Microsoft on the spot

Lindsay Clark talks to Microsoft's UK managing director Neil Holloway about the impact of the company's licensing changes

Lindsay Clark talks to Microsoft's UK managing director Neil Holloway about the impact of the company's licensing changes

Last year, corporate IT departments reacted to the announcement of a new licensing scheme from Microsoft as if a bomb had dropped.

Not long after the May announcement, user groups representing billions of pounds worth of public and private sector IT spending were backed by analysts, including Gartner and Giga Group, in the view that spending on Microsoft products for the average company would spiral upwards as a result of the changes.

The tight October deadline for introducing the new charges made it difficult for organisations to weigh up their options.

Since then Microsoft has yielded to user pressure and delayed until July the implementation of the new terms, which see an end to so-called trade-in options on perpetual licences and the introduction of subscription licensing.

While users were dismayed, Microsoft's investors were thrilled, according to Neil Holloway, managing director of Microsoft in the UK.

"Our stock was the best performing [in the IT sector] last year. The financial market should view subscription as very good news. If you look at our recent results we had a lot of recurring revenue through annuity agreements [providing a fixed income] - that is great because it is predictable revenue."

Which offers a clue to the main driver behind the changes. But, Holloway now admits, the introduction of new licences should have been handled better. "If we had done things differently I think the feedback from the customers would have been different and it is good learning for us," he said last week. "What we are trying to achieve with annuity is the right thing for customers."

The feared escalation of licensing costs led to widespread accusations that Microsoft was once again abusing its near monopoly on desktop operating systems, just as the US courts ruled it had done in bundling browser software with Windows.

But Holloway is adamant that this is not the case. He cited the example of a £50m three-year subscription deal signed with the NHS last year.

"I don't think the NHS is over a barrel, it has a choice. Every customer has a choice on whether they use Microsoft. We are saving the NHS money with this agreement and it is extremely happy.

"Why would we, in three years time, turn round and say, 'Well actually you have to pay twice as much'? You can't do that in business and we would not do that."

But contrary to Holloway's assertion, IT companies have done business like that. In the 1960s and 1970s suppliers were so few that they could squeeze revenue out of customers with onerous upgrade cycles and licensing terms. But whether Microsoft follows the same path could depend on the behaviour of its customers as much as the company itself.

Some businesses were dismally unprepared for the new terms and unprofessional as they went into negotiations with Microsoft, according to Giga Group director Laura DiDio.

She cited Giga research published last year which showed that many customers were unaware of how much they were spending with Microsoft before negotiations started. And although 80% of companies thought they would pay more under the new terms, only 40% had prepared a cost/benefit analysis of whether they would also get more value as a result.

She now recommends that users should be less quick to complain about the new licensing conditions, but should take the fight to Microsoft.

"Many companies say, 'We are just one company, how can we negotiate with Microsoft?' Well, if you go in with that attitude, you will not get far. Microsoft makes money by keeping you as a customer," DiDio said. "Be very specific and targeted. The more specific you are, the more likely you are to get a good deal from Microsoft - or any other supplier.

"Ask for free training if you need it. See if you can get on a beta program for free, or an early peek [at new products]. Ask for price-capping. It is not unheard of for customers to negotiate service level agreements [with software companies].

"[Success] depends on your company being smart. This plan is going to be a contract that will form the foundation of your relationship with Microsoft." Managing that relationship well could prove vital to a successful IT strategy.

As Holloway pointed out, Microsoft has performed well while other IT companies have struggled. It can afford to invest $5bn (£3.5bn) in research and development and spends more developing enterprise software than any other supplier, he said.

As a result, Holloway is brimming with enthusiasm for future Microsoft technology. Support for open standards such as data language XML, protocol Soap and Internet directory UDDI will allow applications to intelligently share data across a range of new transport media including GPRS, Bluetooth and 3G mobile services, he said.

New kinds of devices will also appear - combined phones and personal digital assistants, and Microsoft's favourite of the moment - the tablet PC with handwriting recognition.

Such technologies can allow businesses to interact with customers and business partners in innovative ways, Holloway claimed. He was scornful of the open source movement because of its inability to focus investment in these areas.

DiDio believes that the economic slowdown will see the emergence of a different approach from Microsoft.

"[Chief executive] Steve Balmer and [chief software architect] Bill Gates have a lot of business acumen. The changes in the industry have not escaped them," she said.

"Companies are now being a lot tighter with procurement and Microsoft has to compensate by giving better products."

Whether businesses are in a position to take advantage of those new technologies will depend whether they can forge a relationship with Microsoft that works to their advantage.

Microsoft faced a backlash from users taken by surprise
May 2001
Microsoft announces an end to enterprise agreements that result in the purchase of the software and the introduction of a new licensing regime, where users never own the software. Software Assurance can be bought, which will entitle users to upgrade to the latest products released during the agreement's term. New licensing regime to come into force in October

July 2001
Computer Weekly reports rising concern among users at the likely costs of the new licences

August/September 2001
User groups unite to campaign for changes to Microsoft's proposals and to investigate the practicalities of organisations moving to open source October 2001 Microsoft backs off and announces it is delaying the introduction of the new licensing regime until July 2002 December 2001 UK government raises concerns that licences could cost it £60m a year.

Read more on Business applications