Well, before we talk about the money-making process, let’s try and understand the key business drivers of the technology industry. And by technology, I’m referring to Computer Software and Hardware (excluding mobile handsets/cellular phones) industry. I’ll combine the money-making process along with the business drivers.
Key business drivers of technology industry
(1) Cost of sales
For a technology company, the cost of sales is fairly low. The Cost of Sales include
- Cost of technology upgrades (including cost of development). Usually the upgrades are released every year.
- Cost of hardware refresh: Usually, most of the technology companies have an enterprise wide agreement for their server and storage upgrade [like IBM (NYSE: IBM), HP (NYSE: HP), Dell and Oracle (NYSE: ORCL)] and networking equipments upgrade like Cisco (NASDAQ: CSCO). The refresh period is usually 3-5 years.
- Cost of documentation, duplicating software, training, packaging (if media is supplied) and cost of maintenance (predominantly data center maintenance other than what has been specified in ‘Point b’ above): Now-a-days, most of the companies enable software download feature to avoid costs associated with documentation and media.
These three costs account for 15-20% of the sales revenue, leaving 85% for Selling, General and Administrative Expenses (SG&A), Marketing and Research & Development (R&D). Hence, it’s not surprising to see Technology companies investing handsome amounts in Marketing and R&D. To give you a perspective, in FY11, Oracle invested $ 4.5 billion in R&D. With $ 35.6 billion in total revenues, that’s 12%, a good investment for Oracle.
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