Microsoft’s Licensing Gamble

With just days to go before the July 31 deadline to sign up for its new
software licensing policy, Microsoft will finally bring to an end a tumultuous, 15-month period of customer discontent — a period brought on, in Microsoft’s own words, by its own missteps in not fully communicating the plans’ benefits.

The idea behind the Software Assurance program was relatively
straightforward: Microsoft would scrap its outdated hodgepodge system of
licensing agreements that consists of five different ways to buy upgrades in favor of a unified program that charges customers 25 percent of the license fee
for server software and 29 percent for desktop software on an annual basis.
It would allow customers to have guaranteed maintenance of their software,
much like the system used for mainframes.

Soon, however, Microsoft faced a customer revolt, as many businesses saw the
plan as confusing and designed to wring more money out of them. After
delaying the program twice, Microsoft still faced customer unhappiness. Just
three months ago, researcher Gartner Group estimated that 35 percent of
businesses had joined the program.

Since then, Microsoft has poured $20 million into an aggressive plan to put
a kinder face on the Software Assurance, taking out advertisements, holding
seminars, and visiting with key clients.

“There’s been a fair amount of confusion out there with a lot of
misinformation out there,” says Rebecca LaBrunerie, Microsoft’s program
manager for worldwide licensing and pricing. “We believe in the last six
months we’ve touched our customers at least once and maybe more than once.”

But some analysts say the software company’s damage control could be too
little, too late, as the new program leaves behind still-grumbling customers
more eager to find alternatives to Microsoft’s ubiquitous products.

Sowing More Confusion

Microsoft insists the new volume-licensing policy is nothing more than a way
to provide customers with a more simplified system. The company has
estimated that half of all enterprise customers would see no change in their
costs, 30 percent would see a decrease, and 20 percent would pay slightly

“I’ve got plenty of customers who tell me, ‘This is going to cost me more
money.’ And then, when I actually look at their purchase history, I can
prove to ’em it’s going to cost ’em less,” Microsoft CEO Steve Ballmer told
Computer World in June. He said that even for those customers whose
costs would rise, they would still benefit from a “rational and predictable
framework” for costs.

However, many companies have found the framework neither rational nor
predictable, according to industry analysts.

“I don’t know if they’ve cleared up all the confusion,” says Alvin Park, an
analyst with Gartner Group. “I get calls every day from clients still trying
to figure out what to do.”

LaBrunerie says Microsoft realized that Software Assurance initially
confused customers, who thought the program was required or would nullify
their licensing agreements.

“We created a lot of confusion by the way we rolled it out,” she admits.

While LaBrunerie holds that Microsoft has made up for its initial missteps
with an aggressive marketing and education push, others are not sure.

Many customers complained that Microsoft was eliminating confusion by
eliminating choices, such as the version upgrade program, which allowed
customers to upgrade software in the same family at a discounted rate.

“They’ve admitted there’s been a communication problem,” says Park. “What
they haven’t admitted is that there’s anything wrong with the program.”

Microsoft: the anti-Enron? Will Microsoft’s obsession for predictable revenue lead to a customer rebellion? See 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
in some quarters to hold in a “rainy-day” fund for possible
shortfalls in subsequent quarters. Microsoft settled the
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 founder Michael Robertson’s company,

“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.”

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