Microsoft's plan to alter the way it licenses software to large corporate users is an attempt to increase and stabilize license sales revenue, according to analysts.
The company's strategy is reportedly to begin eliminating "perpetual use" contracts, which allow enterprises to continue using Microsoft products after their multiyear purchase agreements expire. Currently, companies using Microsoft's enterprise agreement sign an initial license with Microsoft for a fixed term, generally three years. After the contract ends, they need only pay Microsoft again if they wish to upgrade their software or initiate a new contract. Under the new licensing terms, according to analysts, companies will need to continue licensing Microsoft's software or quit using it.
Talk of the new licensing structure surfaced recently at research firm Gartner Group Inc.'s annual Windows conference. Microsoft's product pricing will remain relatively constant over the next few years, but customers could end up paying as much as 50 percent more each year for the software because of changes in Microsoft's licensing model and the addition of subscription fees for upgrades and maintenance, Gartner analyst Alexa Bona predicted at the conference.
UBS Warburg LLC analyst Don Young issued a report Monday offering further details of the coming change. "We believe Microsoft will shortly announce new license terms and conditions. We believe a critical aspect of the new licensing agreement will be the elimination/reduction of perpetual licensing," he wrote. "We have confirmed with multiple global accounts that Microsoft is now proposing new enterprise agreements that provided a limited three-year software license unlike the prior perpetual license proposal. In some cases Microsoft is buying back existing perpetual licenses."
The change will affect companies with enterprise agreements, which are contracts designed for large businesses with at least 500 users. Young hailed the proposed alteration as good news for investors. Requiring customers to renew licenses eliminates the risk that users will choose to stick with older versions of Microsoft's software and save the cost of upgrading. It would also reduce volatility in Microsoft's licensing revenue and give the company a steady and recurring source of sales.
However, the plan would force users to keep pace with upgrades and pay for software on an ongoing basis, which might not be such a good deal for the customers themselves.
The planned license switch is currently tied only to enterprise agreements, Young wrote. No change is currently planned for Microsoft's open and select licenses, intended for small and mid-sized businesses, although such a change may not be far off. "We expect all site license (open and select) will eventual migrate to non-perpetual status," Young wrote.
A Microsoft spokesman said there are "no plans to make a change like that," but hedged on whether such a switch might happen in the near future. "It's probably a safe bet to say that Microsoft is always looking for ways they might improve licensing," he said.
Microsoft is already taking small steps toward a subscription model in some of its product lines. The company said Monday it will make Office XP available through subscription in Australia and New Zealand when the software is released in those countries, although it delayed plans to offer a subscription option in the U.S. "We have been predicting that they're going to do more in subscriptions as time goes on," said Gartner analyst Michael Silver on Monday, in response to the Office XP news. "From a corporate point of view, having an annuity stream is a really attractive alternative. It's a really nice way to make revenue a bit more predictable and not really have to worry about massive upgrades for new revenue."