September 4, 1998 6:25 AM PDT
Microsoft profits from license changes
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A soon-to-be released Gartner Group study shows that Microsoft is slowly eliminating provisions for "concurrent" licensing and other price breaks in its BackOffice products that could result in much heftier bills than anticipated. It is a similar tactic to the one that Microsoft took with its desktop Office suite of applications that includes such corporate standards as Word, Excel, and PowerPoint.
While on the surface it appears that the price of Microsoft's products has remained relatively flat the past two years, the company is finding new revenue from saturated markets such as desktop software and increasing their take in the back-office arena through the backdoor tactic of changing licensing contracts.
The practice could also serve to undercut Microsoft's competition by luring customers with low-cost licenses that are later changed so that users end up paying a total fee much closer to what Microsoft's competition charges up front.
"Don't assume what you see on the surface and project for future costs is going to be your actual cost," warned Mary Welch, Gartner Group analyst. "Because in the same way that Microsoft eliminated concurrent user licensing for its Office product, it is doing the same on the BackOffice."
Microsoft last year eliminated concurrent-use licenses on Office products, such as its Excel spreadsheet program. The policy allowed companies to buy fewer licenses than actual users as long as the product wasn't used by all of them at the same time. For example, a investment house with 1,000 brokers, half working during the day and the other half over night, would only need to license 500 copies of Excel because only that many would be used at a single time. But, under the new policy, that same brokerage would need to buy 1,000 licenses to use the software because that many individuals would be using the programs.
Previously, companies could save millions in licensing fees by exercising this software-sharing option and pay a lot less than they may have paid up front for a product from one of Microsoft's competitors.
But when Microsoft ended the practice, after it gained about 90 percent of the marketplace, many companies were hit with higher fees when they upgraded or renewed existing licenses. Stamford, Connecticut-based Gartner estimated in one example that a firm with 5,000 Microsoft desktops would pay 224 percent more over the course of five years.
Now Microsoft is turning its sights on BackOffice and the server application market, where it has much less of a foothold than in the desktop market. Microsoft has already taken a number of steps to change pricing plans. These changes include eliminating the unlimited use of the database software SQL Server for intranets, doing away with concurrent licensing for Exchange 5.5, ending concurrent licensing of Citrix and NT server terminal and requiring users to buy an NT Workstation license and client access licenses (CAL) for all clients connecting to NT Server, limiting to ten the previously unlimited number of connections to NT Workstation, and requiring users to buy Enterprise Editions of its BackOffice products rather than allowing them to use their upgrade rights under current maintenance contracts.
"On one hand they are finding a way to maintain a very low price via initial license and then increasing the cost of the license over time," Welch said. "And on the other hand, they have figured out a way to appear to have a very low price relative to competition."
But Microsoft executives maintain that the recent moves are more a matter of simplifying their pricing structure than pulling a fast one on unsuspecting customers or attempting to dominate the market.
"We hold to three principles when it comes to licensing terms: simplicity, fairness, and always maintaining flexibility," said Peter Boit, general manager of worldwide product licensing at Microsoft. "We have standard licensing fees and then we have mechanisms that we provide for flexibility if necessary. Whatever decisions we make going forward or other changes we make the next five to ten years will pretty much follow those paths."
Boit argued that very few users take advantage of these pricing programs and that Microsoft does extensive studies of its own before eliminating a program to make sure few users are impacted. Boit added that Microsoft is also always willing to extend a cut to those in need.
"These changes may impact a very small amount of customers but then we go back to the three points of fairness, simplicity, and flexibility, and we maintain a process to address specific needs if you have impact," Boit said.
For Philadelphia-based oil company Sunoco, the simplicity factor meant going with a per-user license on its BackOffice suite because it was simple to count the number of desktops and buy a license for that number, according to Jim Snively, systems consultant at the oil company. Sunoco has 1,500 users at its headquarters and another 1,500 accessing systems from remote offices.
Still, the company is feeling the impact of some of Microsoft's policy changes. Sunoco was eyeing hooking up some of its 1,500 remote users to Windows NT via a Citrix Winframe terminal system. Because of Microsoft's recent pricing changes which would require Sunoco to buy NT Workstation licenses for each user, the company is now considering putting the plans on hold.
"It sounds to me like greed on Microsoft's part," Snively said. But he added that his company doesn't usually consider future contract changes when making its buying decisions. Although, next August when Sunoco is preparing its budget for the coming year, Snively said his office is likely to add in additional charges from renewing its BackOffice license that November.
Items that Welch said Sunoco and other users might want to consider include Microsoft cutting the Internet Information Server loose from Windows NT. The Internet server is currently bundled with Windows NT for free. Welch predicts that by 2000, users will need to buy a separate licensing contract for the server. Microsoft is also likely to eliminate all concurrency licensing agreements for BackOffice by 2000, and by 2003 tie usage rights to a maintenance contract.
Boit wouldn't comment on what Microsoft may do in the future but said whatever changes are made will adhere to the companies policy of "fairness, simplicity, and flexibility."
In the meantime, Welch recommends that, "if you are going to consider Microsoft BackOffice products, don't just do the cost justification on the price up front, look at ways Microsoft may increase the cost over time. "
