MESSAGE
| DATE | 2003-09-24 |
| FROM | From: "Inker, Evan"
|
| SUBJECT | Subject: [hangout] Danger Zone
|
Danger Zone
http://www.cbronline.com/magazine/56c261d7c664657f80256da6005163fb
When CEO Steve Ballmer visited Munich's Mayor this year, Microsoft was
wheeling out the big guns. On Mayor Christian Ude's table was a study
advocating that Germany's third largest city rip out Windows NT and Office
from 14,000 machines and replace it with Linux backed by IBM, for a better
return on investment (ROI).
According to SuSE Linux, who worked with IBM on the Munich contract, Ballmer
came armed with offers of extended support options and use of the unreleased
Office 2003. Ballmer's offer, however, was rejected and a $35m IT contract,
plus a major public relations coup, was handed to the open source community.
Munich's officials wanted to regain control over their IT infrastructure.
One way the city feared it might lose that control was by being forced to
upgrade its software at the behest of the incumbent supplier - Microsoft.
That fear appeared all too real with the introduction of a software upgrade
program by Microsoft last summer, which introduced a fixed-term subscription
upgrade program, Software Assurance (SA), and generated a wave of protests
among customers.
Microsoft has since spent $20m, modified support contracts and also delayed
the program's introduction in an attempt to appease users. However, while
Microsoft has struggled, competitors have prepared strategies to capture
customers rejecting Windows for both their desktops and servers. So what
went wrong?
Paying for Microsoft's business
software has never been easy. Added to the generally accepted industry
approach of a volume purchasing agreement, of which Microsoft has four, the
company also charges customers using its server software a Client Access
Licence (CAL) for access from a PC. In addition, until last summer it
operated four different upgrade programs based on different price models.
Licensing 6.0 replaced these programs - Upgrade Advantage (UA), Version
Upgrade Program (VUP), Product Upgrade Program (PUP) and Competitive Upgrade
Program (CUP) - with just one, SA. An SA contract lasts two or three years
and is charged as a percentage of the desktop and server licence price.
Rebecca LaBrunerie, product manager for Microsoft's worldwide licensing,
says Microsoft's old upgrade programs caused an administrative nightmare for
customers. When it prepared SA, Microsoft was responding to customers'
requests to make life easier, she says. "We saw enough demand that we turned
it into a program. We had a lot of customers saying, 'I can't manage and
track my products.'"
Microsoft also launched Enterprise Agreement Subscription (EAS), a
three-year contract for customers who wished to subscribe rather then
purchase their software and which automatically enrolled customers in SA.
LaBrunerie says EAS was designed for companies that wished to lease their
software in the same way they leased other business equipment, such as
photocopiers or coffee machines.
Customer insurgence
While Licensing 6.0 may have seemed rational to planners at Microsoft, it
seemed anything but logical to customers who saw the program as a means of
forcing them to upgrade to the latest versions of Windows and keep the tills
ringing at Redmond.
An April 2002 survey of CIOs, CTOs and COOs at 1,500 corporations found that
37% refused to sign up to Licensing 6.0. The survey, conducted by Sunbelt
Software and researcher Information Technology Intelligence Corp (ITIC),
found 38% of respondents threatening to investigate relevant alternatives to
Windows such as Linux, Unix, Sun Microsystems' StarOffice and Novell's
eDirectory.
The main problem was SA. According to Sunbelt and ICTC, most companies do
not upgrade every two to three years. The majority, 57%, upgrade every four
to five years, resulting in 90% claiming they would be worse off and 36%
saying they could not afford the changes.
A look at the state of Microsoft's user base lends weight to the argument
that Microsoft is forcing customers to upgrade. Office 97 today accounts for
30% of the installation base, meaning customers have ignored Office 98,
Office 2000 and XP, with Office 2003 now ready. Exchange Server 5.5,
meanwhile, accounts for up to 60% of the installation base, as customers
disregarded Exchange Server 2000.
