Microsoft licences sold direct to build subscription model

Max Hotopf talks to Microsoft European channel supremo, Ian Kent, about the vendor's decision to sell all Enterprise licences...

Max Hotopf talks to Microsoft European channel supremo, Ian Kent, about the vendor's decision to sell all Enterprise licences direct and what it means for its partners.

Microsoft is to sell all Enterprise licenses direct in a scheme which will be launched on 1 October in Western Europe and North America. Large account resellers will be paid a small fee by the vendor.

The move follows over a year of headscratching at Microsoft. European Channel supremo Ian Kent says large accounts have been pestering Microsoft to buy direct. "Resellers will get a fee for servicing the licence. I don't think they will be too upset. Up until now, they have found it all but impossible to sell services because the entire sales process focuses on the discount." With a certain menace, he adds: "This way we will find out which large account resellers are really adding value."

There may be some validity in the reasons put forward by Kent. Certainly, when I talked to the big European software resellers about this plan a year ago, most were perfectly happy with an earlier version of the Microsoft scheme. Marc Chatel, the European chief of big software dealer Corporate Software, sees the move as allowing Corporate to focus on adding services.

But the truth is, Microsoft has to go towards direct sales as it moves its users over to the subscription licence model in which they pay a regular fee, to ensure they always have the latest version of Mr Gates' wonderful software at their fingertips.

There is simply no way such continuous subscriptions can be administered sensibly unless the sale is direct to Microsoft. The two-tier channel is a pretty stupid way of handling continuous licences. Kent says: "At the end of the year, we ring the distributor and say: 'It is time reseller X collects the licence fee from company A.' 'Ah yes,' says the distributor. 'The trouble is company A is now using reseller Y.' Or, 'we would love to help you, but reseller X is currently on credit hold.' Two-tier is a nightmare."

In fact, Microsoft has already tested the concept out in Germany. At CeBIT, it quietly launched a scheme where several hundred small to medium-sized resellers get paid a fee as software advisers every time their users buy an open subscription licence from Microsoft. Kent claims the scheme has gone down a bomb.

"The great thing is that it is users who nominate which third party receives the fee - and that tends to be the adviser that helps them to maintain their system. Often they are names we have simply never heard of. And we know these are the guys who really are supporting the users."

Selling Enterprise licences direct takes things a step further. Note that this applies to all Enterprise licences, both subscription and one-off sales.

What is the next step? Kent will not be drawn. But reseller sources say Microsoft is very, very keen to find an aggregator to offer one-stop shopping to SMEs and has been discussing it with other vendors and some of the largest distributors.

The idea should work like this. You have a single central Web site offering all the main brands of software, plus the main hardware brands. All the dealers have their own front-end to this site.

When a customer wants to buy any product, they are pointed to the dealer's front-end Web site. The order goes direct to the aggregator, who pays the dealer a fee for the work. The beauty of the scheme is that the dealer still remains in control - he can, for instance, put the prices up if he thinks users will bear it.

So far, I gather Microsoft has yet to find anyone prepared to take on the role of aggregator. You would have thought Tech Data or Ingram Micro would bite at this bait, but apparently they are disinclined to invest at the moment. I wonder why?

Of course, behind all this there is a bigger question. Will users be prepared to pay for Microsoft software on a continuous basis? My personal opinion is they would rather put their heads through their screens. For every technophile eager to get to grips with the latest feature-rich software, there are five users who would rather not go through the pain and expense of upgrading to the latest version.

Don't mention the A word
Oh, while I am on the subject, I would like you to please note that what Microsoft is NOT, repeat NOT, doing is setting up agents, where the salesman is paid a fee for introducing new business to a vendor.

"If you say what we are doing is the agency model, I will sue you," Kent informs me.

For instance, the German software advisers in the pilot scheme are being paid specifically for their work administering the software licence and ensuring the user remains compliant NOT, repeat NOT, for introducing business to Microsoft. Perish the thought, Ian.

To understand why this would never, never do, we have to thank the dear old European Commission. You know how the EU always worries about the poor and deprived - Greek tobacco farmers, the motor car industry, European MPs and the like? Well, a cause very close to the EU's heart is commission-only salespeople - those nice folk who flog life insurance and double glazing. EU law has been drawn up in such a way as to give such agents more or less the same rights as employees. In doing so, it makes the agency model - where you are paid a fee rather than a commission - all but unworkable in Europe.

Greg Spierkel, European vice president at Ingram Micro, informs me this is the main reason why agency agreements have never taken off over here: "Vendors are very interested in agency and people like Cisco are turning to it in the States. And I don't think the agency model is about driving down margins for the channel - rather the reverse. Vendors know if they use the agent model they can reward partners for value-add. But it is very hard to implement anything like this in Europe."

For instance, when Ingram introduced a scheme which paid a fee to dealers selling user finance on its behalf, it had to make it very clear in the small print that they were being paid for their services, not to introduce new business.

Landis and Azlan escape the two-tier trap
It is fascinating to see how big networking/telecom distributors have transformed themselves into service businesses. Did you know Azlan now has nearly 200 classrooms across Europe? Or that only 500 of the 3,500 strong workforce at Landis are actually involved in two-tier distribution?

In fact, the two big pan-Europeans have followed different routes. Azlan remains closer to the traditional two-tier distribution model, but has built a huge training arm. Meanwhile, two of the three divisions at Landis are now almost entirely single tier, with its public networks division selling direct to telcos and its business networks/telecoms arm also selling mainly direct to largish accounts.

These moves were behind the big increase in profits enjoyed by both companies in the first half. It is interesting to contrast this with the big IT broadliners, such as Tech Data and Ingram Micro. They are still trapped in two-tier distribution and have struggled to build up serious service revenue. Of course, Ingram and Tech Data are both increasingly invoicing and drop-shipping products for resellers. But even in Benelux and Nordics, this remains relatively small beer.

I am producing a study for management consultancy VIA comparing distribution in IT to the channel in pharmaceuticals, chemicals and building supplies. What immediately springs out is that IT is one of the very few industries where two-tier distribution is the norm. And a very tough model it is too!

Dutch pay monthly desktop fee
The idea of users paying a monthly fee for every desktop PC, software and surrounding services is a nice one. Unfortunately, persuading users to move to the model is difficult. This is partly because people don't understand it and partly because the fee tends to look high compared to the price of a PC as it incorporates a lot of the hidden costs of ownership.

But Cees De La Haye, an entrepreneur with fingers in many Dutch IT pies, tells me that at least one Dutch reseller has cracked it. "Reliance has around 30 to 40 small and mid-sized companies which pay a monthly fee for every desktop," he says. "It works well, but of course the user cannot add extra software as and when they want to. Reliance gets to choose for them." He says the model is based on traditional PCs: "It has nothing to do with ASPs."

He adds an interesting point. "Resellers which simply install networking infrastructure may be working with more complex, higher margin product, but they don't get anything like as good an idea of what their customers are really doing with their businesses as those selling plain old desktops."

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