competitor beating Analytical Graphics to the punch. Indeed a
spunky Beltway contractor called Stac Inc. had just released a low-priced
3-D satellite animation tool, and there was no telling what it might do
next. So Mr. Kane moved to win over the skeptics in his own company. "We
need everyone's buyin," he pleaded.
Earlier this month, I watched the software engineers here finish the new,
free release, their eyes glassy from consecutive all-nighters. A courier
picked up the gold master disk for duplication into 75,000 copies, many
going into a trade journal as inserts. The company also began free Web
downloads.
Though surprised by the move, existing customers grasped the logic. "We
just can't afford to put it on everybody's desktop for $9,000, but the free
release enables anybody to get a copy," says Roger Ciesinski, satellite
mission-engineering manager at TRW. In time, he says, some new users will
want add-ons.
It will take weeks or months to see whether the scheme pays off, but if so
the spoils will be great. When a niche product becomes standard, the winner
takes all. "People see this as bold and risky," Mr. Kane says. "It's
definitely bold, but the risky thing is not doing it."
--- Rohit Khare /// MCI Internet Architecture (BOS) /// khare@mci.net Voice+Pager: (617) 960-5131 VNet: 370-5131 Fax: (617) 960-1009