Microsoft revises corporate licensing scheme

After lots of speculation in the past few days, Microsoft Corp. on Thursday announced a revamped licensing scheme. The setup, which Microsoft sees as a first step to offering software as a service, will coexist with its so-called perpetual licensing scheme now in place, Microsoft said.

The new Enterprise Agreement Subscription, together with the Software Assurance upgrade plan, also new, are designed to simplify the licensing structure and make it more flexible, Microsoft said. The new setup, which also includes the lowering of the threshold for an Enterprise agreement to 250 licenses, goes into effect on Oct. 1.

Microsoft Software Assurance will replace the current five different upgrading options. The new streamlined program allows customers to upgrade to the latest version of the software in the period covered by the Software Assurance agreement -- the duration of the agreement is up to the customer to choose. Customers have the option to buy the program for individual PCs or for all their PCs and servers, Microsoft said.

"We expect over 50 percent of our enterprise customers to buy the Microsoft Software Assurance component," said Michel van der Bel, deputy general manager for Microsoft in the Netherlands.

For some customers the new upgrade scheme could turn out to be more expensive, said Van de Bel.

"For about 80 percent of our customers the new licensing setup will be cost neutral or bring savings. For the remaining 20 percent, mainly smaller customers who don't upgrade much, it could be more expensive," he said.

Several analysts question that claim. Guernsey Research analyst Chris Le Tocq predicts that at least 40 percent of Microsoft's enterprise agreement customers will face higher costs under the new system, and said he "wouldn't be surprised if the percentage is higher." Research firm Gartner Group Inc. forecasts that 60 percent of affected customers will pay more.

The change in upgrade options is at the heart of the licensing structure overhaul, said Gartner analyst Neil McDonald. "The real story is the elimination of upgrade options," he said.

Previously, firms could choose to upgrade to new versions of individual Microsoft products or packages whenever they chose. Many upgraded every few years, rather than upgrading every time a new version was released. Under the new system, companies lose that incremental option.

"By eliminating this option, Microsoft is saying you can do one of two things: You can buy Software Assurance, or you can re-buy the licenses," McDonald said. "But the result is, you're going to pay more."

Customers using Microsoft's enterprise agreement won't be forced into the subscription plan. Currently, users can choose to purchase products under a multi-year payment contract, which typically runs for three years. At the end of the contract, customers own the software outright, a system referred to as perpetual licensing. Several analysts speculated earlier this week that Microsoft would scrap its perpetual licensing option.

"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," UBS Warburg LLC analyst Don Young wrote in a report issued Monday.

Opting for reduction instead of elimination is a smart move, McDonald said. "It would have been a grave tactical error to eliminate perpetual licenses," he said. "This (new licensing system) is intended to placate the fears of their customers, to offer alternatives, to ease people into this."

And, of course, it's intended to bolster Microsoft's bottom line. "Many companies have indicated that they have no interest in upgrading their software soon. Microsoft is seeking to protect its revenue stream. It looked ahead and saw that revenue was going to drop," Le Tocq said.

Beyond increasing revenue by eliminating the risk that customers will choose not to upgrade software, the new system reduces volatility in Microsoft's licensing revenue by giving the company a steady and recurring source of sales. That's a change hailed by many Wall Street analysts, including Young.

For customers, the financial ramifications of the change are less positive.

Gartner is encouraging customers to do their own subscribe-versus-purchase number-crunching analysis, McDonald said, offering a typical scenario. For a firm with 5,000 desktops licensing Microsoft Office and upgrading to a new version of Office every four years, re-purchasing the software every four years will be cheaper than a subscription license. However, by Gartner's calculations, the firm will spend US$900,000 to $1.6 million more on re-purchasing the software than it would have on version upgrades under Microsoft's old licensing terms.

The break point in the buy-or-license calculation is about three-and-one-half years, McDonald said. If a company upgrades its Microsoft products every three years, then taking a subscription license and using Software Assurance is generally the most cost-effective option -- but the company will still pay 35 percent to 77 percent more than it would have using version upgrades.

If a company upgrades its software every four years, re-buying the software as needed is likely to be less expensive, McDonald said. He estimated that such a company will still spend 68 percent to 107 percent more than it would have using version upgrades.

On the other hand, customers who upgrade frequently could see lower costs under the new licensing terms.

"Microsoft is telling its customers that it wants them to upgrade every two years," Le Tocq said. "If you do upgrade often, it can mean a cost decrease. ...Those customers who don't upgrade will have to make a decision soon and upgrade before Oct. 1, when Microsoft withdraws its current upgrade options."

Microsoft also made a handful of other, more minor changes, to its licensing structure. Customers will soon have access to online tools for managing their licenses. Additionally, the company highlighted its already-underway Enterprise Source Licensing Program expansion, under which large enterprise clients in certain countries with at least 1,500 Windows desktop licenses are allowed access to the company's prized Windows source code.

"This is absolutely no move towards open source. Customers will be allowed to develop on top of the source code, to innovate. We started this about a year ago with some of our large enterprise customers," said Van der Bel, adding that no altering of the basic source code or sharing of the code is allowed and that Microsoft remains the owner of the intellectual property.

Last week, Microsoft executive Craig Mundie outlined the company's "share source" philosophy in a speech at New York University, igniting a firestorm of criticism from open-source and free-software advocates. "This won't change much for the users, as they won't be allowed to alter the code," said Nathaniel Martinez, a software analyst with research firm International Data Corp.

Microsoft also announced changes to its academic licensing program on Thursday. Microsoft expanded the program to encompass primary and secondary schools as well as colleges and universities. The company also tweaked the program to allow for easier annual renewal, rather than requiring new subscription agreements to be made yearly.

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