Paul DeGroot, an analyst tracking licensing for Directions on Microsoft,
says: "At the time, the feeling [at Microsoft] was, 'Let's find a way to get
annuity from people sticking on older versions of software.'" This is a
claim that LaBrunerie refutes.
A second issue with SA is that while an SA contract may provide you with
upgrade rights to a new product when it is launched, customers have no
guarantee that Microsoft will launch a new version of a product during the
lifetime of their contract.
DeGroot says it is difficult to justify SA to a purchasing manager because
actual product is not guaranteed, meaning that an IT director is gambling on
Microsoft's roadmap. "You are betting that in the time of your agreement
Microsoft will produce an upgrade that is sufficiently compelling."
LaBrunerie denies that SA is a gamble, more what she calls a "very big
decision". "You will have to look at your IT strategy and ask 'what does the
CIO want to do?'"
SA causes another problem, as customers stand to pay more for certain
Windows products during the lifetime of a two- or three-year SA contract,
than if they simply bought the software. SA is charged at 29% of the licence
per year for desktop products such as Office and 25% for servers such as SQL
Server. Fees can be paid in advance or instalments.
Prohibitive expense
Windows Server 2003 Standard Edition has an approximate retail price of
$999. Customers will have to pay $999 to buy the server operating system,
followed by $750 for a three-year SA contract. At the end of the contract
another $750 will be required to cover the next three-year period, amounting
to a total spend of $1,500 in four years.
SA is also more expensive as an upgrade program for certain products than
past programs such as UA or VUP. According to an old Microsoft price list,
upgrading to any future Windows Server, such as Windows Server 2003, from
Windows NT would have cost $531 under UA with the volume Open Licence Plan
(OLP). Moving to Windows Server 2000 from Windows NT via VUP, on the OLP,
would have been even cheaper - $369.
LaBrunerie counters that companies can receive "deep discounts". A customer
running 250 PCs, the minimum requirement for EAS, who takes the client
operating system, Office Professional or Standard Edition, plus the core
Client Access License (CAL) that is sold with Windows Server, SMS, Exchange
Server and SharePoint Portal Server, can get up to 30% discount, plus an
additional 15% saving on SA.
Armed with these figures, Microsoft blames opposition on confusion, which
the company admits it helped to create. LaBrunerie points out that
organisations are not actually compelled to sign up to SA and claims SA has
been misrepresented as a subscription program when it is actually a
"maintenance offering".
Recognising that a problem existed, Microsoft delayed introduction of
Licensing 6.0 by six months from 1 October 2001. As the new deadline
approached,
however, the opposition dug-in, and customers signed-up to UA rather than
SA. This rush caused a 26% spike in Microsoft's net revenue, to $7.75bn for
the three-month fiscal period covering SA's launch on 1 August 2002. CFO
John Connors told Wall Street: "We saw a lot of demand for UA, in advance of
the 31 July date. Much more than expected."
Value-add retrofits
Basking in hindsight, Microsoft is now retrofitting SA with offerings it
hopes will add "value" and encourage customers to subscribe. Now included
under SA are home-use rights, a move that will bring many companies into
compliance, subscriptions to the TechNet online training service, that
normally cost $999 per person a year, telephone support for servers and
Internet support for PCs.
Two temporary programs were also launched that echo the deleted VUP. For a
limited time, SA customers can move from Standard Editions of Exchange
Server, among other server products, to Enterprise Edition, and from
Standard Editions of Office 2003 to Professional without requiring new
licences.
However, the changes may be too late to stop the cracks. A Yankee Group and
Sunbelt survey of 1,000 technology managers, conduced when Licensing 6.0 was
being introduced in March 2003, found that while 28% had signed-up, 60% said
their software fees had increased. The survey also revealed that up to 5% of
respondents plan to switch their PCs from Windows to Linux and up to 9% are
"seriously considering" switching servers.
