MS Licenses Lapse—What's Next?

By David F. Carr Print this article Print

Under its new "Software Assurance" plan, Microsoft has changed the rules for bulk software upgrades. Now, tech managers are deciding how to respond—including some who are simply refusing to participate.

If you've grown used to the regular, discounted, bulk software upgrades that were available as part of your Microsoft contract, pay attention: The party's over.

As of July 31, Microsoft has changed the rules, and now tech managers everywhere are scrambling to come up with ways either to use the new mandate to pay licensing fees annually to their advantage or at very least cut their losses. Some are even taking a flyer—screwing up their courage and holding off for now, refusing to commit to future releases of Microsoft products.

Under the new rules, companies that plan to regularly upgrade their Microsoft software are supposed to sign up for a new "Software Assurance" plan, under which they pay an annual fee toward future upgrades. Chart of MS

Compared to paying full price, the Software Assurance plan is supposed to save you money if you plan to upgrade more often than every three-and-a-half years for desktop products or four years for server products. The Software Assurance fee is equivalent to 29 percent of the license cost for desktop products and operating systems or 25 percent for server software. Software Assurance is an add-on to the most popular volume licensing programs—Open (which starts at five licenses) and Select (which starts at 250)—and is built into the pricing for the more comprehensive Enterprise Agreement business contracts.

Those who snub this plan are faced with paying the full price of a new license every time they upgrade a Microsoft product.

For example, suppose your company has a volume discount that allows it to pay $375 per copy for new Office XP licenses. In the past, you could have gotten an upgrade from Office 97 for a fraction of that price because Microsoft would allow you to trade in the old license.

But now Microsoft would ask you to pay the full $375. If you don't want to pay full price again for the next upgrade, you also need to start paying $109 per year for Software Assurance. Total cost after one year: $484. After two years: $593.

And there's no "skipping" of generations of software, a practice that information technology managers in the past used to reduce costs.

Microsoft has been fending off complaints since it unveiled Software Assurance as part of its new Licensing 6.0 plans in May 2001. Customers gripe that they're being asked for more money just when they can least afford it.

While defending its new licensing options, Microsoft concedes that it initially did a poor job of explaining them, says Rebecca LaBrunerie, product manager for licensing and pricing.

The company twice postponed the implementation deadline, and now argues that sales show customers ultimately quit grumbling and write checks. Microsoft says that in the quarter ended June 30, it pulled in $7.7 billion worth of payments toward future deliveries of software and services, an increase of nearly $1.9 billion over the "unearned revenue" it reported in the same quarter of 2001.

Still, there are Microsoft customers refusing to buy into the new scheme.

"We're not going to do it," says Harry Roberts, CIO of Boscov's, a $1-billion private retailer based in Pennsylvania. Boscov's was already moving toward migrating some of its systems to Linux when Microsoft announced its new licensing plans, but Roberts says his cost analysis of Microsoft's new terms prompted him to accelerate those plans.

"Microsoft's new policies have made the ROI (return on investment) on the Linux migration a very compelling argument," he says. "I'm not anti-Microsoft. I'm just looking for ways to reduce my budget."

Roberts says his IT staff is also experimenting with "Windows-free desktops" running Linux and StarOffice, a configuration he believes may eventually replace some of the 2,500 Windows PCs he currently supports. If so, it will be because of both the licensing cost increase and support costs. "The idea that we would have to pay a 30 percent maintenance fee, combined with the prospect of having to touch every PC to install those upgrades, doesn't thrill me at all," he says.

By analysts' reckoning, all of Microsoft's new pricing options wind up costing most customers more. Software Assurance is supposedly designed to save money for customers who upgrade Microsoft Office every two years, for instance, but analysts for the Gartner Group consulting firm says most companies are on closer to a four-year cycle—and they will pay 68 percent to 107 percent more because of the elimination of upgrade discounts.

This article was originally published on 2002-07-31
David F. Carr David F. Carr is the Technology Editor for Baseline Magazine, a Ziff Davis publication focused on information technology and its management, with an emphasis on measurable, bottom-line results. He wrote two of Baseline's cover stories focused on the role of technology in disaster recovery, one focused on the response to the tsunami in Indonesia and another on the City of New Orleans after Hurricane Katrina.David has been the author or co-author of many Baseline Case Dissections on corporate technology successes and failures (such as the role of Kmart's inept supply chain implementation in its decline versus Wal-Mart or the successful use of technology to create new market opportunities for office furniture maker Herman Miller). He has also written about the FAA's halting attempts to modernize air traffic control, and in 2003 he traveled to Sierra Leone and Liberia to report on the role of technology in United Nations peacekeeping.David joined Baseline prior to the launch of the magazine in 2001 and helped define popular elements of the magazine such as Gotcha!, which offers cautionary tales about technology pitfalls and how to avoid them.
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