Sam Ellis is worried. As president and CEO of Forward Software,Inc., Sam
introduced a new spreadsheet product, Cinco, to market lastyear. Forward Software has
been developing and marketing high-quality software packages formore than five years,
but those products were mostly computer software languageinterpreters, similar to
Pascal, FORTRAN, and C. These products received excellentcritical reviews, and
because of Forwardâs aggressive pricing and marketing, thecompany quickly captured a
major share of the software market. Buoyed by its wideacceptance, last year Forward
Software decides to enter the applications area for the IBM andcompatible audience,
leading off with Cinco and following up with a word processingapplication, Fast.
The spreadsheet market is dominated by Focus Software, whoseproduct â Focus
A-B-C has an 80% market share. Focus A-B-C was released in 1981,shortly after IBM
personal computer (PC) was introduced, and the two products hadan immediate
symbolic effect. The spreadsheet was a major advance over whatwas available at the
time, but required the extra 16-bit processing power that theIBM PC offered. IBM, on
the other hand, needed an application that would make its PC aâmust buy.â Sales of
Focus A-B-C and the IBM PC took off as a result of theirnear-simultaneous release.
At the time of its release, Focus A-B-C was a superb product,but it did have
flaws. For example, because the software was copy-protected, itcould be installed on a
hard disk, but the original floppy disk has to be inserted eachtime before the software
could run. Many users found this step an annoyance. Anotherproblem with A-B-C was
printing graphs. In order to print a graph, users had to exitthe software and load a new
program, called Printgraf, which would then print the graph.Finally, the product had a
list price of $495, and the best discount price available wasapproximately $300.
However, Focus A-B-C had a unique menu system that was intuitiveand easy to
use. Pressing the slash key (/) displayed the menu system at thetop of the spreadsheet.
The menu allowed the user to make choices and provides aone-line explanation of each
menu option. Compared to the cryptic commands or keystrokesusers had to enter in
other products, the Focus A-B-C menu system was a model ofsimplicity and clarity.
Millions of users became accustomed to the menu system andhailed its use.
Another advantage of Focus A-B-C was its ability to let userswrite their own
macros. Literally a program, a macro allowed a user to automatespreadsheet tasks and
then run them with a keystroke or two.
In 1985, a small company named Discount Software introduced itsown
spreadsheet to the market. Called VIP Scheduler, the productlooked and worked exactly
the same as Focus A-B-C. Pressing the slash key displayed theidentical menu as found in
Focus A-B-C. VIP Scheduler was designed to look and work exactlyas Focus A-B-C so
that users would not have to learn a new system and could startproductive work
immediately. VIP Scheduler also offered two advantages overFocus A-B-C: its list price
was $99, and the software was not copy-protected. Sales for VIPScheduler were strong,
but many consumers, perhaps feeling safer with the Focus name,did not buy the product,
even though critical reviews were positive. VIP Scheduler didfind a receptive market in
academia.
When Forward released its first spreadsheet product, Cinco, itwas hailed by
critics as a better all-around product than Focus A-B-C. It hadbetter graphics, allowed
users to print graphs from within Cinco, and was 100% compatiblewith Focus A-B-C,
but the menu and options were arranged more intuitively. Forusers who did not to invest
time to learn a new menu system, Cinco could emulate the FocusA-B-C menu system.
Both menus were activated by pressing the slash key, and theusers could specify easily
which menu system they wanted. All macros written for FocusA-B-C ran perfectly on
Cinco, provided that the Focus A-B-C menu system was being used.Because of
favorable reviews and aggressive marketing by Forward, Cincoquickly gained market
share. In a move that surprised the industry, Focus recentlysued Discount Software,
publisher of VIP Scheduler, for copyright infringement. Focusclaimed that its menu
system was an original work, and that VIP Scheduler, byincorporating that menu system
in its product, had violated copyright laws. Focus claimed thatthe look and feel of its
menu system could not be used in another product withoutpermission. Sam is certain
that Focus initiated this lawsuit because Cinco has made suchdramatic progress in
gaining a share of the spreadsheet market. Sam is also sure thatFocusâs target is not
really VIP Scheduler, because it has such a small market share,but Cinco.
