Microsoft quietly introduced the change on Oct. 1 in conjunction with another sweeping licensing revision that, according to research firm Gartner, raised software costs for many customers from 33 percent to 107 percent.
"The message here is customer pressure works, and the government scrutiny helped," said Gartner analyst Neil MacDonald.
But the change, while technically a victory for Microsoft customers, may not be logistically feasible for many of those affected. A provision affecting Windows XP could compel some companies to subscribe to a higher-level volume-licensing program than the one they use today.
A Microsoft representative confirmed the company had relaxed the restrictions on "reimaging" but could not immediately offer additional comment.
Under the old licensing provision, Microsoft could force customers buying PCs installed with Windows 98, NT or 2000 to pay for a second copy of the operating system.
To more efficiently manage their systems, many companies erase the copy of Windows installed on their PCs and replace the OS with an identical version that also includes the appropriate hardware drivers and software applications for their work environment and corporate network.
But the software giant started telling companies last year that the practice, known as reimaging, violated their licensing agreements. Microsoft's solution: Pay twice for Windows.
The charges had applied to companies subscribing to Microsoft's Open, Select and Enterprise volume-licensing plans, although it had little effect on Enterprise subscribers. Because companies typically used software media supplied with the plans to reimage their PCs, Microsoft argued this technically violated the license. While the copies of Windows supplied with the PC and volume program might be identical, they were separate licenses: one from the computer maker and the other from Microsoft.
"Reimaging is relatively standard in the industry and every single customer has a custom image of some type," said Mark Romanowski, a senior vice president with New York-based technology consultant AMC. "For somebody to say 'pay them twice because I have to reimage,' that's nuts."
Stiff customer resistance to the licensing policy compelled Microsoft to back down to a degree, but many small- and medium-size businesses still had to pay twice for Windows if they reimaged their PCs.
In the first revision made in September 2000, Microsoft agreed to let Select customers reimage without paying a second time but did not extend the privilege to Open customers, which typically are small- or medium-size businesses.
The most recent licensing change, announced Oct. 1, frees Open subscribers from paying twice when reimaging but carries a stiff restriction for those interested in Windows XP. Microsoft requires these customers to use XP's controversial product activation feature during installation, making reimaging a very difficult process.
In fact, Gartner recommends companies regularly reimaging and subscribing to the Open plan move up to Select, where product activation is not necessary. Select and Enterprise subscribers get the software media direct from Microsoft without product activation enabled, whereas Open customers typically pick up their media and licenses through third parties, such as computer wholesalers and dealers.
Microsoft introduced product activation with Office XP and extended it to Windows XP, in part to help fight software piracy. The feature requires the user to contact Microsoft, either over the Internet or by calling a representative, to activate the software. This process locks Windows XP to the hardware configuration.
But the point of reimaging is to get new systems up and running quickly, configured correctly for the corporate network. Technology managers can install the operating system and other software over the network to multiple PCs. Product activation would require entering a code during installing and contacting Microsoft later on, slowing the process.
"Microsoft gave you the rights but just not the logistical ability to do it," said Gartner analyst Michael Silver.
But AMC's Romanowski defended Microsoft's restriction, reasoning that the prevalence of software piracy among smaller businesses warrants product activation.
"The gray-market business affecting Microsoft is staggering," he said. "The focus for the Open guys and product activation is more for the consumer-type...model, where (because of piracy) you have more gray-marketed copies.
An important lesson
Microsoft's concession on reimaging comes at a tumultuous time, as the company assesses the impact of broader, more controversial licensing changes, also introduced Oct. 1.
The company did away with version upgrades, which was the most popular way for many Microsoft customers to buy new copies of Microsoft software. The licensing option also let companies choose when they wanted to upgrade.
Microsoft replaced that option with a new program, Software Assurance, which essentially is a two-year maintenance program companies pay for annually. Software Assurance guarantees a more steady revenue stream for Microsoft at a time many companies are dragging out the period between upgrades as much as three or four years.
A recent survey by market researcher Giga Information Group and Windows NT/2000 integrator Sunbelt Software found that 36.4 percent of technology managers polled upgrade every three years and 26.2 every five years. Nearly 19 percent upgrade every six years.
About 80 percent of those polled in the survey also said they expected their software costs to rise as a result of the Software Assurance program. MacDonald said that result is consistent with Gartner's estimates, which also projects many companies facing hefty price increases--in some cases as much as 107 percent.
But if Microsoft's backing down on reimaging is any indication, there could be relief on the licensing changes if enough companies complain about them, McDonald said.
"If enough people push back, just like this reimaging issue, Microsoft will change the policy," he said. "Microsoft's worst fear is that too many people will say that Software Assurance cost too much. 'I don't want to spend more, so I'm going to upgrade every five years and thus reduce my overall expenses.' If they did that, they can hurt Microsoft."
But several technology managers requesting anonymity said Microsoft has made resisting the move to Software Assurance difficult. Software license violations, especially inadvertent ones, are common enough that customers hesitate to get on Microsoft's bad side.
"They threatened to audit us, and we just didn't know for sure what we had on our networks, so we gave a hell of a lot more ground in negotiating new licensing contracts than we wanted," said one technology manager.
Giga analyst Laura DiDio said that 90 percent of the customers she talks to of all sizes have some problem with unlicensed software--most of it inadvertent--and 40 percent have serious problems.
Customers that want to stand up to Microsoft and demand more during licensing negotiations have to work from a position of strength.
"It's a real high-stakes poker game," DiDio said. "The only way that customers win is if they determine what their true costs are, eliminate their noncompliance issues and ask for more things."