Software Assurance is 'Healthy and Vibrant,' Microsoft Claims

Published: August 1, 2007

by Alex Woodie

Microsoft this week poured cold water on claims that Software Assurance and other volume licensing and maintenance programs for Windows and other products are slowing. In fact, the programs are strong and growing, despite media and analyst reports suggesting customers may be opting not to renew their Software Assurance contracts, according to the executive in charge of setting Microsoft's licensing and pricing policies.

A report issued by Forrester Research last month, which we covered in this story, concluded that a good percentage of Microsoft's largest customers were unhappy with their two- and three-year maintenance contracts, and were considering not renewing at the same level as before.

The report's authors conducted a survey of Microsoft customers and found that three-quarters of the respondents' contracts were up for renewal this year. The group also found that only about a quarter of the respondents would "definitely or probably" renew their contracts at the same level. Another quarter said they would not renew their contracts, while the biggest chunk--31 percent--said they were still unsure about what they would do (18 percent said they would renew their SA contracts, but only for some products).

Microsoft executives rejected the findings of the report and said they contradicted the healthy renewal rates they were seeing. They also raised doubts about the validity of Forrester's statistical method, which was based on a sample size of only 63 Microsoft customers. In a public opinion study, a sample size of 63 would correspond with an unacceptable margin of error of 12.3 percent, according to Raosoft's handy margin of error calculator. Such a high margin of error would be intolerable in most applications, but Forrester obviously had confidence in the data.

The first check of whether Forrester's forecast might come true occurred two weeks ago, when Microsoft issued its fourth-quarter and year-end financial results. The software giant's sales went, in a word, gangbusters, with Office 2007, Windows Vista, Windows Server 2003, and SQL Server 2005 leading the charge.

The company also reported a very healthy increase in unearned revenue, which is the accounting category where money from Software Assurance and other Enterprise Agreement contracts gets lumped before it can be recognized on the official balance sheet. The size of the unearned revenue pile was 28 percent higher at the end of June 2007 then where it was at the end of June 2006, according to Microsoft.

In a Q&A posted to the company's Web site this week, Joe Matz, corporate vice president of worldwide licensing and pricing at Microsoft, defended his company's recent performance in getting companies to sign Software Assurance agreements.

"A key component of Microsoft's strong revenue performance for fiscal year 2007 was the growth we've seen in annuity billings which is driven mainly by our Enterprise Agreement offering," he says. "Forty percent of the company's revenue mix resulted from multi-year license sales, and enterprise agreement renewal rates exceeded the high end of our historic range of 66-75 percent. To sum up, Microsoft's volume licensing business is healthy and vibrant."

Matz attributed the rise in Software Assurance renewal rates to Microsoft's strong product pipeline. "That speaks to the strength of our current product portfolio, our future product roadmap and the value that customers receive through programs such as Software Assurance," he says.

Microsoft also recorded a 23 percent increase in customer satisfaction, as rated on the company's Customer Partner Experience (CPE) scale, over the past two years, Matz says. That "shows that customers believe we're on the right track," he says.

He also had something to say about the recent media coverage about unhappy Software Assurance customers. "The coverage I've seen is not consistent with what I'm seeing here at the company and hearing from other industry watchers," he says. "We don't see customers opting out--quite the contrary, in fact, as our earnings announcement shows."

However, during Microsoft's recent conference call, company CFO Chris Liddell cast doubt on whether the world's richest software company could repeat its recent performances.

While the amount of money Microsoft put into the unearned revenue pile increased by a total of 19 percent during all of fiscal 2007 (which corresponds to money in, as compared to the 28 percent figure cited above, which as the size of the pile, or money taken in minus money taken out and finally recognized as revenue, at the end of the 2006 and 2007 fiscal years), Liddell said to expect the amount of money Microsoft puts into the unearned money bin to increase by only 7 to 10 percent during the course of fiscal 2008.

So, to sum up, Microsoft's own CFO--who is legally forbidden from making suggestive comments the way somebody from, say, the marketing department is allowed to do--expects the company's annuity business to grow at slower pace for the next 12 months than it did for the past 12 months. In fact, it's expected to grow at a pace that's more than 10 percent slower than the previous rate of growth, according to Liddell.

Whether that's a reflection of the awesome job Microsoft has done serving its customers over the past 12 months, or is the tip of a wave of customers who are not renewing their Software Assurance contracts, as Forrester forecast, is simply unknown at this time.

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