After discussions with Forwardâs attorneys, Sam thinks that ifhe makes a quiet
overture to Focus to settle out of court, Focus would beamenable to such proposal. This
overture, if settled, would stave off potential negativepublicity when Focus wins its suit
against Discount Software and then follows up with a lawsuitagainst Forward. Based on
projections of Cincoâs sales, Forwardâs attorneys think thatFocus could ask for $5, $8, or
as much as $12 million in damages. Sam believes that theprobabilities of Focus agreeing
to $5, $8, and $12 million are 0.5, 0.3, and 0.2, respectively.Also the settling process
would cost Forward $1 million of the attorneysâ fee.
Sam knows that settling now means an immediate loss of income,in the amount
of one of the three estimates given, plus an admission of defeatand guilt for Forward.
On the other hand, Sam could wait for the outcome of the Focusversus Discount
Software suit. Forwardâs attorneys believe that Focus has a 40%chance of winning its
lawsuit against Discount Software. With a win, Focus would haveits legal precedent to
sue Forward. It is by no means certain that Focus wouldinstitute a lawsuit against
Forward because Forward is a much larger company than DiscountSoftware and could
afford a vigorous legal defense. Also the case against Forwardis not a clear-cut because
Cinco has its own menu system as the primary mode of operationand offers the Focus A-
B-C menu system for those who want to use it. VIP Schedulerprovides only the Focus
A-B-C menu system. However, Forwardâ attorneys believe there isa 90% chance that
Focus would initiate a lawsuit against Forward if Focus wins itssuit against Discount
Software. They also believe that Focus would not initiate anylawsuit if Focus loses its
suit against Discount.
Sam believes that even if Focus sues Forward, he would still tryto settle the case
out of court at that time or decide to go to trial. An attemptto settle out of court at that
time would be more expensive for Forward because Focus wouldfeel secure that it would
win its case against Forward, having already won its lawsuitagainst Discount Software.
Thus Forwardâs attorneys think that Focus would settle for noless than $8 million,
possibly asking for $11 million or even $15 million. Therespective probabilities that
Focus would settle for these amounts ($8, $11, and $15 million)are estimated to be 0.3,
0.4, and 0.3. Also, Forward would have to pay its attorneysroughly $1.2 million to go
through the settling process.
However, if Focus sues Forward and Forward decides to go totrial instead of
initiating settlement proceedings, Forward could lose the case.Forwardâs attorneys
estimate there is an 80% chance that Forward would lose thetrial, resulting in a judgment
of $8 million, $16 million, or $18 million against Forward, withprobabilities of 0.1, 0.3,
and 0.6, respectively. The attorneys also estimate that theirfees for a trial could run
around $2.5 million.
What is Samâs optimal decision strategy and what is the expectedcost of that
strategy. What considerations would you like to bring to Samâsattention?
An outside law firm has recently offered Forward Software for$0.7 million
dollars to conduct a detailed research on the likelihood thatDiscount Software will win
the lawsuit filed by Focus.
This law firm has a reputation in correctly predicting
outcomes of many copyright lawsuits similar to the one Sam mayrun into. In fact, the
prediction accuracy of this law firm in the past is about90%
2
2
The outcomes of 90% of the lawsuits were correctly predicted bythe law firm; i.e., P(Law firm predicts
Focus wins | Focus actually wins) = .90 and P(Law firm predictsFocus loses | Focus actually loses) = .90.
. Do you think Sam should
hire this law firm to do a similar study for Forward Software?In other words, is $0.7
million a good price for such a study, and if not, what shouldbe Forwardâs counter offer?
Explain.