One organisation keeping an open mind is the Met Office. The weather service
has moved 400 HP-UX users to a Red Hat 9.0 and Intel platform running
Ximian's open source Evolution email, workgroup and personal information
manager.
The organisation is also moving 800 Windows NT users to Windows 2000, but
says Licensing 6.0 served as a wake-up call, warning them Microsoft could
increase its prices again. John MacGrillen, systems developer, says the Met
budgeted a "hefty figure" to cope with Licensing 6.0, but calls the move to
Linux an experiment, in case a decision is also taken to switch the 800
Windows users to Linux.
Richard Seibt, CEO of IBM's Munich partner SuSE, says that once news of
Munich broke, his company received many calls from local authorities in
Europe and Britain interested in migrating from Windows to Linux. "Munich
wanted to control its IT budget and wanted to be independent. They didn't
want to be forced into the licensing and payment model that was being
offered," he says.
Competitors like SuSE have recognised new opportunities arising in the
desktop and desktop productivity market. Microsoft has roughly 90% of the
desktop suite market, according to Gartner. Linux and open source have, in
recent years, failed to offer user-friendly applications or suppliers whose
models were suited to most customers. However, this situation could now be
changing.
Ximian, who supplied the Met Office, offers Evolution as an Outlook-style
client for Unix and Linux, with a Connector to plug into Exchange Servers.
It also offers a complete desktop package with Evolution, including a
version of the OpenOffice open source desktop productivity suite, Mozilla
browser and Instant Messaging for $99. That compares to a recommended retail
price of $399 for Microsoft's Office XP Standard Edition and $499 for the
Professional Edition.
Following Ximian's acquisition by Novell in August, products such as
Evolution will now come to market via a network of 4,000 channel partners,
while Ximian's desktop is expected to become Novell's Linux desktop in the
long term. Novell will also develop a Linux version of GroupWise early next
year, effectively providing a respectable open source collaboration suite
overnight.
Sun Microsystems is also in the game. This month the company will launch
Project Mad Hatter, an Intel-based desktop running its version of OpenOffice
called StarOffice, Mozilla browser, Instant Messaging, Java Runtime and Java
Card security. StarOffice is currently priced at $79.95 and senior VP for
Sun's software group, Jonathan Schwartz, claims that Mad Hatter will be
between 80% and 90% less expensive than an equivalent Microsoft quote for
SA.
"Microsoft has made a fatal misstep on the desktop by raising the price with
Software Assurance at a time when everyone is under crushing price
pressure," says Schwartz. "The net is, we are in the desktop business again
and we foresee a huge opportunity."
Indirect competition
Neither Ximian nor Sun plans to repeat past industry mistakes, by tackling
the Microsoft desktop monolith head-on. Instead, they favour an indirect
approach, pitching organisations with small budgets, or those using just a
handful of applications, such as call centres and governments, who cannot
justify the price of a full desktop productivity suite such as Office. While
such customers are not big IT spenders, they are an important link in the IT
chain. If they switch, suppliers often follow them - especially in
government - for the sake of regulatory compliance or business continuity.
It would be wrong to write Microsoft off. The company's annual revenue for
fiscal 2003 was an impressive $32bn, while it owns a lucrative Office
business whose income grew 5% in the fourth quarter to $102m. However,
Microsoft's licensing planners have needlessly exposed a flank with SA,
allowing customers to think about what they want to spend and where.
CBR Opinion
Microsoft's decision to launch a controversial and unpopular software
upgrade program, SA, has given many pause for thought. Users are evaluating
whether they want to pay for Windows and be tied to the fortunes of a
single, one-stop supplier, or whether to diversify both their IT and
suppliers. IT directors are in a powerful position. Microsoft is on the back
foot, attempting to make SA more palatable, and the company is in a
deal-making mood.
Companies should closely examine SA, evaluate the permutations for a variety
of product and discount scenarios, and then sit down with Microsoft and
haggle - hard. Microsoft spent $20m to win back customers' loyalty; let it
prove how much it wants your business.
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