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Pratap Ravindran

Microsoft wants to sign on corporate clients on an annual fee basis. But companies don't want to commit themselves to buying an Operating System and application upgrades ahead of time, they want wiggle room. So what's going to happen?

THERE'S been trouble brewing in paradise for some time now.

On May 10 last year, Microsoft announced that it was revamping its licensing programmes in a way that would radically change the manner in which the majority of companies and organisations acquire its software and updates.

Subsequently, in early October the same calendar, the rajah of Redmond announced that it had revised deadlines and that companies would have time till July 31, 2002, as against February 28 stipulated originally, to participate in the new programmes.

The company further stated that customers would no longer be compelled to upgrade to Office XP to qualify. This concession had been significant, as we shall see down the road. The Microsoft spokesman, Dan Leach, had explained the roll-back of the deadline as the company's "response to customer feedback.'' He had said: "When we went to talk to customers about the issue, they made it clear they needed sufficient time to examine their existing licences, review the improvements (in the new programmes) and decide how to take advantage of the new software offering.''

Independent analysts, however, hadn't bought this argument and had postulated customer discontent. They had gone on to point out that Microsoft's decision to stretch the deadline had been the second major change in its new licensing programme.

The first change had involved the relaxation of another licensing restriction on "reimaging,'' a common practice among Microsoft's business customers who would get their techies to erase the copy of Windows installed on PCs and replace it with an identical version of an Operating System (OS) that included the hardware drivers and software applications required specifically for their network and environment.

Customer resistance to the new licensing programmes has to be understood in the context of their divergence from the earlier ones.

Under the latter, companies had bought software licences for each PC and then gone in for upgrades on an as-needed basis.

Typically, upgrades were undertaken every three or four years and used to cost 59-72 per cent of the original software.

Under the revised scheme of things, say Software Assurance, companies participating in the Open and Select programmes would have to shell out an annual fee that would give them the right to upgrade each desktop for a specified number of years. And the fee? That would work out at 29 per cent of the initial licence for desktop software and 25 per cent for server software.

Sounds good, right?

Well, the problem was the Windows XP requirement (now dropped). The way companies looked at it, they would be paying 29 per cent of XP's cost for three years as against zilch under the old programme, assuming that upgrades were not released or were not thought to be necessary.

Software Assurance is not the only plan available, of course. Microsoft offers enterprise agreements under which licensing can be negotiated with large companies on an annual fee basis. Microsoft also offers a subscription option which allows enterprise agreement customers to pay a single, annual, per-PC fee for software.

While the subscription option doesn't allow a company to hang on to software if cancelled, Software Assurance rests on a perpetual licence that never expires. And finally, there's direct buying which allows companies with more than 250 desktops to buy software directly from Microsoft.

The problem now can be summed up in very simple terms. Microsoft wants to smooth out revenues by signing on corporate clients on an annual fee basis. But companies, confronted by difficult times, are not convinced that they should commit themselves to buying an Operating System and application upgrades — ahead of time — through an annual free. They want wiggle room. Which the new plans don't give them. They can, of course, opt out of the new plans altogether — but they'll then lose out on the discounts attached to them.

With the July 31 deadline coming up over the horizon, a lot of interest has been generated by two separate studies undertaken by Gartner and Giga Information Group, both of which say that one-third of the businesses polled do not plan to sign up for the subscription-based programmes while another one-third are still undecided.

It is learnt that many businesses are looking at the other options available to them: the Linux Operating System and Sun Microsystem's StarOffice, for instance. It may be coincidental — or then again, it may not — that Sun is souping up StarOffice and vetting pricing changes.

But there are problems here too. Switching has its costs too. According to Gartner, outfits switching to StarOffice will probably wind up shucking out an additional $1,200 per user: about $800 towards labour costs and roughly $400 for lost productivity.

Over time, StarOffice will cost less than Office to maintain — but, by current reckoning, a business that switches over will be able to break even on the conversion costs only over eight years.

Be that as it may, it bears noting here here that Microsoft can no longer afford to bull its way through the market. The company is not in trouble — far from it — but the fact is that its revenue growth rate in fiscal 2001 was 10 per cent — down from 16 per cent the preceding accounting year.

Earnings fell by 23 per cent during the same period (primarily because of the $4.8-billion impairment charge on investments).

Meanwhile, the company's cost of revenue has touched 17.5 per cent in the first six months of the current fiscal (Micosoft's accounting year ends on June 30), up from 13.7 per cent during the same period the preceding fiscal.

The general environment isn't all that hot either. The market for the Windows Operating System, the company's primary revenue driver, is not as elastic as it used to be and the global PC market growth rate is becoming discernably sluggish.

Given this scenario, it is quite understandable that Microsoft doesn't want to miss out on the cash windfall of approximately $1 billion that it hopes to get in the first three quarters of fiscal 2002 through the change in its licensing plans.

Further, the company obviously wants to iron out the peaks and dips in its balance sheet — Microsoft treats income from licensing programmes as deferred revenue which means that the revenue is booked on a monthly basis over the contract period.

