As many companies race to stay ahead of the curve in the evolution of the
Web, Microsoft Corp. is no different. The software giant, too, is in the
midst of changes — changes that Goldman Sachs (GS) addressed in a research
report Tuesday.
Noting that Microsoft has been opting for recurring revenue streams as of
late — with the firm’s pending software-as-a-service play .NET penciled in
as primary example — GS said analysts have been talking about how the
outfit plans to move its perpetual software licensing business to a
recurring revenue stream.
Specifically, Microsoft has been “renting” its Office XP suite. GS’ Rick G.
Sherlund and Nils Tristan noted that Microsoft has tested these waters with
customers in Europe by offering them new enterprise licenses that require
that the customer renew agreements every few years to continue to use
office; hence, the recurring revenue stream.
While GS is unsure whether or not Microsoft will give up up-front revenues
to steer enterprise customers in the direction of recurring license models,
the research firm said it does not anticipate much of an effect on beyond
what is currently reflected in management’s guidance and street estimates.
GS further noted that it does not expect a near-term revenue or earnings
benefit because sales from enterprise license agreements generally span two
or three years and any change to a recurring revenue model would also likely
result in revenues being recognized over the life of the contract.
Moreover, Sherlund and Tristan said, “We would not expect an enterprise
customer to agree to renewable contracts where they have to purchase the
software again every two to three years without some inducement from
Microsoft, so we are not convinced there would be any near term benefit from
this potential shift in license terms.”
The analysts said Microsoft could be “heavy handed” by killing the perpetual
license option, but this would probably alienate customers unless the terms
were similar to the economics of a perpetual agreement.
