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Microsoft customers balk at license changes

The company is dramatically changing how it licenses software, driving up what customers pay for products such as Office XP or Windows 2000.

6 min read
What's the cost of little or no competition?

For some Microsoft customers, it's paying as much as 107 percent more for the software they buy in volume.

As previously reported by CNET News.com, Microsoft on Oct. 1 will dramatically change how it licenses software to its largest customers. That change will drive up what they pay for products such as Office XP or Windows 2000 between 33 percent and 107 percent, according to market researcher Gartner.

Many customers also are finding they have to buy new versions of Office even to qualify for the new licensing program. With market share of more than 90 percent in both desktop productivity applications and operating systems, Microsoft is able to charge more in a way it couldn't in a more competitive market, say analysts and the company's customers.

Some Microsoft customers--many of which are companies not even halfway through their 2001 fiscal year--are outraged with the changes, which the software giant announced in May.

Ray Bailey, information services manager at a electronic component manufacturer Bergquist Company, said he is "disappointed that Microsoft has been so aggressive in its (licensing) program. We have to pay because we have no choice. Why couldn't they give us some more time to do it gracefully?"

By eliminating certain options under the new licensing program, some technology managers contend they no longer have the choice to upgrade when they want. Instead, they feel railroaded into buying expensive maintenance contracts from Microsoft.

Bill Landefeld, Microsoft's vice president of worldwide licensing and pricing, defended the changes. "I think customers have choice. They had choice before, and they have choice going forward."

Some analysts and customers disagree."On the desktop, there really aren't alternatives," said Gartner analyst Neil MacDonald. "Microsoft knows that people don't have a choice for desktop operating systems and productivity applications."

IDC analyst Al Gillen agreed. "If there were a lot of alternative choices on the client systems, it would be much more difficult for Microsoft to implement licensing programs with such limited choices for the users," he said. "Basically, Microsoft is twisting its customers' arms, and I can't believe its customers are thrilled about this."

There are alternatives to Microsoft's Windows and Office software, including the Linux operating system and Sun Microsystems' StarOffice productivity package. But the vast majority of businesses have standardized on Microsoft's products, making migrating to a rival product difficult. "There aren't a lot of alternatives for desktop productivity," MacDonald said. "Corel (WordPerfect) is a weak competitor and so is StarOffice."

The new licensing policies, however, could lead to businesses taking a second look at alternative products. No customers contacted by CNET News.com said they planned to evaluate alternative applications.

But competition in the server software market remains healthy. For example, companies can choose Linux as an operating system, database software from IBM, or Oracle or messsaging software such as IBM's Lotus Notes as alternatives to Microsoft's products.

"Certainly, Microsoft runs the risk here at the server (level) of giving some advantage to people like Oracle and IBM," MacDonald said. "It's really too soon for Microsoft to feel secure on the server side. They have good market share, but I wouldn't say they're dominant."

Strong-arm tactics?
Bailey said the Oct. 1 deadline to switch to the new licensing plans is "way too short for our company given the economic downturn...We were never given time to budget properly. Microsoft would not sit still if one of its vendors did that to them. Why are they doing it to us?"

Other companies subscribing to Microsoft's "Open" or "Select" volume-licensing programs also complained about the change in licensing but requested anonymity.

Several recounted similar stories about Microsoft pressuring them to upgrade Office versions more frequently.

"They kept bringing up the BSA (Business Software Alliance) and insinuating about software audits," said one technology manager. "We got the message, all right: Upgrade to Office XP or else."

BSA is a trade group backed by 18 hardware and software makers. The organization, which is strongly backed by Microsoft, helps companies combat and prevent software piracy.

Some companies, unsure whether some employees might have installed illegal software on corporate PCs, decided to take no chances.

"My bosses are mad as hell about the way the whole licensing process is going," one IT manager griped. His company just paid more than $125,000 for two years of Office licenses--or about $177 per PC.

"We would certainly want to know more about" any veiled threats, said Landefeld, who said such sales tactics would not be condoned. "If that is happening, what people need to understand is that administering software is very difficult, especially for large, multinational companies."

Guernsey Research analyst Chris LeTocq said he found the strong-arm tactics surprising but read in them a serious implication.

"We have a quarter that's just about to end (on Sept. 30), and I wonder if it's getting tough for Microsoft," he said. "I wonder if what they're getting is not enough takers" on the new licensing program.

Weighing the costs
The licensing changes were unpopular from the start, because Microsoft essentially eliminated the most common and cheapest way of purchasing new software.

Rather than paying full price, many larger customers purchase software through one of two popular volume-licensing programs. Under terms ending Sept. 30, most companies could purchase upgrades either through a two-year maintenance contract called "Upgrade Advantage" or by buying one of four common version upgrades--the most popular option. Starting Oct. 1, both plans will be replaced with a new program called "Software Assurance."

But because version upgrades are being eliminated, customers no longer can choose how often they upgrade their software. They either must pay an annual fee as part of a two-year maintenance contract or pay full price for upgrades.

"Software is going to be delivered differently in the future, and we're getting ready for that," Landefeld said. "We are providing a more predictable way for people to get the greatest and latest from Microsoft."

Before participating in Software Assurance, Microsoft customers must be on the current version of the product to even qualify. In the case of Office, that would be XP, released the same month Microsoft announced the changes. Microsoft had wanted companies to make those upgrades by Oct. 1 but later extended the deadline to Feb. 28.

"Your main alternative is to pay the upgrade price more frequently now," LeTocq said. "Alternatively, you decide you're going to pay full whack somewhere down the road."

For customers who upgrade every two years, software costs would actually go down 19 percent, analysts concluded. But the majority of customers--particularly those buying Office--typically upgrade every four years.

"Microsoft claims that over 50 percent (of customers) will see no change in costs, which is not true," LeTocq said.

Said Landefeld: "There is a fine balance as we move toward delivering software as a service and having a balance that works for all customers. There are some customers that are going to upgrade more and some less, but there's a need for a fine balance...We think we're doing the right thing for our customers."

Gartner estimates that medium-sized businesses upgrading software every three years would pay anywhere from 33 percent to 77 percent more under the new plan than they did with the old. Four-year upgraders would pay 68 percent to 107 percent more.

In a scenario of 5,000 desktops, the typical company would see a licensing increase of $900,000 to $1.6 million, Gartner concluded.

"Microsoft has made it pretty clear that it expects its customers to step up to the plate and upgrade more often," Gillen said. "Microsoft is causing pain and resentment in their customer base. Their customers probably are going to have to upgrade--they don't really have a choice. There has to be an alternative for customers to switch to, and there really isn't."

That the company is squeezing customers isn't surprising given the weak PC sales climate and Microsoft's overwhelming market share, MacDonald said. Both situations make more voluntary upgrades difficult.

"Can Microsoft grow much past 92 percent market share on the desktop?" he asked. "There's no new room for growth for new customers on the desktop. In fact, it's a declining market...If you don't have enough more to offer, you're going to squeeze more out of the people using your products."

The larger problem is that Microsoft has revised its licensing policies almost every year for the last four of five years, analysts say.

"Microsoft has been using changes in licensing terms as a way to generate revenue for years," MacDonald said. "It allows Microsoft to come in under the radar screen with something not as blatant and obvious as raising the prices."

He warned Microsoft customers to expect more aggressive licensing changes in the future.

"People should expect more of this," MacDonald said. "Our guidelines to our clients are that at least for 2002, they can look at their budget for Microsoft software and add 40 percent per year compounded."