TUESDAY, SEPTEMBER 9, 1997
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Gift Rift: High-Tech Companies Battle Over the Value Of Donated Software
--- Microsoft Gives `Millions' To Charity, but Critics Question the True
Cost --- `Junk Bonds of Philanthropy'
By Monica Langley Staff Reporter of The Wall Street Journal
After donating tens of millions of dollars in software, Microsoft Corp. for
the first time was crowned the nation's top giver last year -- an honor
that in the past had sometimes been won by International Business Machines
Corp. The year-end issue of Corporate Giving Watch cited Microsoft's total
contributions of $73.2 million.
IBM was stunned. Then it fought back, encouraging the newsletter, whose
ranking of corporate givers is widely watched, to re-evaluate the numbers.
IBM's complaint: Microsoft wasn't playing fair because it used retail
prices to value the products that made up the bulk of the donations.
"We based our product gifts on wholesale prices, a more realistic value of
what a company is giving," says Stanley Litow, IBM's vice president of
corporate-community relations. "But if a comparison is going to be made, we
argued that you should compare apples with apples, not with oranges." So
IBM recalculated its product gifts based on retail, rather than wholesale,
pricing, to bring its total up to $92.7 million, from $72.2 million.
The headline in this spring's issue of Corporate Giving Watch: "IBM Ousts
Microsoft: New Data Reveals IBM as Top Corporate Funder."
Companies such as Microsoft and IBM are in a new kind of battle these days
-- not over what they sell, but over what they give away.
At issue: Just how much is a gift of software worth?
The fight over how software or any other product gift is valued, of course,
isn't an issue of substance, but of corporate bragging rights. No one is
quarreling about the gifts themselves.
Nevertheless, critics charge that technology companies' virtuous
philanthropy is more like virtual philanthropy -- giving that looks a lot
bigger and better than it actually is. By giving away products that they
value at high retail prices, technology companies are getting credit for
being more generous than they really are, skeptics say.
"Inflated software gifts are the junk bonds of the new philanthropy," says
Josef Woodman, founder of Lightworks Technology Foundation, Chapel Hill,
N.C., which helps nonprofit groups obtain technology.
Of course the recipients of corporate largess aren't complaining. "It's a
win-win situation," says Elizabeth George, director of the Minnesota
Council on Compulsive Gambling, which last year received a donation of one
copy of Microsoft Office Professional, valued by the company at $599. "We
get the software, so we don't care if Microsoft puts top-dollar value on it
as their payoff for giving."
Moreover, product gifts can bring big benefits to charities. The Carter
Center in Atlanta, for instance, received millions of dollars worth of
hardware and software from IBM to create a door-to-door immunization program.
Still, all companies these days -- and technology companies in particular
-- are under increasing pressure not just to do good, but to be seen doing
good. "Frankly we faced a lot of criticism for not being involved," says
Barbara Dingfield, Microsoft's manager of corporation contributions. So
when she came on board a couple of years ago, she cranked up both product
donations and the publicity machine.
Indeed, it was Microsoft's recent highly publicized $200 million software
donation to libraries that sparked a hot debate among givers and
philanthropy experts over just how such gifts should be valued.
The donation was widely hailed as the biggest gift to libraries since the
days of Andrew Carnegie. "It means that potentially every child and adult
will have access to global information on-line at public libraries across
America," says Elizabeth Martinez, executive director of the American
Library Association.
But other big donors weren't so pleased. They have been complaining to the
Conference Board, the big nonprofit business group in New York whose
members are among the nation's largest corporations, that there was a lot
less to such product donations than meets the eye.
"Microsoft can issue a press release using any value it chooses," says
David Ford, president of Chase Manhattan Bank's foundation, and vice
chairman of the Conference Board's contributions council.
No one challenges the value of the tax deductions for the gifts. Those
guidelines are set by the Internal Revenue Service, based on the actual
cost of manufacturing the product being donated. (Microsoft refused to
reveal the tax deduction it took for product gifts last year.)
Rather, big givers and philanthropy experts are piqued over how tech donors
tally up bragging rights. Particularly miffed were those who traditionally
make big cash gifts. Mr. Ford calls the $45 million in cash his bank gave
last year "a hell of a lot of money" compared with product gifts.
Members are arguing whether the Conference Board's contributions council,
which tracks corporate giving, should set standards for valuing gifts of
products.
"Frankly, we don't have a clue what companies are really giving away," says
Curt Weeden, corporate-giving chief for Johnson & Johnson and an
influential member of the council. "Banks, insurance companies and
investment firms are really ticked off, saying, `You guys giving away your
own products are beating your chests and making us look like skinflints,' "
he says.
Westina Matthews, director of philanthropic programs at Merrill Lynch &
Co., agrees: "We don't have products, so we're always at a disadvantage
when compared to companies reporting products."
