Good exchange on the Yahoo thread between Brian Lempel and Unclebux (a Yahoo regular and thoughtful contributor)...this was a comment from Unclebux that I have often thought of, and gets right to the crux of the lily pond forecasting model;
"The problem with looking at unit growth as a predictor of royalty growth, is that you can bet that WIND's customers negotiate a sliding scale, where as unit shipments go up, per-unit royalties go down."
Unclebux has a good point, any volume sale I have ever made (different channel) I have always had to concede on price (and margin).
I have also noticed that second generation RTOS for a specific lily pond always have significantly higher royalties (ASP) than first generation RTOS. This stands to reason, greater functionality = higher cost...however;
1) business has a way of developing product improvements and maintaining, or lowering, their cost structure for any given product. The PC is a good example of this throughout the 90's. Will WIND really be able to increase their ASP when manufacturers will be striving to lower unit costs as volume ramps exponentially?
2) When 2nd generation RTOS are introduced, 1st generation RTOS average selling price is maintained. This defies conventional business practices...when "new and improved" is introduced, invariably you have to lower the price of your 1st generation product to maintain demand and clear it out.
3) As markets proliferate in any given lily pond, technology is driven down to the lowest common denominator that still defines value...that is..it gets the job done and its cheap...is WIND vulnerable in the mature market product stage to royalty free RTOS/Linux? (where most of the volume is). We haven't seen evidence of this, but is WIND vulnerable if manufacturers opt for low cost RTOS to wring out costs and maintain their competitive cost structure.
I am not privy to WIND's contracts pertaining to royalties and whether they are volume based or not, can anyone provide clarification?
I am long WIND, but simply find the late stage royalty forecasts (FY 04, 05) too optimistic. I hope I am proven wrong!
Rinks |
