Microsoft's licence to bill

Microsoft's Software Assurance licensing scheme has been the cause of much complaint in the past few months. Danny Bradbury...

Microsoft's Software Assurance licensing scheme has been the cause of much complaint in the past few months. Danny Bradbury explains the steps that customers should take to protect themselves.

Microsoft has not been the most popular company in the past few months. For those still unaware, the software giant has been revamping its licensing scheme to bring it more in line with its "software as service" strategy. The release of its .net Web services framework, along with other online services such as Windows Update and Windows Activation, herald a larger change in the company's thinking. Now it is offering customers the chance to update their software regularly online using a licensing scheme called Software Assurance.

The system, which is mandatory in some Microsoft licensing schemes, is designed to make things easier for customers, but there is a catch: it replaces Microsoft's old licence upgrade scheme altogether, and both Microsoft executives and resellers alike admit that, in some cases, customers that prefer to upgrade their software less frequently may end up paying more under the new regime. The cut-off date for the transition period between the old and new licensing regimes is 31 July. After this point, if you are not enrolled in a Software Assurance licence, you will have to buy a full licence if you want to upgrade.

Microsoft's old upgrade licensing scheme consisted of a variety of upgrade options:
  • Version upgrades gave users the chance to upgrade from one version of a product to the next
  • Competitive upgrades enabled users to upgrade from a competing product to a Microsoft one
  • Product upgrades, while similar to a version upgrade, gave users the right to upgrade from one product to a different but related piece of software. An upgrade from Windows 98 to Windows XP Pro would be one example
  • Language upgrades enabled end-users to upgrade from one language to another in the same product and version
  • Upgrade Advantage customers could upgrade to the latest version of a product over a two-year period.
Under the new regime, language, product and competitive upgrades have been eliminated in volume licences. Version upgrades have been almost completely eradicated under volume deals, apart from desktop operating system upgrades, where Microsoft requires volume licensing customers to buy full operating systems through OEMs. The Upgrade Advantage option will disappear on 31 July.

Customers using Windows 95, 98 or ME on the desktop will need to upgrade to Windows 2000 Professional before taking advantage of the Software Assurance licence.

The two upgrade schemes currently available are Upgrade Advantage (but only until 31 July) and Software Assurance. As the only volume licensing upgrade option, other than desktop OS version upgrades, available after 31 July, Software Assurance deserves our full attention. Software Assurance runs for the duration of the licence that you purchase it with and entitles you to software upgrades for that period. If you already own an appropriate licence, you can buy Software Assurance for it.

Upgrade Advantage is a means for customers with non-current versions of Microsoft software to bring themselves up to date. Like Software Assurance, it also gives you the right to upgrade your software with new versions as they become available, for the duration of your agreement. There has been a 5% discount on Upgrade Advantage, but only until the end of June. This was Microsoft's attempt to generate new upgrade revenue before the end of its fiscal year. By the time you read this, the discount will probably no longer be available.

The Microsoft licensing landscape now consists of two main types of licence - perpetual and non-perpetual - with various categories of licence in each. Perpetual licences give customers the right to use the software forever, after the licence payment period expires. Non-perpetual licences are more subscription-based, requiring Microsoft to continue renewing their software when the licence payment period expires.

In the Perpetual track, volume licence agreements (under which licences can be purchased) break down into three main options:

Open Licence agreement
The Open Licence targets smaller companies with a minimum of five Microsoft licences. The company explains that while all payments are made up front in an Open Licence arrangement, companies nevertheless get a two-year licence period where they can buy additional software licences at the same discount rates that they get with the initial order. Software Assurance can be purchased as an optional extra with this licence.

Select Licence agreement
The Select Licence is designed for companies with a minimum of 250 desktops, and represents a three-year commitment. The old Select agreement version 5.1 is still available until 31 July, and the new Select 6.0 agreement is already available. Under the new agreement, customers forecast the number of software "points" they will use over three years. An Office XP Professional or Windows XP Professional upgrade represents two points, for example. The licensing pricing reflects the software volume forecasted by the customer, and it is reviewed during each year of the contract so that pricing can be adjusted up or down, depending on whether the customer has reached its targets or not. There are some significant differences between the old and new versions of Select, according to a US-based document on Microsoft's Web site.

In general, the new licence ties you in for longer (three years as opposed to two). On the other hand, you can renew the Select 6.0 licence for either one or three years, compared to a two-year-only extension option under Select 5.1. Software Assurance can be purchased as an optional extra with this licence. The Select agreement offers four different volume-based discount levels. It gives you the chance to amortise your licence cost over the three-year period if you purchase an optional Software Assurance upgrade licence with it.