Technology companies felt the heat. Microsoft's philanthropy manager wasn't
even allowed to join the Conference Board's contributions council until
recently because its software gifts weren't viewed as significant relative
to other big corporations' gifts.
Indeed, last year when Microsoft unveiled its first "Annual Giving Report,"
a slick booklet with touching tales of its charity, Mr. Weeden of Johnson &
Johnson called Microsoft's Ms. Dingfield and said: "This may rankle a lot
of people."
The problem: Microsoft's cover page boasted of $73.2 million donated in
"cash and software." Not until the back of the report, in a small chart,
was the true picture of the philanthropy detailed: $11.1 million in cash,
the rest -- $62.1 million -- in software donations. The final offense to
critics was a small asterisk after "software" referring to fine print that
noted the amount was valued at retail.
The Johnson & Johnson official on the Conference Board's contributions
council -- whose members' corporations represent the bulk of the nation's
corporate givers -- made a suggestion to Ms. Dingfield. Microsoft had never
been invited to be a part of the invitation-only council, but if its new
report indicated an effort to play "in the major leagues" of corporate
philanthropy, Mr. Weeden suggested she seek a spot on the Conference Board
as soon as one opened up.
Now Microsoft will make its first appearance at the contributions council
this fall. Microsoft's Ms. Dingfield acknowledges big companies on the
Conference Board calling and "teasing, `you've really stepped up. . . .
We'll welcome you, but we have to talk to you about valuation.'"
Of course all kinds of companies can make questionable donations of
products and services. During the beverage wars of a few years ago,
manufacturers gave truckloads of beverages that were actually failed new
products or expiring ones.
But with donations of technology, the issue is particularly acute, because
the gap between the cost of software and the value claimed for it is so wide.
In its latest gift, Microsoft is expected to give the libraries a wide
range of software, from Windows 95 to the Magic School Bus. But the $200
million donation, which will be made over five years, is calculated at
suggested retail price, a figure far higher than either what the programs
actually sell for in stores or their cost as reported to the IRS.
Microsoft won't say what the donation will cost the company. "What it costs
to burn a CD-ROM is not the issue," Ms. Dingfield says, noting that the
cost of producing intellectual property such as software must be factored
in. "We've thought about it in terms of what would the organization have to
pay if they were to buy the software on the open market."
Yet, although one of Microsoft's popular donations -- its Office
Professional '97 program on CD-ROM-lists at a suggested retail price of
$599, its actual average retail price is currently $536, according to PC
Data Inc., a market-research firm in Reston, Va. And most charities,
especially educational institutions, typically buy products at an even
deeper discount, as much as 70% off.
The gap between retail price and the cost to make the product is even
greater. Software priced at $100 costs an average of $15 to make, says
David Readerman, an analyst at Montgomery Securities, San Francisco. Even
factoring in the costs of research, sales and marketing, Mr. Readerman
estimates Microsoft has an 85% gross profit margin for most programs.
Novell Corp., a software maker, acknowledges that its gifts last year,
valued at around $1 million retail, actually cost it only $4,820. Oracle
Corp., which says it has made $350 million in software donations to
colleges since 1995, doesn't even bother to take any charitable tax
write-offs. Because tax deductions are based on manufacturing cost, a
company spokeswoman says, the tax breaks are negligible. "It costs more in
paperwork to do the write-off than you get back," she says.
Microsoft's practice of reporting its donations at retail price rather than
cost isn't embraced by all software companies. Pro CD Inc. says touting
gifts of its software programs, which it sells for $99 each but which
actually cost around $10 to make, would constitute "marketing hype," Chief
Executive Greg Andrews says. "We don't play that game," he adds, noting
that Pro CD doesn't quote any price when it gives away its software.
"I can assign whatever value I want," says Michael Durney, director of
philanthropy for Lotus, a unit of IBM. "There's nothing illegal to value it
at the highest possible price. But there is an ethical issue -- the value
we report should be based on reality." Acknowledging that "no one pays
suggested retail any more," Lotus tries to estimate what consumers would
pay, Mr. Durney explains, which is "considerably less" than retail pricing.
In fact, Microsoft says that if it were to base the value of the donated
software on its wholesale price, it would revise the total for the past
year to $50 million from $62 million retail, dropping the total value of
the contribution to $61.2 million.
"You can value any way you want, what's important is we're giving," Ms.
Dingfield says.
Nonprofit advocates worry that all the focus on product gifts ultimately
will deprive charities of the cash they need for personnel and training.
Says Joel Makower, author of a corporate-responsibility newsletter: "You
can only go so far on products, on surplus Hula-Hoops. Given a choice,
every nonprofit would want cash."
---
Don Clark contributed to this article.
--- Rohit Khare /// MCI Internet Architecture (BOS) /// khare@mci.net Voice+Pager: (617) 960-5131 VNet: 370-5131 Fax: (617) 960-1009