Microsoft makes moves to sell software as a service

The US giant's new licensing system will mean a cost increase for many users, writes Jamie Smyth

Firms using Microsoft software have less than four weeks to take advantage of their existing upgrade programs before the US firm introduces a licensing system that will increase costs for many users.

The introduction of Microsoft's latest 6.0 licensing model will replace a myriad of existing upgrade programs with a controversial new system called software assurance from July 31st.

The new assurance program will act as a three-year volume licensing agreement, where firms pay Microsoft an annual fee entitling them to automatic upgrades of new software.

This new approach to licensing by Microsoft is part of its move to sell software as a service rather than an out-of-the-box product. This will reduce many of the administrative costs associated with selling software, along with the physical costs involved with distributing it.

But companies that do not subscribe to these new agreements will be forced to pay the full price for a new software product, which can cost twice the upgrade price. The new scheme will also lock customers into three-year deal cycles, removing flexibility while at the same time stabilising Microsoft's revenue stream, say critics.

The Gartner Group research firm estimates that the new program will raise prices for some companies that do not automatically upgrade their software by 33-107 per cent.

Last September, Microsoft told The Irish Times the new assurance program would increase costs for up to a third of its customers here. Following unease among Microsoft's global customer base last year, the deadline for the introduction of the licensing scheme was delayed.

"We pushed back the date twice because of customer feedback. Customers said they didn't have time to make the change and we put our hands up and said we got it wrong," says Ms Donna Gibson, business marketing manager for Microsoft Ireland. "But we won't extend the deadline this time."

Microsoft is spending up to $20 million (€20.4 million) publicising the change in its licensing scheme to avoid what its executives privately admit was a public relations disaster when it was first announced.

Since February, the firm has been contacting customers here to explain the changes and driving home its message that the new system is simpler than the plethora of upgrade options available. But Microsoft admits the new scheme will not suit all customers.

"In the vast majority of cases, the cost effectiveness of the new system depends on the upgrade cycle," says Ms Gibson. "Some small firms are as well to hold on and then just to buy a new licence when they are ready."

It is also a good opportunity for customers to get up to date with new software before their upgrade expires on July 31st, says Ms Gibson.

Microsoft is reporting an upswing in business coming up to the deadline as companies choose to exercise their upgrade rights before the new system kicks in, she adds.

The new assurance program is designed to try to drive value from their existing products such as Windows XP, says Mr Al Gillen, a consultant with the technology research firm, IDC.

"Customers that will be hurt by this are those that buy software every four years or so and buy upgrades ... Generally speaking, these are smaller or mid-size companies," he says. "But if customers don't want to sign up to the new system, they don't have to."

Mr Gillen is advising Microsoft customers over the next few weeks to evaluate their software needs for the next few years.

Customers with older software packages and in need of an upgrade would be foolish not to take advantage of their current upgrade options before July 31st, he says.

The Gartner Group is offering clients similar advice and has said that Microsoft's popular Office program could lose market share to Sun Microsystem's rival StarOffice application.

Even Microsoft critics, however, believe the US firm's stranglehold on operating system software is unlikely to be broken anytime soon.