Microsoft changes the way you pay for software

As PC sales decline in the US Microsoft is betting its long-term cash flow stability on software licensing changes - but will...

As PC sales decline in the US Microsoft is betting its long-term cash flow stability on software licensing changes - but will users buy it? Daniel Thomas reports

Last week Microsoft introduced changes to its software licensing model as a precursor to selling its software as a service rather than a product. The move is the start of a radical change in the way businesses pay for the software that runs on most desktops in the UK.

The software giant said the new subscription licences would make life easier for users, who have often complained about the onerous complexity and rigidity of Microsoft's licensing terms. But the switch is unlikely to be straightforward. Users seeking to manage the change effectively will have to consider a range of financial, technological and logistical factors, analysts say.

Meanwhile, Microsoft must manage the collapse of confidence in the US technology markets, its continuing court battles, and a 180¡ change in its business model.

Currently, large companies purchase software from Microsoft on a per-user basis under three-year "enterprise agreements". Once users have paid for the software it is theirs to keep. Under the new plan, effective fromOctober, companies would continue to contract these agreements for three years, but at the end of the period would either have to pay again, or stop using the software. The change would move Microsoft software buyers from a "perpetual" licence to one that is fixed for a certain period of time.

Microsoft said it will not force companies to move to a subscription model. "I fully expect that we will still offer perpetual licences for the foreseeable future," said Duncan Reid, Microsoft product services group manager, although he would not give an exact timescale. "However, we expect businesses to see the advantages of a subscription model," he added."

Microsoft has been offering the subscription model to its enterprise customers in Europe for some time. According to Reid, 1,000 have already signed up. Microsoft expects that about 50% of enterprise users - 40% of its customer base - will sign up for the new model.

Don Young an analyst with UBS Warburg said a number of his company's corporate clients had confirmed that Microsoft was proposing new enterprise agreements that provided a limited three-year software licence. In some cases Microsoft was even buying back existing perpetual licences, he said.

Microsoft's move is a fundamental shift in its financial model, said Young. Rather than revenues being driven by PC shipments - which have fallen as a result of the US-led economic slowdown - PC software revenues will be driven more by changes in the installed base of PCs. As a result, revenues for PC clients, such as Windows and Office, will become stable and more long-lived, said Young.

"It is not surprising that Microsoft is doing this as it needs more revenue per customer to maintain its profits," said Simon Moores, chairman of The Research Group.

Microsoft is keen to encourage users to upgrade their software as roll outs of Windows 2000, for example, have been slower than anticipated. Reid said the licensing model changes should smooth out Microsoft's revenue. "The subscription offering is cost-effective in the short-term through attractive pricing models," Reid said. But he admitted that over a period of five years the perpetual licence user would be better off. Microsoft admits that 20% of users with longer upgrade cycles could lose by shifting to the new model.

"These days companies do not take upgrades lightly. They have generally taken a cautious approach because of problems with bugs," said Bob Griffith, general secretary of the Society of IT Managers.

Small businesses, manufacturing companies, and public sector organisations could end up paying more, said Jessica Figueras, an analyst with Ovum. But companies should consider moving to the subscription model if they would rather account for software as an operating cost than an investment, she added.

"Alternatively, companies can choose not to buy from Microsoft at all, but instead use its partners in the channel. Software costs will be lower as these resellers are competing with each other on price," said Figueras.

Moores also said the subscription model could benefit some companies. "For the end-user, a rental model can be good because it means they can always have the latest software," he said.

Griffith said Microsoft's move could encourage competition from other suppliers as well as its channel partners. "As companies will not necessarily be locked into Microsoft products, other suppliers will be able to say, 'Look at my product, it is better', which could benefit the end-user."

Reid said the licensing model changes were part of Microsoft's .net vision, which sees software as a service. He said the company would be eventually offer more frequent updates over the Internet, and the subscription model was better suited to this way of operating.

Figueras said offering services was an important move for Microsoft as part of its application service provision (ASP) strategy. She said the company would be testing the benefits of the ASP model, and advised users to see what they could get out of it.

"Companies will ask themselves, 'Do I still want the hassle of running my applications in-house?' and may well decide to move to the ASP model," said Figueras.

Microsoft's move could be a catalyst for more companies to look at outsourcing to ASPs generally, a market that has shown very little growth, despite the hype, she added.

Although the ASP model has been heavily promoted by IT suppliers, take-up has so far been slow. business/licensing/

Microsoft licensing changes

Purchasing software licences through Microsoft volume licensing programmes is different from purchasing packaged software licences. The company is purchasing the software licence only, which provides the rights to run a Microsoft software product. It contains no media, user guides, or product support.

At the moment, companies with 500 or more desktops (a ceiling that will soon change to 250) enter into an "enterprise agreement" with Microsoft. The user company pays in equal installments over a three-year period for the right to run a Microsoft software product. Once the product is paid for, the company has the perpetual right to continue running the software.

On 1 October, Microsoft will introduce a subscription licence option for enterprise agreements. Customers will "rent" Microsoft software for a fixed period of time and a fixed fee. At the end of the fixed period, companies can either continue to pay for the software or stop using it.

Microsoft will introduce a software assurance offering, which can be acquired for licences for individual machines or all of an organisation's PCs and servers. This provides the rights to upgrade to the latest versions of products released during the term of the agreement.

The company will also introduce new online management tools, designed to allow licensing customers to track and manage their licence acquisitions more easily via the Internet.

In addition, Microsoft will introduce an integrated enrolment contract that will allow customers to acquire their licensing and Microsoft product needs in a single transaction.

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