Sam Ellis is worried. As president and CEO of Forward Software,Inc., Sam
introduced a new spreadsheet product, Cinco, to market lastyear. Forward Software has
been developing and marketing high-quality software packages formore than five years,
but those products were mostly computer software languageinterpreters, similar to
Pascal, FORTRAN, and C. These products received excellentcritical reviews, and
because of Forwardâs aggressive pricing and marketing, thecompany quickly captured a
major share of the software market. Buoyed by its wideacceptance, last year Forward
Software decides to enter the applications area for the IBM andcompatible audience,
leading off with Cinco and following up with a word processingapplication, Fast.
The spreadsheet market is dominated by Focus Software, whoseproduct â Focus
A-B-C has an 80% market share. Focus A-B-C was released in 1981,shortly after IBM
personal computer (PC) was introduced, and the two products hadan immediate
symbolic effect. The spreadsheet was a major advance over whatwas available at the
time, but required the extra 16-bit processing power that theIBM PC offered. IBM, on
the other hand, needed an application that would make its PC aâmust buy.â Sales of
Focus A-B-C and the IBM PC took off as a result of theirnear-simultaneous release.
At the time of its release, Focus A-B-C was a superb product,but it did have
flaws. For example, because the software was copy-protected, itcould be installed on a
hard disk, but the original floppy disk has to be inserted eachtime before the software
could run. Many users found this step an annoyance. Anotherproblem with A-B-C was
printing graphs. In order to print a graph, users had to exitthe software and load a new
program, called Printgraf, which would then print the graph.Finally, the product had a
list price of $495, and the best discount price available wasapproximately $300.
However, Focus A-B-C had a unique menu system that was intuitiveand easy to
use. Pressing the slash key (/) displayed the menu system at thetop of the spreadsheet.
The menu allowed the user to make choices and provides aone-line explanation of each
menu option. Compared to the cryptic commands or keystrokesusers had to enter in
other products, the Focus A-B-C menu system was a model ofsimplicity and clarity.
Millions of users became accustomed to the menu system andhailed its use.
Another advantage of Focus A-B-C was its ability to let userswrite their own
macros. Literally a program, a macro allowed a user to automatespreadsheet tasks and
then run them with a keystroke or two.
In 1985, a small company named Discount Software introduced itsown
spreadsheet to the market. Called VIP Scheduler, the productlooked and worked exactly
the same as Focus A-B-C. Pressing the slash key displayed theidentical menu as found in
Focus A-B-C. VIP Scheduler was designed to look and work exactlyas Focus A-B-C so
that users would not have to learn a new system and could startproductive work
immediately. VIP Scheduler also offered two advantages overFocus A-B-C: its list price
was $99, and the software was not copy-protected. Sales for VIPScheduler were strong,
but many consumers, perhaps feeling safer with the Focus name,did not buy the product,
even though critical reviews were positive. VIP Scheduler didfind a receptive market in
academia.
When Forward released its first spreadsheet product, Cinco, itwas hailed by
critics as a better all-around product than Focus A-B-C. It hadbetter graphics, allowed
users to print graphs from within Cinco, and was 100% compatiblewith Focus A-B-C,
but the menu and options were arranged more intuitively. Forusers who did not to invest
time to learn a new menu system, Cinco could emulate the FocusA-B-C menu system.
Both menus were activated by pressing the slash key, and theusers could specify easily
which menu system they wanted. All macros written for FocusA-B-C ran perfectly on
Cinco, provided that the Focus A-B-C menu system was being used.Because of
favorable reviews and aggressive marketing by Forward, Cincoquickly gained market
share. In a move that surprised the industry, Focus recentlysued Discount Software,
publisher of VIP Scheduler, for copyright infringement. Focusclaimed that its menu
system was an original work, and that VIP Scheduler, byincorporating that menu system
in its product, had violated copyright laws. Focus claimed thatthe look and feel of its
menu system could not be used in another product withoutpermission. Sam is certain
that Focus initiated this lawsuit because Cinco has made suchdramatic progress in
gaining a share of the spreadsheet market. Sam is also sure thatFocusâs target is not
really VIP Scheduler, because it has such a small market share,but Cinco.