Enterprise Agreement
The Enterprise Agreement is also aimed at a 250-desktop minimum, but is designed for companies that want to standardise on Microsoft software. They install software licences as needed from a CD-Rom update kit during the three-year licence period, and report them to their large account reseller. Software Assurance is built into this licence. Pricing levels in Enterprise Agreement 6.0 are different to those in Enterprise Agreement 5.0, comprising four volume levels:
  • A: 250 to 2,399 PCs
  • B: 2,400 to 5,999 PCs
  • C: 6,000 to 14,999 PCs
  • D: 15,000+ PCs
The non-perpetual track excludes the Select agreement. Instead, it consists of subscription versions of the Open Licence agreement and Enterprise Agreements. The Enterprise Subscription Agreement provides a 15% discount on the perpetual Enterprise Agreement, and if you buy an Enterprise Agreement comprising licences in the three product areas (Windows OS upgrade, Office Professional, and Core Client Access licences for products such as SQL Server and Exchange), you get a 15% discount on your non-subscription Exchange agreement, too.

What does all this mean?
The scenarios are long and varied, but there are some basic options. First, if you are using non-current editions of Microsoft software (and by this it means software earlier than the last-but-one version), you are a likely candidate for the Upgrade Advantage package. This will give you an upgrade for your older products and get you on track for future upgrades. People with current products should consider buying an appropriate licence with Software Assurance if they are likely to upgrade more than once every three years. Software Assurance costs 29% of the full licence cost per year for desktops, 25% for servers.

This means that if you purchase Software Assurance for desktop products before 31 July for, say, three years, then you will pay 78% of the cost of a licence for the privilege of staying current with your software every three years. If you wait until after 31 July, you will pay the cost of a full licence, plus the 29% per year Software Assurance cost if you want to stay current.

Microsoft's licensing manager Sue Page argues that it is not possible to provide scenarios in pounds, shillings and pence because Microsoft does not control pricing directly, and because the variables are so complex. So we went to Wstore, a Microsoft reseller that like most others has been trying to educate its user base about the best course of action. It provided the following scenario:

A customer is using Office 97 and NT 4 server, and its licence will be based on Select level A licensing. John Gorton, software business manager at WStore, explains that it is not possible to purchase Upgrade Advantage under Select 6.0 - only under Select 5.1, which lasts for two years. Consequently, the company's upgrade option before the 31 July deadline will use the Select 5.1 licence, which runs for two years, and which involves a commitment to purchase between 1,000 to 8,000 points across that period for the A band, which is the minimum volume band. All prices given are on a per-licence basis.

Before 31 July
Before 31 July, to upgrade to Office XP the customer would use the Upgrade Advantage option. This costs £135.30, and it covers the company for two years. Upgrading from NT 4 server to Windows 2000 Server would cost £339.23

After 31 July
After 31 July (at which point Select licensees have to use Select 6.0), purchasing a licence only for the latest edition of Office will cost £268.98. Buying a licence only for the Windows 2000 Server will cost £521.82. Purchasing a desktop licence with Software Assurance will cost £502.89 in total. The Software Assurance part of that costs £78.01 per year.

Buying a server licence and Software Assurance will cost £913.09. The Software Assurance component of that would cost £130.46 per year.

At the end of the agreement period, the company can purchase Software Assurance renewal under a new Select 6.0 agreement lasting three years. Assuming things do not change between now and then, it will have to pay 29% of the cost of a full desktop licence per year, or 25% of a full server licence. Again, under current pricing, that works out to be £78.01 per year for the Office product and £130.46 per year for the server product. But all Software Assurance purchases under Select agreements are optional.

Under the old upgrade regime, under a Select 5.0 agreement, the customer could have bought a version upgrade. Office Standard version upgrade (a one-time upgrade) would have cost £129.83. The server upgrade would have cost £260.91.

Clearly, the new licensing scheme favours those companies that upgrade their software on a regular basis. Page admits that some users will be worse off, but argues that the majority will come out roughly even, or will benefit from the deal. To those that will lose out, she says, "Look at your business model and how valuable Microsoft software is to your business. If we are doing a good job, then that is going to be beneficial, regardless of what is happening with licensing."

