Taking License

Microsoft claims that less is more in its new software license program. But more for whom?
Tim ReasonJuly 1, 2001

When technology firms promise to simplify your life, be careful. On October 1, new software licensing rules go into effect at Microsoft Corp., which touts the “simplified” program as a way to streamline the smorgasbord of licensing options currently available to most corporate customers.

But many analysts say that Microsoft gains more from the move than customers do. “Microsoft has confused simplification with the elimination of options,” says Gartner analyst Alexa Bona. “The cheapest and most popular way of upgrading has simply been eliminated, leaving most organizations paying significantly more.”

Under the new rules, companies will no longer be able to pay from 50 percent to 70 percent of the price of a new license to upgrade existing software. Instead, they must enroll in an ongoing maintenance contract called Software Assurance (SA) and pay an annual fee amounting to 25 percent to 29 percent of the cost of a full license–or simply buy a new license at full price. Moreover, any company that doesn’t have the most current version (Office XP and Windows 2000) in place on October 1, or that subsequently allows SA to lapse for more than 90 days, must buy a full license before it is eligible to join or rejoin.

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Gartner estimates that upgrading Microsoft Office every four years will cost from 68 percent to 107 percent more under the new scheme; companies that upgrade every three years will pay from 35 percent to 77 percent more. For a firm with 5,000 desktops on a four-year cycle, that’s a bump from $900,000 to $1.7 million.

“I don’t know how they came up with those numbers,” counters Bill Henningsgaard, Microsoft’s vice president of worldwide licensing and pricing. He says that only 20 percent of customers will pay higher prices, and the maximum increase will be approximately 35 percent. Meta Group analyst Kurt Schlegel agrees with Henningsgaard that the net present value of SA is equivalent to upgrading every two to three years, but many companies don’t upgrade that frequently.

Bob Ksiazek, manager of PC administration and support for St. Louis­ based Graybar Electric, buys licenses for 10,000 PCs, and says he’s certain Graybar will pay more. “I feel like I’m staring down the barrel of a gun, and Microsoft is just asking me to hand over my wallet,” he says.

Schlegel predicts other software vendors will follow Microsoft’s lead. And Bona believes that SA is “a necessary stepping-stone to nonperpetual licenses,” or rent-as-you-go software, which may well become the industry norm. Ultimately, the predictable costs and off- balance-sheet expense of such programs may appeal to customers, but Bona warns that “the initially lower price point leads to a much higher total cost of ownership.”

In the near term, companies will need to study the new licensing options carefully. As confusing as the landscape may be, says Schlegel, at the very least, companies should make sure they are on an upgrade plan (Upgrade Advantage or Enterprise Agreement) by October or pay for a version upgrade; otherwise, they face what amounts to a “balloon payment” to get current. Some companies may be tempted to simply buy licenses outright and hold them for four years or longer, which looks to be the cheapest way out at the moment. However, Bona points out that since there is no way of knowing how often Microsoft will issue future upgrades, or how they will be priced, this approach is far from risk- free.

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