July 14, 2000 3:40 PM PDT

Microsoft gives details of software-for-rent strategy

Microsoft today popped the cork on its plans to sell software through subscriptions rather than through licenses, as it now does.

Microsoft said its new plan will help the company sell its software through application service providers, companies that host software programs that are usable over the Web. The software giant, which said this would be the first in a series of Windows-related initiatives expected to be introduced over the next two years, made the announcement during its annual partner show in Atlanta.

Under the new plan, businesses will not buy copies of Windows or Microsoft Office software with a PC. Instead, they will effectively rent software from ASPs and pay a per-user monthly fee to use the software. The more applications each individual uses, the larger the monthly fee.

Whether this new strategy will help customers save money remains to be seen. One analyst pointed out, however, that after reviewing prices under a pilot program it seems that the subscription method could cost more than buying software outright after two years of use.

"The prices look high when you compare them to the regular shrink-wrap prices of software," Gartner analyst Neil MacDonald said. "Basically, Microsoft has taken their shrink-wrap software price and divided it by 24 months."

Because most Microsoft customers keep their software more than 24 months, "most people are going to find these prices expensive," MacDonald said. "I expect (Microsoft) will go through restructuring at least twice before they settle in on a pricing model."

Though known primarily for its software, Microsoft is also legendary within the computer industry for how it structures its sales programs. Microsoft Office became the most popular application suite partly through the company's bundling strategy. Training subsidies, equity investments and other incentives helped convert several Novell specialists to Windows NT in the past decade.

"Pricing is a big deal, but it's not the only deal," said Hurwitz Group analyst Bill Martorelli. "The obsession with pricing masks a more fundamental issue"--the fact that most ASPs are grappling with ways to educate customers on the new model and giving customers more reasons why they should even invest in the service, he said.

Engaging ASPs
Under the ASP Service Delivery Initiative, Microsoft will offer ASPs a series of how-to marketing guides, extended support services from Microsoft, and system integration services from, among others, Andersen Consulting, Compaq Computer and EDS.

Microsoft also created an ASP certification program, which will help customers identify those ASPs that have met Microsoft's guidelines to successfully implement and deliver a hosted product.

In addition, Microsoft will not require ASPs to pay the company for software until the ASP customer pays. This strategy is a serious departure for the software giant; currently, Microsoft middlemen, including PC manufacturers, pay the company first, then sell the software to their customers.

Although the ASP market is still in its infancy, market research firm International Data Corp. expects it to reach $2 billion by 2003.

Like a number of major technology firms, Microsoft has made an aggressive effort to tackle the lucrative application hosting market. During the past year, the company has forged links with ASPs that will host, install, manage and support Microsoft products such as the Windows 2000 operating system, Office 2000 productivity software, Exchange messaging tools, Windows 2000 Server and SQL Server.

Microsoft already has partnerships with several ASPs and Web hosting firms, including Corio, Digex, FutureLink and Cable & Wireless.

Under the pilot pricing plan, Microsoft would charge $3.25 per user, per month for a Windows 2000 or Exchange license. For Windows 2000 Server, the cost would be $35 per month. The charge for hosting Exchange Server and the SQL Server would cost ASPs around $65 and $185 per month, respectively.

Dwight Krossa, Microsoft's director of marketing for the Windows 2000 solutions group, said the pricing is from a commercial pricing pilot initiated about eight months ago, "and it is not the licensing we will reveal under nondisclosure to Microsoft-certified solution providers."

"The prices we have now that will be available to our solution providers on Aug. 1 are not even in that form, and they don't even work the same way as the pilot," he said. "They're not even accurate."

Among other pilot prices, Microsoft posted a price of $365 per month to license its Site Server Commerce server and the SQL application Internet connector. The Windows 2000 Advanced Server, which is a multi-seat version of the OS designed for use on servers, would cost partners $145 per month.

Playing with pricing
Because the ASP market is still in its infancy, many companies are experimenting with pricing, including Microsoft.

"What they've done here is bent over backwards to make sure they don't lose revenue," MacDonald said. "Microsoft is paranoid about their revenue numbers--especially since they didn't meet their expectations last quarter--and losing money because they initially came out too low."

Microsoft also has departed from standard desktop licensing and volume discounts common among PC makers. Larger software buyers, such as Compaq and Dell Computer, get bigger discounts than smaller competitors.

With ASPs, Microsoft initially plans no volume discounts. Krossa said the software licensing model used for PCs didn't make sense for the service provider market.

But MacDonald believes Microsoft's antitrust case may have much to do with the pricing shift. One of the government's longstanding allegations is that Microsoft uses volume discounts to discriminate against companies that fail to embrace the entire Microsoft package.

"It's very likely that the current scrutiny they're under from (the) Justice Department had a lot to do with the pricing model," MacDonald said.

Corio, which received a $10 million investment from Microsoft in January for joint research and development efforts, is a participant of Microsoft's pilot program and was involved in helping the software giant establish some of its fees.

Larry Yu, a spokesman for Corio, said Microsoft's fees are reasonable. "It still allows us to enjoy the good margins...and enables customers to see greater cost advantages," he said.

 

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