Not so, according to industry leaders. Peter Monk, an industry expert on Microsoft licensing who has worked with several clients on the issue, says that there are some very unhappy people in Microsoft UK's customer base. US customers mostly swallowed the change to the licensing rules without complaining, but that is because they are generally less conservative than UK users. He says upgrade cycles here are longer because customers do not want the new features as badly as their counterparts across the Atlantic. Paradoxically, it could end up having a negative effect on Microsoft's revenues if conservative UK customers do what he thinks they will.

"If you know that within the next three years you will be wanting the XP version, the arithmetic is that it is better to buy the Upgrade Advantage or Software Assurance now rather than waiting and paying the full price for the next version," says Monk.

For example, if like many users you want to upgrade as infrequently as possible but you would like to upgrade just once this year, you could buy Software Assurance or Upgrade Advantage now under your old Select or Open Licence to get the latest software versions. Then, when your licence expires you will be able to go on using that current version and purchase a new licence years down the line. You will still have to face that problem eventually, but you will be able to start putting budget aside for it now, and you will not be forced to continually upgrade your applications.

Such conservatism is likely to be popular as disgruntled customers refuse to swallow the Software Assurance scheme, says Peter Bradley, an honorary member on the management board of the Infrastructure Forum, a representative body of blue-chip IT users in the UK. As you would expect, Microsoft is relying heavily on its resellers to educate customers and get them on the new upgrade track, and Bradley says that in some cases customers may feel panicked into upgrade early.

In reality, for a lot of firms there is no need to upgrade early. "People have just upgraded and they are on something reasonably current, and now they will wait and see what happens down the track in a few years," explains Bradley, adding that many customers feel that upgrades are not only costly but too difficult to manage. With the recent raft of security alerts over new versions of Microsoft products, such sentiments are hardly surprising.

The other option is to move away from Microsoft altogether, but while Page estimates that 30% of customers have looked at this in earnest, she does not believe that many people will follow that route. "My view is that people buy software because it solves business problems, and if there is a better solution then people will use it," she says, sidestepping the other obvious answer, which is that compatibility is a huge issue - unless everyone moved to another set of operating systems and applications at once, any defectors from the Microsoft camp would probably run into trouble with trying to deal with business partners.

In short, no one is going to make the first move. Unless, that is, public sector organisations get irritated enough to do something about it. Bob Griffith, national secretary of the Society of Information Management (Socitm), which represents public sector IT managers, explains that although it has combined with the Office of Government Commerce and other government departments to negotiate its own licensing terms with Microsoft, it is still exploring other options.

Socitm ran an event on 3 July to explore the creation of an open desktop, which would enable Windows and non-Windows products to interoperate. "We are not calling it open source, it is just open. It is down to interoperability - we want different products to work together, so that a spreadsheet under Staroffice would work with a Windows product," says Griffith. The organisation has also negotiated licensing terms with Sun for Staroffice, which gives it yet another bargaining chip.

Monk says Microsoft has been increasing the level of audits it carries out on its customer base, but Page denies this. Whatever the case, customers should expect check-ups from Microsoft, meaning that it is time to get your house in order and make sure that you are not running any illegal copies of your software. The ramifications of flaunting Microsoft's licensing policies are not clear, but the company is very familiar with licence enforcer the Business Software Alliance (BSA). For instance, debt management firm Baines & Ernst Financial Management settled out of court with the BSA in February for the misuse of Microsoft software, saying that it lost track of its licences.

Although Microsoft's move has angered many in the user community, perhaps the most positive consequence is that it has forced users to take a long-term look at their software strategies, says Monk.

Tips on upgrading
  • Find out what Microsoft software you are running. Microsoft's software inventory analyser is a useful tool for assessing your current usage (see "useful resources" box below)
  • Assess your software and upgrade needs over the next three years. Decide whether you will need to upgrade to new versions of Microsoft software during this period. Talk to business managers to find out their plans
  • If you want to upgrade once to get to the most current versions of your applications then freeze your software versions for the next three years, look for unexpired Select 5.1 agreements. You can use these as vehicles for Software Assurance or Upgrade Advantage licences that last only for as long as the agreement itself, potentially saving you Software Assurance rental charges if you do not wish to upgrade further in the future
  • If you took out a new Select 5.1 agreement with Software Assurance, it could run for two years rather than the three years of a Select 6.0 deal
  • If you decide that you would need to upgrade multiple times over the next three years, consider buying a Software Assurance or Upgrade Advantage licence - but do it quickly, before 31 July
  • If you do not plan on upgrading your software in the next three years, you may be best off doing nothing.

Useful resources

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