The Razor's Edge - Brief Article

Industry Standard, The, August 6, 2001 by Richard Martin

The second condition is that the free goods must have negligible marginal costs: Once you've made one, it should cost next to nothing to make the second and each one after that. That explains why the giveaway model works so well for information technology: Creating the first copy of Acrobat Reader took years and cost millions; knocking off copy after copy entails only the cost of running the server from which customers download them, for free.

The third requirement is to have a product, like razor blades, with inelastic demand: In other words, people will keep buying it, over and over, in perpetuity. That's why Bill Gates is so enthusiastically touting Microsoft's .Net initiative; it's a way to shift the company's business model from selling razors (that is, the Windows operating system) to selling blades (Internet based software applications). As PC sales have flattened, Microsoft has had trouble convincing people to keep shelling out for "upgrades" that they regard as little more than bug fixes. In the future, if Gates has his way, the software platform will be a one-time purchase, while the applications that run on top of it will be sold by subscription and delivered over the Web. That's a self-perpetuating razor-and-blades model, except for one thing: Gates still wants to make money off both the razor and the blades. Here's a wild-eyed suggestion, Mr. Gates: Give Windows away.

Another sector that could profit from Gillette's insight is telephony. For years, the cost of providing long-distance calls has dropped toward zero. But companies like AT&T and WorldGom continue to milk the dying market for every cent they can, plaguing consumers with confusing bills and phantom charges. Meanwhile, the demand for more valuable services, particularly high-speed Internet access, piles up. The phone companies would be better off giving away long-distance calls and charging for the cool stuff.

But then, telco executives have never been known for their vision. Before he died in 1932, King Gillette lost his fortune in the stock market crash and in patent lawsuits. His company has also struggled of late: Its share price is on a two-year slide, and in the quarter that ended July 20, the company's profits from razors and blades dropped 14 percent. Nevertheless, Gillette has $9.1 billion in annual revenue, and you can buy its blades from Dubuque to Djibouti. And King Gillette's essential insight has not lost any of its force or clarity. The phone company executives could learn something from Gillette's eccentric life: One way to make money in this world is to let something go.