Microsoft delays deadline for new licensing program

From...

July 6, 2001
Web posted at: 4:50 p.m. EDT (2050 GMT)

By John Fontana

(IDG) -- After howls of protests and threats of platform defections from user organizations, Microsoft has pushed back the deadlines for enrollment to its new licensing program by five months so enterprises can build the cost of the program into next year's budget cycles.

The news will come as a welcome relief to IT executives who were scrambling to figure out how to pay for the new program, called Software Assurance, which will replace all of Microsoft's upgrade options.

The original Oct. 1 deadline for enrollment in Software Assurance will now be extended to February 28, 2002.

However, the move does not mean Microsoft is abandoning the new licensing model, which has been criticized as a vehicle to resuscitate flat revenues over the past year in the Redmond giant's desktop application division and provide a buffer as more applications move to the Web.

"Microsoft is saying 'we made a mistake,'" says Chris LeTocq, principal analyst with Guernsey Research. "They listened to IT executives."

Those executives were saying they could not afford the new licensing model this year.

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Some enterprises were looking at as much as a $5 million fee to get all their software in line with the program, which will still officially kick-off on Oct. 1.

Under the program, enterprises don't need to actually deploy the software, but they must have the license.

"Never in my career have I seen the customer base so angry at Microsoft," says Rob Enderle, an analyst with the Giga Information Group. "They were calling Microsoft things you wouldn't want your family to hear." Now, Enderle says, "users won't have to do anything draconian" under the pressure of Software Assurance. "There is less of a panic, but I suspect that customers won't soon forget this."

Microsoft admitted it heard IT executives loud and clear. The decision comes just a week after the company responded to industry complaints and pulled its Smart Tags feature from the upcoming version of Windows XP.

"There has been a lot of interest in Software Assurance, but customers have said they want more time to plan and budget," says Simon Hughes, program manager for worldwide licensing and pricing at Microsoft. "Our response has been to extend the transition period."

Microsoft intended to formally announce the news last Thursday, but the ruling by the U.S. Court of Appeals in the company's antitrust trial scrubbed that effort.

Under the new deadlines, Open and Select volume-licensing customers can get their non-current licenses in line with Software Assurance by purchasing Upgrade Advantage before March 1, 2002. If companies make that move before October 1, 2001, they can get up to two years additional coverage under Upgrade Advantage.

Upgrade Advantage, the upgrade option for Open and Select customers that Software Assurance replaces, gives enterprises the rights to the current version of software. That is important because users must be on current versions of Microsoft software to be eligible for Software Assurance.

For example, a user on a version of Office older than Office XP gets the rights to Office XP and up to two years of upgrade coverage and a path to move into Software Assurance.

At the end of the Upgrade Advantage cycle, however, enterprises still have to buy into Software Assurance, which is priced at 29 percent of the full-retail price of the licensed software. For example, a $368 Office license would carry nearly a $107 fee for Software Assurance.

Those same Open and Select customers can enroll their current licenses, such as Windows 2000 Professional, Office XP and .Net Enterprise Servers, for the same 29% fee in Software Assurance between October 1 and February 28, 2002. The original deadline was January 31, 2002.

In addition, Enterprise Agreement and Subscription options for customers with more than 250 PCs will be available from October 1 and include Software Assurance.

The protests over Software Assurance arose because the program and the 2001 deadline to enroll were announced after enterprises had set budgets for this year. That meant enterprises likely had to either raid existing budgets or trim workforce to enroll.

For example, enterprises contemplating an upgrade after the October 1 deadline to the recently released Office XP faced the prospect of spending as much as $300 more per user to purchase new licenses for the suite of software. Those costs were about double the fee it would cost the same user to upgrade before the October 1 deadline.

Software Assurance was announced in May and requires enterprises to maintain current licenses for software.

Critics say the program is a response to customers that have not been upgrading to new versions of software, most notably Office, and a way for Microsoft to rectify that loss in licensing revenue. Microsoft has reported nearly $7 billion in revenue in the past three quarters this year for its desktop applications division, roughly equal to the same three quarters last year. The revenue accounts for 37 percent of its business, so that means 37 percent of Microsoft revenue has not grown over the past year.

Microsoft contends the changes are being made to simplify the alphabet soup of upgrade options. The company claims that organizations that upgrade on cycles of three years or less will see a reduction or no change in licensing costs.

A study by Guernsey Research shows that enterprises on a two-year upgrade cycle will save 19 percent in licensing costs, but that enterprises on a three-year cycle will see a 40 percent increase in costs.