The New Economics of Information
With Windows, Gates would promote Microsoft Office, a bundle of Microsoft applications including Word, Excel and PowerPoint. It was a strategy that, MIT's Brynjolfsson said, would guarantee success in the new information economy. That's because creating the first copy of software is expensive due to all the programming work involved, but additional copies are very cheap to produce. A vendor can further increase its profit margin by bundling a lot of products together. The strategy works particularly well when no single product is best-in-class, which has often been the case with Microsoft applications.This model leads to higher market share and much higher profits. "It's a bit like the McDonald's meal bundles," Brynjolfsson explained. Check out here Spencer Katt's favorite Bill Gates cartoons. The result: "Microsoft products were consistently priced much lower than competitors' products when you adjusted for their capabilities and features," he said. "I think Bill Gates' biggest contribution was in understanding the new economics of information. Most of his competitors didn't get it."
"Selling average products separately would not yield a large market share, but bundling them together makes it more attractive for the buyer," said Brynjolfsson. "It gave [Gates] a big advantage. Even if a new product is better, most people will prefer to stick with the bundle, as they did with Microsoft Office."