Microsoft licensing: How does it work?

Microsoft revamped its licensing programs on May 10, 2001, and as a result, changed the way the vast majority of companies and organizations acquire Microsoft software and upgrades. Here's a primer:

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The old program: Previously, companies bought software licenses for each desktop and then picked up upgrades on an as-needed basis. Software upgrades cost about 59 percent to 72 percent of the original license. Typically, customers upgraded operating systems or applications every three to four years.

Software Assurance: Under the new plan, which is available to participants of Open and Select volume licensing programs, companies pay an annual fee that gives them the right to upgrade each desktop for a specified number of years, usually two to three. The fee is 29 percent of the initial license for desktop software and 25 percent for server software.

The rub: Software Assurance is not cheap. Assuming Windows XP costs $100, companies will pay $87 per desktop after three years for the right to upgrade ($29 x three years). By contrast, companies may have paid nothing under the old program if no upgrades were released or if companies decided not to upgrade. Because many companies upgrade only every other version, the no-cost scenario would be common.

Enterprise Agreements: The most encompassing of Microsoft's licensing programs, these are negotiated directly between large companies and Microsoft. Like Software Assurance, fees are paid annually.

Subscriptions: Microsoft also offers a subscription option where Enterprise Agreement participants can pay a single, annual per-desktop fee for their software needs. The number of desktops can be adjusted up or down more easily than with other programs. If canceled, the company doesn't get to keep any of the software. Other programs, including Software Assurance, offer a perpetual license that doesn't expire.

Direct Buying: Microsoft is also increasing the pool of companies that buy software directly from the company. Along with the licensing changes, Microsoft now allows companies with 250 desktops or more to buy software directly from Microsoft.