Microsoft licensing deals confuse customers, study says

Market researcher Gartner has issued a report that says confusing and ornate contractual terms in Microsoft's licensing agreements are forcing many corporate customers to buy two copies of Windows 2000 for the same computer or to invest in additional upgrade packages.

"Clients are calling us and saying, 'Microsoft is insisting we buy upgrades for Windows versions we already got with the machines,'" Gartner analyst Neil MacDonald said. Six Gartner clients have complained about the practice during the past few weeks, he added.

Not so, says Microsoft, which argues that its customers and Gartner misunderstand the rights granted by its software licenses.

Regardless of the philosophical aspects of the debate, one thing is certain: Unless businesses buying Windows on new PCs take the right precautions, they could be compelled to pay twice for the operating system.

The wrinkle occurs because of a discrepancy between how corporate customers acquire their software from Microsoft and how they buy their computers. A number of businesses buy software from Microsoft through the company's "Select" licensing program. These companies also invariably buy computers that come preloaded with Microsoft software.

For years, customers have used programs such as Symantec's Norton Ghost to delete the software that came with the computer and install their own "software image" purchased via the licensing agreement. The software image is the bundle of software, including applications and the operating system, that resides on each corporate computer. Usually, the software image is burned in after the customer buys the computer.

Because they are using only one copy of Windows, and the two copies are virtually identical, customers have long assumed they are obligated to buy one license, Gartner says.

By contrast, Microsoft is telling customers it's not that simple. The software that comes on their computers and the software that is part of their software image are covered by separate license contracts. Although they might be identical technically, customers cannot legally replace one copy for another without incurring consequences.

If they want to replace the software that comes on the computer with their software image, they have to buy all of the software twice. Wiping off the software on the computer also voids any obligation on the part of the PC manufacturer to provide technical support. Technical support can be had from Microsoft, but at a cost of $375 per incident, according to Gartner.

Customers can avoid duplicate purchases by buying their software completely through the computer manufacturer and having the manufacturer install the software image. Unfortunately, that adds $25 to $35 per computer, Gartner says.

The scenario does not apply to all corporate customers or all buying situations, but it does affect a large population. Business customers with fewer than 10,000 employees that subscribe to Microsoft's Select licensing plan can be affected, according to Gartner.

Microsoft hotly denies this contention and says the problem occurs because the two Windows versions--the one that came with the PC and the one added later--cannot be considered the same.

"The first important point is that we are absolutely not trying to overcharge customers," said Noury Bernard-Hason, Microsoft's group product manager for Windows. "It's unfortunate that the analyst who wrote the memo chose to take that view. That's certainly not what we're doing."

Gartner laid out a typical scenario: A corporation purchases 5,000 PCs from Hewlett-Packard with Windows 2000 installed. But the company puts its own custom software on the systems using Select media provided by Microsoft. By Microsoft's interpretation, the customer would be required to pay an extra $117 to $157 per computer--or $585,000 to $758,000 total--for the right to install the Windows 2000 it had already paid HP for.

"Depending on how you re-image your machine, Microsoft wants to charge you twice," MacDonald said. "And they're actually using this in contract negotiations with clients"

Nothing new?
The practice of "re-imaging" PCs is a common one, including doing so using software provided by Microsoft with its Select volume-licensing program. MacDonald says that until recently, Microsoft treated that as an acceptable practice.

"This is a way to generate additional revenue," he said. "Microsoft uses changes in licensing terms and conditions to increase the amount of money organizations pay for their products, while ostensibly keeping list prices flat. This has been a consistent strategy for years, but this is just a very odd twist on that."

Microsoft argues that this has been its policy all along, and corporate customers were never allowed to use Select media to create custom software images.

"It's something we see come up from time to time in our discussions, but it's not anything new from us. There's no new emphasis from a selling standpoint on this issue here," said Bill Landefeld, Microsoft's general manager for pricing and licensing.

MacDonald said he heard the same argument from Microsoft and "went back in our email archive and found contradictory information from Microsoft that certainly, people can re-image with their Select CD. If this weren't a new issue, why would we get the phone calls to begin with?"

The problem is one of interpretation, Bernard-Hason contends. The analogy most appropriate to understanding licenses is buying an air ticket, he said.

"If you have a really low-cost discount ticket, it will get you from point A to point B, but the usage rights of that ticket would be somewhat restrictive. It may be non-transferable," he said.

At the other end are first-class tickets, "where you have as much flexibility as you want," he said. "In those analogous terms, I would characterize an OEM (PC maker) license as a discount ticket and an Enterprise Agreement (volume licensing plan) along the lines of a first-class ticket."

Said MacDonald: "They're basically making you buy two tickets, paying money where you didn't have to before." Airline seats are also limited, he noted, while Microsoft can make infinite copies of Windows.

Two major-brand PC makers contacted by CNET News.com confirmed, on condition of anonymity, that Microsoft does dictate the terms of their Windows licenses with customers.

Gartner found that Microsoft makes exceptions for its largest customers, those with more than 10,000 desktops, and cried foul that the company would compel others to pay twice for Windows.

A way out
Ultimately the onus is on corporate buyers to be aware of the situation and to take action to avoid being caught in a potential licensing quagmire, MacDonald said.

One option is to receive new PCs without any operating system and use Microsoft's Select media to create custom software images, although this could prove more costly than getting Windows from the system manufacturer. In this situation, the customer would pay only Microsoft for the cost of Windows and not the PC maker as well.

Another option is to use Windows software provided by the PC maker to create the custom software build. A third workaround is to have the PC maker load the custom software images at the factory, but this adds $25 to $35 per system.

Landefeld didn't totally disagree with Gartner's analysis.

"Almost all of what they have in their statement is correct, except for a few little things," he said. "But I would take issue with the tone of the letter and the title that 'Microsoft uses the license compliance confusion to drive new revenue.'"