What are VARs and Resellers Doing to Regain Margin as Product Prices Drop?

Even veterans of previous high technology price wars were surprised at how quickly the cost of continuous dictation software dropped after Dragon first introduced Naturally Speaking a little over a year ago, at what was then a breakthrough price intended to get speech into the mainstream - $695. The next day, (or so it seemed) IBM released ViaVoice, initially priced at $199 and offered very shortly after at $99. A market that by rights should have been in its infancy was suddenly subjected to the type of price war normally associated with maturity. It shows no sign of letting up. There are now two more players in the arena, both with dictation products under $100. They are Lernout & Hauspie with VoiceExpress, priced at $49 and Philips, with a product sold over the Internet at $39, but seemingly named for where the price is headed: FreeSpeech. In June, IBM responded with ViaVoice 98, with a home edition priced at $49, an office edition at $89 and an executive edition at $149. (Dealers interviewed for this story were contacted before the formal announcement of ViaVoice 98, but after the L&H and Philips releases.) Obviously it has some very positive implications for speech as a technology. No one can ever again cite software cost as a reason for speech not being a part of the mainstream computing environment. But it left quite a few VARs and resellers, many of them early champions of speech technology, with a dilemma. How does a reseller turn a profit on a product when its cost approaches zero? We asked several VARs to share their thoughts on this, and were actually somewhat surprised at how positive the reaction was to the current state of the market. This is not to say the price cuts did not rankle dealers, but rather that after the initial shock, many have found ways to recoup their margins. Many of the dealers noted that an earlier price drop, from $1100 to $700 had been relatively easy to handle. They had seen that cut coming, it had made business sense to them and they were able to prepare. But the latest round of cuts were of a different nature, more abrupt, and in the view of some, without a real reason. Phil Briskin, an IBM dealer in Florida, expressed the generally held view that dealers were stunned when the price went from $695 to $99. “It was a shock to the system in that we had quite a few customers who had purchased the product at $695. They were really upset to see the product come out at $99 a month later. We feared lawsuits. Some of these guys were lawyers and they were saying, ‘Oh you must have known what was going on.’ The whole marketplace had changed so dramatically.” Customization
Briskin’s solution - customization, proved popular with several other dealers as well, with medical applications being regarded as particularly attractive. In general, VARs and resellers are finding solutions to the problem of decreasing margins which fall into three often overlapping categories - customization, training and volume. At Voice Automated, Joe Buckle, chief operating officer, sees his company as functioning in some ways as a developer. Voice Automated, based in Huntington Beach, Calif., develops and resells specialized language models for IBM ViaVoice and Dragon Systems, with an emphasis on medical and legal products. “The companies that are going to be successful with speech in the future,” he said, “will be the ones that take a product like ours, or create one of their own, and market it as a package in the field. If you go to a cardiologist and try to sell basically a ViaVoice product, it is a tough sell. “If you are a speech recognition VAR and you are not selling to a specific vertical you are not going to be in business for very long. You are not adding any value. You have to target a professional end user,” Buckle said. “Find a niche, and attack it.” Typical opportunities in customization include specialized language models or templates and key wizards or macros as add-on sales. Training
Another revenue opportunity for resellers is training, although of course this is can sometimes be part of customizing. For companies that train people to use speech products, the more widespread speech becomes, the better for their business. The reseller most enthusiastic about the price drop was George Poidomani, an IBM reseller in Pennsylvania. “I love it,” he said, when asked about his reaction to the drop in price. “The cheaper it gets the better I like it.” When asked why, he responded, “Because I don’t sell the product. I train it. I bundle a seminar with the product.” Poidomani conducts seminars with chambers of commerce and other business organizations, and said he would “love” to see the product get to a point where they gave speech away within the operating system. (The view here is that he won’t have long to wait.) “I have been telling IBM this for years, “ he said. “If you are going to mainstream speech, you have to make it as cheap as the mouse. It does not have to be perfect.” He thought IBM was on the right track, and also approved of the Philips strategy of selling the product on the Internet at a low price. Service
Dan Newman, president of Berkley Voice Solutions, took a more even handed view of the cuts. “I think that for speech VARS there is a positive and a negative aspect to going into the mass market. The negative, obviously, is that the price is at the floor. Any retail product that sells for under $200 is not sustainable for a VAR.” In his view, if a large number of outlets get a product, it wipes out a dealer’s margin on software sales. But on the plus side the potential for services is high and stable. Once a reseller has a way to make money with a product priced as low as speech recognition is now, it is clear he or she can succeed for some time, in part because the product price really can not go much lower. And in Newman’s view, the need for services is a constant. “Since the dawn of the computer, people have always needed help with computers,” Newman said. “It is clear that most users need some help with speech.” He also pointed out that as a result of the price drop in software (and for that matter, hardware), the cost of a total solution to the customers has dropped a lot. He recalled when the DragonDictate Power Edition was priced at $1700, there were fewer customers, and they had less money left over after buying the software to pay for the types of services a VAR provides. Now they can afford the training, service and customization a VAR provides. This will be the only consistently profitable solution for resellers, Newman predicts. “We have the potential to provide people with a high value solution.” Service opportunities abound, including maintaining client back up copies of trained software for disaster recovery and maintaining phone in help lines. Volume
Dealers are able to make more money on volume in two ways. Some are simply selling much more product then ever before, and others are able to concentrate on large accounts. Connell McGrath, director of voice recognition at ABN in Massachusetts, which sells both Dragon and IBM, said that “the price drop has worked in our favor.” He said ABN was now doing 5 or 6 times the volume they had been doing a year ago, and that the increased volume lead directly to increased customization and installation sales. James Cox, president of Crown International, of Henry, Ill., while acknowledging the importance of services, training, support and customization, also felt he had been able to recoup lost margins by concentrating on large accounts. “That way the margin replicates itself,” he said. “ Sometimes it takes as much work to sell a country doctor as it does to sell a large corporation.” Cox, like most of the resellers we surveyed, sees speech soon becoming a commodity product. “It was a specialty product a couple of years ago, but not any longer,” he said. “The product just keeps getting better and better, and the price keeps coming down,” Cox said. Still, with the innovative solutions offered by VARs and resellers today, it seems likely VARs will find creative ways to keep the distribution channel open and thriving.
Brian Lewis is the editor of Speech Technology Magazine.
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