WishX Posted July 30, 2002 Share Posted July 30, 2002 Microsoft's Subscription-Software Plan Produces Grumbles By Kristi Heim July 30, 2002 http://www.newsfactor.com/perl/story/18803.html Microsoft's (Nasdaq: MSFT) push to convert business customers to a new subscription software plan by Wednesday is causing some customers to abandon its products for cheaper alternatives. Cash-strapped companies and governments are complaining about the insurance-like plan they must purchase now to avoid paying more for software upgrades in the future. For Cam Scott, client support analyst for the city of Nanaimo in British Columbia, Canada, that means paying $70,000 to Microsoft by Wednesday, or having to pay at least 30 percent more the next time he needs the latest version of Office productivity software for the city's 300 machines. That would cut a substantial chunk out of the city's annual software budget of about $100,000. "Down the road, the last pocket it hits is the taxpayer's pocket," he said. "It smacks of arrogance and greed." But many larger buyers see advantages in spreading out the cost of software over several years. The new program, called "Software Assurance," applies to customers who buy software in bulk, such as companies, governments and schools. Fundamental Shift It's part of a fundamental shift in the way Microsoft sells software and accounts for that revenue. To reach its goal of selling software by subscription, Microsoft will have to get its customers to move from one-time software purchases to leasing software through multi-year agreements. This gives Microsoft a clearer and more dependable revenue stream in the future, analysts say. Software Assurance works like an insurance policy. Companies pay a premium each year for the right to purchase future software upgrades during the policy's contract term -- usually two to three years. The annual premium is 25 percent or 29 percent of the original cost of the software program, depending on the product. Customers who don't subscribe must pay the full price of a program when they decide to upgrade, rather than benefiting from the discounts that Microsoft has offered for customers who already have an older version of the same product. Microsoft can pressure existing customers to sign up by the deadline because after that the sticker shock will be even greater, said Paul DeGroot, an analyst at Directions on Microsoft, a research firm not affiliated with the software company. Without Software Assurance, for example, upgrading a copy of Office could go from $450 to $700, DeGroot said. The price difference is pushing at least a few customers to jump ship. "A customer looking at preserving cash now can pay $76 for StarOffice or $700 for Microsoft Office," DeGroot said. "For a customer with 100 computers, that's under $10,000 vs. more than $70,000. A lot of people are going to look at it and say that's somebody's salary for a year." Testing StarOffice Scott of Nanaimo decided to test a competing product, Sun Microsystems (Nasdaq: SUNW) ' StarOffice, and so far he's pleased with the results. The city has been using Office 97 -- since then Microsoft has come out with two newer versions -- but Scott said he didn't upgrade because of compatibility issues with older files. "What we've done before is sort of upgrade by attrition," he said. "We haven't been forced into a situation where we had to relicense the whole group." Others decided to sign on. "We didn't have too many choices but to go with the new licensing program," said John Laurenza, director of IT corporate support for Weblink Wireless, a Dallas wireless messaging company. He said that after attending seminars where Microsoft explained the program, "We felt pretty comfortable that we knew what had changed and what we needed to do." Wednesday's deadline won't affect the majority of Microsoft customers, said UBS Warburg analyst Don Young. "It's a small minority of laggard customers who upgrade infrequently who are going to pay more. Tough luck." Young does not personally own shares; Microsoft is a client of UBS Warburg. Not for Everyone The majority of Microsoft's business customers are already on multi-year enterprise agreements, said Jeff Raikes, group vice president for productivity and business services at the company. Software Assurance isn't for everyone, said Rebecca LaBrunerie, product manager for Microsoft worldwide licensing and pricing. She said the program works best for frequent upgraders. Microsoft had a dramatic increase in deferred revenue last quarter as a result of customers switching to volume license agreements in June, Chief Financial Officer John Connors said. Connors expects that to grow to about 20 percent of the company's total revenue this fiscal year. During that time, the company will try to convert its small and mid-size customers to the program. Meanwhile, competitors are working hard to lure them away. Wins for Linux Red Hat (Nasdaq: RHAT) , a distributor of open source Linux software, sees a chance to win over customers from popular desktop applications like Office. "We're making a hard push to add desktop features because we see an opportunity now," said Mark Webbink, senior vice president and general counsel. "Our server customers are coming back to us and asking for that. That's where you will start to see a measurable opportunity for us. Microsoft has about 95 percent of the desktop market. If we capture even 4 percent, that's huge for us." In March a study of 1,400 IT executives worldwide conducted by Information Technology Intelligence and Sunbelt Software found that 41 percent of respondents said they did not have the funds to convert to the volume licensing plan by the deadline. Only 12 percent answered that they were financially prepared. Cost of Gambling The survey also found that many of Microsoft's customers are angry about the licensing changes announced last year and that 90 percent believe their licensing costs will rise. Even Microsoft agrees that the licensing plan is confusing. It extended the grace period twice over the past 14 months after customers protested that they couldn't understand the new pricing options -- much less come up with the money to enroll. Microsoft then launched a $20 million marketing campaign that included seminars, direct mailings and Web-based call-in shows to explain the plan. That still might not be enough information for some. "I believe there is no way to make a business decision about Software Assurance," DeGroot said. Because Microsoft doesn't provide roadmaps for its products more than a year in advance, "Microsoft hasn't told you what the benefits are," he said. "They've only told you what the costs are." As a result, customers have to bet whether the money they spend now for software insurance is going to be worth the upgrades Microsoft makes to the products. But in the current economy, he said, "there just aren't that many people with cash they can tie up on a gamble for two to three years." Link to comment Share on other sites More sharing options...
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