After discussions with Forwardâs attorneys, Sam thinks that ifhe makes a quiet
overture to Focus to settle out of court, Focus would beamenable to such proposal. This
overture, if settled, would stave off potential negativepublicity when Focus wins its suit
against Discount Software and then follows up with a lawsuitagainst Forward. Based on
projections of Cincoâs sales, Forwardâs attorneys think thatFocus could ask for $5, $8, or
as much as $12 million in damages. Sam believes that theprobabilities of Focus agreeing
to $5, $8, and $12 million are 0.5, 0.3, and 0.2, respectively.Also the settling process
would cost Forward $1 million of the attorneysâ fee.
Sam knows that settling now means an immediate loss of income,in the amount
of one of the three estimates given, plus an admission of defeatand guilt for Forward.
On the other hand, Sam could wait for the outcome of the Focusversus Discount
Software suit. Forwardâs attorneys believe that Focus has a 40%chance of winning its
lawsuit against Discount Software. With a win, Focus would haveits legal precedent to
sue Forward. It is by no means certain that Focus wouldinstitute a lawsuit against
Forward because Forward is a much larger company than DiscountSoftware and could
afford a vigorous legal defense. Also the case against Forwardis not a clear-cut because
Cinco has its own menu system as the primary mode of operationand offers the Focus A-
B-C menu system for those who want to use it. VIP Schedulerprovides only the Focus
A-B-C menu system. However, Forwardâ attorneys believe there isa 90% chance that
Focus would initiate a lawsuit against Forward if Focus wins itssuit against Discount
Software. They also believe that Focus would not initiate anylawsuit if Focus loses its
suit against Discount.
Sam believes that even if Focus sues Forward, he would still tryto settle the case
out of court at that time or decide to go to trial. An attemptto settle out of court at that
time would be more expensive for Forward because Focus wouldfeel secure that it would
win its case against Forward, having already won its lawsuitagainst Discount Software.
Thus Forwardâs attorneys think that Focus would settle for noless than $8 million,
possibly asking for $11 million or even $15 million. Therespective probabilities that
Focus would settle for these amounts ($8, $11, and $15 million)are estimated to be 0.3,
0.4, and 0.3. Also, Forward would have to pay its attorneysroughly $1.2 million to go
through the settling process.
However, if Focus sues Forward and Forward decides to go totrial instead of
initiating settlement proceedings, Forward could lose the case.Forwardâs attorneys
estimate there is an 80% chance that Forward would lose thetrial, resulting in a judgment
of $8 million, $16 million, or $18 million against Forward, withprobabilities of 0.1, 0.3,
and 0.6, respectively. The attorneys also estimate that theirfees for a trial could run
around $2.5 million.
What is Samâs optimal decision strategy and what is the expectedcost of that
strategy. What considerations would you like to bring to Samâsattention?
An outside law firm has recently offered Forward Software for$0.7 million
dollars to conduct a detailed research on the likelihood thatDiscount Software will win
the lawsuit filed by Focus.
This law firm has a reputation in correctly predicting
outcomes of many copyright lawsuits similar to the one Sam mayrun into. In fact, the
prediction accuracy of this law firm in the past is about90%
2
2
The outcomes of 90% of the lawsuits were correctly predicted bythe law firm; i.e., P(Law firm predicts
Focus wins | Focus actually wins) = .90 and P(Law firm predictsFocus loses | Focus actually loses) = .90.
. Do you think Sam should
hire this law firm to do a similar study for Forward Software?In other words, is $0.7
million a good price for such a study, and if not, what shouldbe Forwardâs counter offer?
Explain.
