Ruminations

Opinions, thoughts, & recommendations.

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Name: Dave Leigh
Location: Union, South Carolina, United States

I was born too young. And when I die, I'll still be too young.

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Tuesday, May 23, 2006

Want to Get Rich? Sell to the Poor.

In today's ComputerWorld, we see this article: WinHEC: Microsoft to test pay-as-you-go PCs.

The upshot of it is that Microsoft is testing pay-as-you-go PCs for sale in underdeveloped countries. You'd buy the PC for about half price, then buy time on it using the Internet or prepaid cards, much as you do with cell phones today. The theory is that with the lower cost of entry, more poor people will have access to computing, and Microsoft will open a brand new market for expansion of their software and services.

It's a valid theory, and it may actually work. I hope it doesn't, because there are better options for the poor than to purchase their computing at a much higher cost than the rich spend.

I know. You're thinking, "How can it be a higher cost when they're charging half?" Simple. Microsoft loves to tout "Total Cost of Ownership" (TCO) and here's a place where it most certainly applies. By selling the hardware cheap, then eeking out the use of that same hardware as a pay-as-you-go service, Microsoft stands to make many times more on each computer than they would if it were sold outright. It's the same theory that allows them to sell each and every Xbox at a loss, hoping to make up the loss with the sale of games. It's a common tactic when dealing with the poor. You use a low cost of entry to slowly bleed a huge sum of money.

The vast middle class may not realize exactly how much money can be extracted from seemingly broke people, but it's lucrative to the max. Take, for example, payday advances: You're poor, you're a couple of bucks short on your electricity bill, and your power's about to be shut off. So you run down to your local paycheck advance store and you can borrow up to $300 until your next paycheck, at which point you pay back the $300, plus $45 interest. These places can legally get an APR of 1200% or more on these short-term loans. A rich person, charged similar rates by his bank, would sue for usury and win. The sad part is that, once locked into an off-sync cycle between bills and paycheck, the poor client is back for more next paycheck, and then again, and again... dumping $90 or more a month on finance charges he can't afford -- and ironically he's paying the charges because he can't afford it.

Other "low ticket" finance companies wind up with similar windfalls. Someone with money will just go out and buy a lawnmower at list price... let's call it $600. Someone without money will hop down to a finance company, pay $50/month until he's plopped down a couple of grand for the same model. Even high-ticket items. If you don't have money for a down payment, you rent a house for $1100/month and never, ever build equity. If you do have money you cough up a couple of grand, finance the rest at $700/month, and wind up owning it.

This is the way things are. The most lucrative markets cater to the poor. Do you think Wal-Mart got to be the largest company in this star system because they're servicing the Fifth Avenue crowd? Hardly. They're the richest because they sell to the poorest.

Lest you think I'm engaging in some class warfare here, I'm not. The poor need affordable products, and there are more poor than rich. No one would argue that you shouldn't sell to the poor, for cryin' out loud. But here's the part where we as a society do ourselves a disservice. The poor have been brainwashed to act on class envy... they see themselves as being entitled to those things that the rich can afford. Note that it's not that these things are attainable... it's an entitlement. Thus, every child needs a laptop, or an iPod, or a new pair of Nikes. People have been trained to not have the patience to save and "make do." They've been trained to be ashamed of anything not new. In this country people do not limit themselves to what they can afford, and they enslave themselves for life.

Is it the fault of the vendors? Not entirely, no. They saw a need and filled it. And often they look at the lowered cost of entry to justify their feelings that they have done something good for the underprivileged... that they're "giving something back," without ever stopping to consider that the long term burden on their customers is onerous. Others are just rip-offs. "Blue Hippo Funding" comes to mind. (and no, the link isn't to them, but to a story about them).

Obviously the moral of this story is that if you're poor you can't afford credit, so don't use it. But if you save and make do, you'll advance to the point where you can easily afford the credit you won't need. There are only two things that most people in the U.S. need to buy on credit... a house and a car. For everything else, there's green paper. But that's enough social ranting... let's go back and look at the Microsoft story.

Are they evil for offering the pre-paid plan? No, they're just trying to fill a need and open a market; albeit presumably without the indignity of lowering their prices in accordance with the normal laws of supply and demand. They see something that works for the telecom industry and in true Microsoft fashion, they're going to copy it and see if it works for them.

The pre-paid model works well for cell phones because the service is required for the operation of the phone, and because you can choose to moderate your use of the phone. Limit it to emergency calls and it can be an excellent deal. Let's face it, you have to buy service to use the phone. If pre-paid service lowers your cost of obtaining the phone (because the costs are absorbed by the vast majority of callers who don't limit their use) then you benefit.

Will it work as well with computers? I'm not so sure. Unlike a cell phone, a computer is normally useful even if it's not connected to the 'Net. Microsoft's plan would change that: these machines would disable themselves if the computing time is not paid for. I tend to think a user would have to be crazy to take them up on the offer when he could pop on over to the Salvation Army, get a decent used machine with Linux and OpenOffice.org (Mandriva's very good for the purpose!) for a $150 or so, and use it until it falls apart. If he wants Internet access, then it's available for less than $10/month. Together, owning a used machine and cut-rate Internet service is much, much more affordable than this open-ended rental agreement. But are people smart enough to make the comparison? Not all of them, I'm sure (just look at the folks suckered by Blue Hippo!)

I'm interested to see how this plays out.

In the meantime, if you're one of the "haves" you can feel good about being able to help someone in an underdeveloped country more effectively than Bill Gates. Just donate your obsolete computer to a non-profit organization that reconditions and recyles this equipment, such as Youth for Technology.