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Microsoft: Are you committed?

Corporate tech managers could pay more for their next software upgrades if they fail to sign up for the software giant's controversial licensing plan, analysts warn.

Market researcher Gartner on Tuesday again warned corporate technology managers that they could pay more for their next Microsoft software upgrades if they fail to sign up for a controversial licensing plan before a July 31 deadline.

Microsoft introduced its Licensing 6 plan one year ago this month. The plan includes a controversial new program known as Software Assurance. Under the program, rather than simply being able to upgrade their software when they want to--and when their budgets allow--companies would need to commit to buying operating-system and application upgrades ahead of time through an annual fee.

The software titan also did away with the most common way of upgrading software, known as Licensing 5, raising fees anywhere from 33 percent to 107 percent, according to Gartner.

With the July 31 deadline for signing up for the new program quickly approaching and as many as two-thirds of companies not on board, Gartner warned Microsoft customers to join the program or take advantage of a provision from Licensing 5 if they want to avoid paying a hefty price for their next upgrades.

Before companies qualify for Software Assurance, they must be on what Microsoft considers is the current version of the product. In the case of Office or Windows, that is either version 2000 or XP. Companies on older software, such as Office 97 or Windows NT, must sign up for two years of Upgrade Advantage. Like Software Assurance, Upgrade Advantage is an annuity program, where companies pay annually a percentage of the software's full price for the right to upgrade. Upgrade Advantage disappears after the deadline, and only the XP versions of Office or Windows would be considered current.

"July 31 is the last day to enroll your existing licenses in one of those two programs," said Gartner analyst Alvin Park. "If you don't do it by that date, it won't matter if you're current or not. You have to make the decision between now and then to enroll your existing licenses that are current into Software Assurance and those that are not into Upgrade Advantage. If you do neither of those, you've made the decision it will be more cost-effective to throw those licenses away and buy new ones at a later date." Primer
Licensing: How does it work?

There have been many changes
to Microsoft's software licensing
programs. Make sense of it here.

For some companies, skipping the new licensing program makes sense. Gartner and Giga Information Group estimate the majority of customers don't upgrade more often than every other version, or about every three to four years. Many companies taking this long would find it cheaper to pay full price for their next upgrade rather than signing up for a subscription-like service where they pay annually for the right to upgrade.

Microsoft estimates the break-even point is three-and-a-half years.

"Customers could pay 45 percent more if they don't take advantage of this upgrade or Software Assurance before July 31, if they're planning on upgrading their products in the next 12 to 24 months," Park said.

Microsoft sells licenses in volume under three programs: Open, Select and Enterprise Agreements. Typically the largest businesses sign up for an Enterprise Agreement, which is a long-standing Microsoft annuity program largely unaffected by the changes introduced under Licensing 6. Microsoft sells about 40 percent of its software through volume licensing programs, according to the company.

Under Licensing 5, Open and Select customers could buy version upgrades--similar to what consumers can do today in stores--when they needed them. The upgrades cost anywhere from 59 percent to 72 percent of the full price. When Licensing 6 goes into effect on August 1, those companies not covered by Upgrade Advantage or signed-up for Software Assurance would no longer be able to upgrade existing licenses for any discount.

In an April report on Licensing 6, Gartner concluded many companies felt Microsoft was forcing them to adopt the new annuity program, whether they wanted to or not.

So far, about a third of volume licensing customers have decided to skip the new program, according to Giga. Both Giga and Gartner estimate about two-thirds of companies have yet to act on Licensing 6.

The furor over the program has generated renewed interest in alternatives to Microsoft's cash cow, Office, which accounted for about a third of the company's revenue during its fiscal 2002 third quarter, ended March 31. Gartner estimates Office market share could drop by about 10 percent within two years if Microsoft doesn't amend its licensing policy.

Microsoft is well aware of the controversy and confusion over the Licensing 6 and the implementation of the Software Assurance annuity program.

"We have a $10 million education campaign worldwide going on," said Microsoft spokesman Dan Leach. "We are doing hundreds of free licensing seminars, free Web seminars, (and) free call-in licensing Q&A sessions. We are paying all the licensing analysts to do live Webcasts in June so customers can tune in and e-mail them specific questions. We are trying to make sure customers have all the information they need to make the right decision for their business."