It just may achieve its objectives if those undecided now about accepting the new licensing programmes decide, at the last minute, to go for them....

pratap@thehindu.co.in

Some fast facts

Can somebody explain what the deal is with Microsoft's new Licensing policy?

Beginning October 1, 2001 Microsoft has introduced an update to its two existing volume licensing programmes Open License 5.0 and Enterprise Agreement 5.0 to version 6.0. The change is because of the announcement of Software Assurance, a new simpler way of upgrading to the latest versions of software, and one that is easier to understand and administer.

What is Software Assurance and what does it mean?

Software Assurance (SA) is a new upgrade offering that provides customers with rights to any new versions of a particular product that are released during the term of the agreement. SA is an upgrade option that the customer can choose to opt for. The SA term is for a maximum of two years and could be renewed at the end of the term. It provides customers with a new and simpler way of obtaining upgrades to the latest and most innovative Microsoft products. If you are already on the version of a product that Microsoft qualifies as "current" then you can enrol your licences in Software Assurance during the launch period between October 1, 2001 and July 31, 2002. This assurance will then ensure that for a fraction of the cost of your licence, you are entitled to upgrades of the product as and when they become available within the two-year period for which your agreement is valid.

What if I am not on the "current version" of the software?

During the launch period from October 1, 2001 to July 31, 2002, there will be one more upgrade option available called "Upgrade Advantage" (UA). If you are not on the "current version" of the software, you could go in for UA, which would give you two benefits. It will provide the rights to upgrade to the current version of the product, and it will provide the rights for future upgrades to the latest versions of products released during the term of the agreement. And UA, like SA, has a maximum term to two years, which can be renewed at the end of the term.

What's the price implication?

Licensing 6.0 does not change the prices for any products. The financial impact of the new program varies depending on the individual choices each company makes in licensing. We looked at the last few years of licence purchases and the rate at which customers were purchasing upgrades, and believe the new licence program will reduce licensing costs or be cost neutral for a large number of cases. Furthermore Microsoft is encouraging customers to evaluate the cost/benefit of Software Assurance on a case-by-case basis before making their decision.

What if I don't want this at all?

It's really quite simple. If you don't want the option of Software Assurance, you don't have to opt for it. You can simply purchase a new version/retain your existing version depending on your preference. Should you choose to retain your current version and not opt for Software Assurance, you are free to evaluate new products as they are released and decide to purchase or not at the time.

What's the catch?

There's no catch. Here's the deal: You can pay a percentage of what your product costs to cover yourself for product upgrades for a two-year period. If you do not want to do this right now, you don't have to. You can choose not to opt for Software Assurance. What this will imply is that you will not be provided new product versions automatically. And if you desire to move to a newer version, you could do that by buying that licence afresh.

But this means you are forcing me to upgrade to Windows XP right now.

No. Actually Windows XP is the least affected in this new Licensing program. As a matter of fact, upgrades to Windows XP will be available even after July 31, 2002. Upgrades for customers will be available from Windows 98, Windows Millennium Edition, NT Workstation and Windows 2000 Professional. Additionally, for corporates buying under Open Licensing, upgrade options from Windows 95 will also exist. So, for home users, upgrades from Windows 98 and Windows Millennium Edition will continue to be available.

This is definitely Microsoft exploiting its monopoly. How can Microsoft lock its customers in this way?

We are not locking in customers at all. This is simple economics. We are rewarding those of our customers who want to use our latest products now and in the future by giving them a cost effective way to "get current" and "stay current". We totally accept that this might not be appropriate for all our customers. Hence, Software Assurance is completely optional. No one is being locked in or forced in any way to buy Microsoft products, upgrade to Microsoft products or rush their purchases in any way. Naturally there are benefits to those of our customers who choose to do so, but the operative word here is choose.

How will this affect home users? How will this affect enterprise customers?

This announcement is all about improvements and new introductions to Microsoft's licensing program focused on corporates. Therefore the impact on home users is zero. With regard to Windows XP specifically, there is no change for enterprise customers as well as upgrades continue to be available for them. With regard to other products as explained above, enterprise customers can gain a cost advantage by choosing to go in for Software Assurance or, alternatively, they can opt to wait and watch and buy products as and when they are released at full price.

I heard that the deadline for this was September 2001 and now it seems to have been pushed to July 2002. Is this true?

On October 8, 2001 Microsoft announced that it has extended the launch period for Software Assurance and Licensing 6.0 to July 31, 2002. Customers told us that Licensing 6.0, our improved licensing program, which we launched on October 1, 2001, is a significant change, but that our original five-month transition period was just not long enough. Given the economic climate today, it's clear our customers were right. After listening to customers, Microsoft has extended the launch transition period to allow customers sufficient time to review their existing licences, evaluate the new options and decide how to take advantage of Software Assurance. This is really because we remain committed to listening to all our customers and to improving our licensing programmes. Our objective is that the licensing program should make it simpler for you to acquire, understand and administer while providing you with a variety of options to meet your diverse business needs.

Source: Microsoft

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