Microsoft's Licensing Gamble - Page 2

Leveling the Roller Coaster
The other side of the coin is that Microsoft badly wants a rational and predictable framework for its revenues.

"It's all about building a recurring revenue stream," says Giga Information Group analyst Julie Giera. "Microsoft used to suffer from peaks and valleys with product release cycles."

While its dominance mitigated some of these peaks and valleys, Microsoft is still a software company, which like pharmaceuticals and movie studios, depend on blockbusters.

The need to show Wall Street a predictable revenue stream was evidenced in Microsoft's recent scrape with the Securities and Exchange Commission (SEC). Unlike the high-profile cases of profit inflating at WorldCom and Enron, the SEC investigated Microsoft for hoarding revenues in some quarters to hold in a "rainy-day" fund for possible shortfalls in subsequent quarters. Microsoft settled the investigation without any admission of wrongdoing, but the company agreed to stop the practice.

In addition to leveling out revenue, Giera says the program also enabled Microsoft to push many companies into bumping up their licensing from open or select to a high-end enterprise agreement.

"The big surprise here is that Microsoft made a boatload of money on enterprise agreements," she said.

The Blowback Danger
Perhaps the biggest risk for Microsoft is that any ill will generated by a ham-fisted approach to changing its volume-licensing plan will lead customers to consider Microsoft alternatives. To be sure, with Windows running on most every PC and 250 million copies of Office operating worldwide, Microsoft position remains dominant.

Microsoft's rivals have seen Software Assurance as an opening to chip away at the software giant's dominance. In May, Sun Microsystems unveiled StarOffice 6.0, a suite of office software priced below Microsoft's popular Office software.

Gartner analyst Michael Silver estimated StarOffice has the potential to grab as much as 10 percent of Microsoft's Office market share.

Meanwhile, Microsoft's Windows stranglehold in the operating-system market is potentially threatened by the emergence of Linux-based alternatives, like the LindowsOS offered by MP3.com founder Michael Robertson's company, Lindows.com.

"What we've found is that companies are accelerating their review of Linux and StarOffice," Giera says. "They're installing it, and they're testing it out. I don't think this push would have happened without Microsoft changing" its licensing policy.

At least abroad, some big Microsoft customers have been put out enough to look at alternatives. After balking at the terms of the volume-licensing agreement in November, the United Kingdom wrung concessions out of Microsoft. Its Office of Government Commerce announced the announced on July 22 that it would look into open-source alternatives to Microsoft products.

"That's pretty significant," Giera says.

Even so, she concedes Linux remains a niche OS and Microsoft's Office remains the "lingua franca" of business. Park agrees, saying many customers might not like Software Assurance, but they have learned to live with it.

"Even though they're unhappy and complain, most have decided they cannot afford to move off Microsoft products," Park says. "I'm sure there are customers out there getting off Microsoft products, but they haven't talked to me."