Guild Companies

With its Software Assurance and Licensing 6.0 pricing models for its operating systems, middleware, and applications, Microsoft is trying to create an annuity-like software pricing scheme that works like the pricing model that IBM has used for its mainframes. Many customers are unhappy with the Licensing 6.0 pricing scheme, and re-upped for their older licensing terms at the end of July. Now Microsoft is trying to tweak Licensing 6.0 to encourage customers to keep current and to keep on the Windows platform.

Microsoft needs both to continue to be successful. Like the venerable IBM mainframe, customers who are locked into Windows software have nowhere else to turn to run their Windows applications. Microsoft is the sole supplier of the Windows environment, which accounts for 93 percent of desktops and 50 percent of servers sold these days. With Licensing 6.0, customers pay in advance for a two-year or three-year contract to use Microsoft products in various mixes and volume discount schemes. You need a PhD in "schmarketeering" to work through all the angles in Licensing 6.0, but you don't need more than common sense to see that Microsoft has veered far away from the days when it just charged a price for a product and then created an upgrade and hoped customers would buy it. All mature products eventually become monopolies, duopolies, or "triopolies" and they tend to gravitate toward a utility model when the market conditions and/or the characteristics of a product allow it; water, electricity, telephone, garbage collection, cable television, Internet service, dry cleaning, movie rentals, and now software.

In the next few months, Microsoft is expected to announce a variant of its Licensing 6.0 scheme called Open Value, which will allow small- and mid-sized businesses with 500 or fewer employees using Microsoft products on their desktops and servers to spread the cost of Licensing 6.0 licenses and Software Assurance upgrades across 36 months. Right now, customers have to pay in advance for a two-year or three-year licensing agreement. (Only a monopolist could try to get away with such pricing and account lock-in. You can't say Microsoft doesn't have nerve.) Depending on who you ask, various consultancies estimate that anywhere from 50 percent to 75 percent of Microsoft's customers balked at Licensing 6.0's terms and signed up for its Licensing 5.0 schemes, which included traditional upgrades and pricing practices. Most of the companies who balked at the high up-front fees for Licensing 6.0 were small- and mid-sized business, so it comes as no surprise that Microsoft will in the next few months or so roll out the Open Value plan to its small- and mid-sized business customers and the reseller channel that supports them.

Microsoft already offers an Open License Credit Line plan to small- and mid-sized businesses that spreads the cost of Licensing 6.0 and Software Assurance fees over 24 months with zero interest. This program was announced on November 1, and it is no doubt a stop-gap measure and a trial balloon until Open Value is delivered to the market.

Microsoft could have saved itself a lot of trouble if it just realized that it owns the desktop and that market momentum is with it on the server and, believe it or not, customers want to use its products. If Microsoft had annual contracts and monthly payment schedules as IBM does for its mainframes, it would have encountered little resistance. This is how people pay for cell phones. But asking for all the money up front was just plain greedy and Microsoft deserves all the backlash it gets. What Microsoft really wants is not just monopolistic lock-in--which it already has--but contractual and budgetary lock-in, too. Once customers are in contract, they are unlikely to consider alternatives like Linux and its applications, and once they have prepaid for two or three years, there is no way they will consider alternatives. Moreover, under Licensing 6.0, customers can't forget to pay their bill and Microsoft doesn't have to chase them down for the money or figure out some way to shut down its software when customers don't pay for it. It sounds good, perhaps, until you think about it from the customer's perspective.

That said, the Open Value plan is a step in the right direction. Microsoft has to live and die by the merits of its products, just like the rest of us. And it has to price its products in such a way that they deliver value and accrue fees to Microsoft at about the same levels at the same time. This may be a hardship for Microsoft, but it is just going to have to face these facts and adjust Licensing 6.0 to be a less-draconian scheme. If it does this, then the company will find that small- and mid-sized business customers will openly and willingly sign 12-month contracts and pay their bills on time on a monthly basis. Yearly or multi-year prepay schemes are just not fitting the economic realities.