Making Sense of Microsoft’s New Software Licenses

Surprise! Microsoft wants more of your money. Is there a way to not give it to them?
Jennifer CaplanMay 25, 2001

Microsoft is handing corporate America an ultimatum.

The software giant has effectively said, “Get your software current by October 1, or pay a steep price when you finally do decide to move to the latest version of Windows or Office.”

The licensing changes have left CFOs trying to determine how to mitigate the financial blow they’ve just been dealt. It won’t be easy.

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For example, Jim O’Brien, CFO of Synygy, an incentive compensation company, says, “We have yet to analyze the details of how this will affect us, but we will have to decide what makes sense for all the areas of our company.”

So what exactly do the changes entail?

In a nutshell, Microsoft is eliminating a whole menu of upgrade options, including Version Upgrades, the most popular choice of corporate users, and replacing them with a single new upgrade program called “Software Assurance,” according to Neil Macdonald, director of research at Gartner.

Currently, when a company purchases a license for a software application, it can purchase version upgrades for that application when it chooses at 50 to 70 percent of the cost of the license.

Under the Software Assurance program, on the other hand, users will pay a yearly fee to get upgrades in bulk throughout the duration of their agreement at no additional cost. The yearly fee under the new program for desktop products will be 29 percent of the full license cost, and 25 percent of the license cost for server products.

But here’s the catch. In order to qualify for the program, a company must have the latest version of Microsoft’s software, which will force most companies to upgrade to Windows 2000 or have an agreement to purchase Windows XP by October 1.

Simon Hughes, program manager at Microsoft’s worldwide licensing group, says that companies that have not purchased Software Assurance after October 1 can still qualify for the program, but they won’t get the discount they would have had they purchased the software before that date.

The announcements will not change Microsoft’s volume license prices, however, says Hughes.

For example, five licenses of Office XP Professional, will still cost $454 per copy, the same as they do now, Hughes says. Large volume corporate sites will pay $357 per copy. The current retail price for Office XP Professional is $579.

Customers that want to upgrade to Windows 2000 Professional, from Windows 95 or 98, will continue to pay between $175 and $137 per PC depending on the volume of the purchase. Because most PCs are equipped with Windows when they are purchased, Microsoft only sells upgrades for this product. A full retail price for a Windows 2000 Professional license is $319.

But analysts contend that despite Microsoft’s claims to the contrary, the changes eliminate choice and will significantly increase corporate costs for most users.

Macdonald claims that the majority of companies upgrade their software every three years or more, when hardware comes to the end of its lifecycle.

“The best strategy is whatever operating system a PC is born with, it should die with,” he says.

And because different PCs have different life-cycles, they typically run different versions of an operating system simultaneously. “It’s ok to have Windows 98, 2000, and XP on your desktops all at the same time,” he says. It is less expensive to manage a mixed environment than it is to force a homogenous environment by upgrading all your PCs to the same version of the operating system at once.

The Software Assurance program, therefore, will force companies to incur expenses they would not normally have incurred, he claims.

“We ran through a calculation for a typical organization with 5,000 desktops running Microsoft Office that upgrades every four years. The increase in upgrade costs was between $900,000 and $1.6 million more under Software Assurance,” Macdonald asserts.

Companies that upgrade every four years, and have to re-buy a license every time they upgrade, will have to pay between 68 percent and 107 percent more, he says, and those that upgrade every three years will see their costs increase by 35 percent to 77 percent under the new program.

“Either way, it is going to cost you more,” Macdonald insists.

Not surprisingly, however, Microsoft sees things differently.

Hughes says that the average customer upgrades every 2-and-a-half to 3 years, not every 3-and-a-half to 4 years as Macdonald contends.

“We are basing our analysis on the sales figures that we’ve seen over the last two years, and we believe that our figures are accurate,” Hughes explains.

Hughes says 80 percent of Microsoft customers will see their costs remain unchanged or decrease as a consequence of the changes. “Those customers that upgrade less frequently than the average, the remaining 20 percent, will see license costs increase,” he concedes.

Although analysts are claiming that Microsoft has essentially cornered its users into forking out big chunks of cash, Macdonald contends that you don’t necessarily have to play by its rules.

He advises that in preparation for the October deadline, companies take the time to assess their existing Microsoft contracts, and recommends that in developing a strategy, corporations determine how often they’ve been upgrading their Microsoft software over the years.

Companies that don’t upgrade frequently are better off ignoring Software Assurance and simply re-buying a full license every time they need to upgrade, Macdonald advises.

“We’ve calculated the break even-point to be 3.5 years,” he comments. “If you upgrade every three years, then you are better off buying Software Assurance. If, on the other hand, you upgrade every four years or less frequently then you’re better off not buying Software Assurance and just re-buying the licenses when you need them.”

In addition, Microsoft has announced that as of October 1, it will offer its largest clients the option to license software through a rental-style subscription plan. Subscribers under what it calls an Enterprise Agreement Subscription plan will purchase a license every three years, but will not have the right to use the software indefinitely after the agreement terminates, as they do now under perpetual agreements.

Hughes claims that the subscription model may create tax advantages for some companies, as it allows them to account for software as an operating expense as opposed to a capital expense.

While Microsoft is not doing away with perpetual licenses, it hopes to lure customers into a subscription model by offering 15 percent discount off the cost of perpetual licenses.

Although Hughes claims that customers have responded positively to the subscription option, Macdonald believes that the advantages will not big enough to attract customers.

One thing appears likely, however. As Microsoft looks after its own best interests, it will create more headaches for its customers than it needs to.