Tech Industry

Microsoft targets defectors with discounts

The software giant plans to set up a new licensing arrangement to keep smaller businesses from turning to Linux or other open-source alternatives.

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Microsoft said it plans to offer smaller companies a more lenient licensing plan intended to stem defections to Linux or other open-source software.

The software giant on Tuesday said it will launch the new plan, called Open Value, early next year. The new program is part of Microsoft's controversial Licensing 6 volume licensing program, which was put in place this summer.

Many Microsoft customers--particularly smaller companies--have resisted Licensing 6 and its "Software Assurance" program for buying software under two- or three-year maintenance contracts. Up to two-thirds of Microsoft customers either rejected the plan or bought partial upgrades under the older Licensing 5 program, analysts say.

Gartner estimates that the program raised a majority of customer fees anywhere from 33 percent to 107 percent. After two delays, Microsoft fully enacted Licensing 6 in August.

Smaller businesses, which are the target of Open Value, make up the majority of companies which declined to sign up for the licensing plan.

"Licensing 6's penetration into the (small and medium-size business) market was not as well accepted as Microsoft would like it to have been," said Gartner analyst Alvin Park.

Under Open Value, smaller businesses can sign up for Software Assurance and spread payments out over a three-year period. This payment option could attract cash-strapped operations looking to keep current with Microsoft technology, without paying hefty upfront fees.

Analysts said the new program could help prevent small businesses from switching to competing products, such as Linux, Lindows or StarOffice.

"With Open Value, Microsoft is doing everything they can to keep small and midsize businesses, which are the most likely for further defection," said Yankee Group analyst Laura DiDio.

The software giant said its priority had originally been on larger purchasers of its products.

"We certainly hope our customers will stay on board with Microsoft products. And we recognize that our products have to provide compelling value and that (small and medium-size business) customers have their own distinct business needs," Rebecca LaBrunerie, a Microsoft licensing program manager, said in an e-mail to CNET

"Licensing 6.0 addressed primarily the needs of larger enterprises, and...we needed to circle back around to meet the needs of (small and medium-size business) customers. The Open Value payment plan is one step in that direction," said LaBrunerie.

Getting a lock on customers
Park said that under the Open Value plan, "these companies won't be able to look at alternatives. They won't be able to look at competing products."

Locking customers in is a key component of Licensing 6, analysts say. Under Microsoft's older licensing program, companies could buy software upgrades at any time. But Microsoft removed these "version upgrades" under Licensing 6, moving companies to an annuity model where they pay up front under two- or three-year upgrade contracts.

Companies signing up for the annuity program would be highly unlikely to consider alternatives during the contract period, since they have already paid in advance for upgrades, analysts said.

Still, the "pay before you buy" program met with stiff resistance from a majority of Microsoft customers.

"It looks like only...25 percent to 30 percent (of customers) went for Licensing 6," DiDio said. "You still have two thirds that didn't sign up."

Gartner came to slightly different conclusions based on discussions with hundreds of large businesses and computer dealers. The market research firm estimates that one-third of Microsoft customers refused to sign up for Licensing 6, while another third "bought upgrades on part of their licenses," Park said.

Microsoft's long-term problem is wooing smaller businesses. Those companies have the most financial incentive to seek out alternatives, particularly given recent economic woes. They can also switch technology vendors more easily than large companies, said DiDio.

"These folks are feeling pretty disenfranchised," DiDio said. "Fifty percent of the market are small and midsize businesses with under 1,500 users--many with under 1,000 users. So that's half your installed base."

Looking for alternatives
DiDio sees these smaller companies as ripe candidates for StarOffice running on Windows or even Windows replacements such as Linux and Lindows. Because of the licensing terms for these competing products, smaller companies can install the software for a fraction of what it costs to obtain Microsoft upgrades under Software Assurance.

"Take a look at their infrastructure," Didio said. "If you have a company with 1,000 PCs or 500 PCs, they're going to be in centralized office locations. It's not so difficult for those folks that do not have a huge infrastructure to rip out and replace Microsoft and switch to something else."

Analysts couldn't say how many small or medium-size businesses might take advantage of Open Value. But they noted that Microsoft has reason to be concerned about further defections.

While the software maker slowly gets Open Value going, it is offering another incentive aimed at small businesses. Until Jan. 31, the company is offering zero-percent financing for one of its Software Assurance programs targeted at small businesses.

The slow start-up for is intended to let Microsoft prepare the dealers that will be selling Open Value licenses. Allowing dealers to handle Open Value--as opposed to Microsoft itself--makes sense for two reasons, said Park: Smaller businesses tend to buy products through dealers, and Microsoft wants to give something back to keep dealers loyal to the company. With Licensing 6, Microsoft took lucrative "Enterprise Agreements" away from dealers, selling them direct instead.

"Microsoft wants to give something back to the (sales) channel, by letting them sell Open Value licenses," Park said. "They really took a lot of money out of the channel's pocket, because they got a piece of the action on Enterprise Agreements."

Park described "a companywide" component of Open Value as a "baby Enterprise Agreement." Under this option, small companies would receive a huge discounts for buying licenses in bulk rather than piece by piece.

"Microsoft would like nothing better for companies with five to 500 employees to sign up for the companywide option and get Office, Windows, client-access licenses--the whole thing," Park said.

"That's an even better way to lock people into not some, but all Microsoft products for three years," he added.