Have you noticed how Microsoft update marketing works these days? They've pretty much dropped even the pretense of running updates through the distribution channel except for mega-million blowouts like Windows 3.1 or DOS 6. No, as long as you've registered the product, right about the time the new release hits the cover of PC World, a little letter from Bill shows up with their little blue OCR form. You just tick the box and attach your check or credit card number for a readily-digestible fee (usually US$30 through US$150) and bung it in the post. A week later the update shows up at your door. For those who update faithfully this way (and I won't get into the many ways Microsoft forces you to stay current or pay a heavy price--they're masters at it), this amounts almost to a subscription--not on a consolidated basis like cable or satellite TV, but to a product, like a magazine subscription. And the economic dynamics strongly resemble those of magazine subscriptions.
Magazine subscriptions are typically sold through retail channels and/or highly discounted for an initial subscription; publishers don't usually make money on initial subscriptions. Renewals, however, are handled by direct marketing and all the recurring revenue for the subsequent years goes right into the publisher's pocket. It's the same for Microsoft Word; Gates has every incentive to discount initial sales of Word as much as possible to gain market share against Word Perfect, and to grant all kinds of incentives to his channels as long as he believes that each initial sale plugs him into a virtually guaranteed revenue stream of, say, $50 per copy per year. Of course to realise that revenue he has to keep the updates coming and provide enough added value in each one so people continue to stay current. But since I've never seen a wish list get shorter for any software product I've worked on, I hardly think that's a problem as long as you're willing to invest in development.
Editor: John Walker