Redmond Negotiator

Will Microsoft Ever Change Its Licensing Ways?

No, Microsoft will not be "nicer" next time around. Deal with it.

• By Scott Braden
• 06/15/2007

In answer to these questions (sort of), I point you to a couple of recent stories you might have already seen regarding Microsoft licensing.

One story says that Microsoft had "backed off" from a licensing change regarding Exchange CALs that would've made users pay for Software Assurance if they wanted the same functionality in Exchange 2007 as they already had (without paying for SA) in Exchange 2003.

But did Microsoft really "back off"?

In another case, Microsoft leaked that it had been about to ease up on some Vista virtualization restrictions -- before it apparently changed its mind.

What do these stories have in common and what do they mean to you? Here's my take: As we say down in Texas, Microsoft is caught between a rock and a hard place.

The company is under constant shareholder pressure to grow revenues and earnings. However, the largest chunks of its income come from two product sets: Windows and Office. And because these two products are nearing complete market saturation -- at least in the most-developed parts of the world -- there aren't many (if any) large untapped markets left where they can help boost revenue significantly.

So, if you've already sold to just about everyone who can buy, your options to increase revenue are 1) sell something new and, of course, 2) raise prices.

Microsoft is trying to sell new things; SharePoint is doing well, for example. But SharePoint alone isn't going to bring back the days of 30 percent or more annual revenue increases. The problem is, Microsoft has a very difficult time bringing new products to market (take Vista, for example). In fact, Microsoft's track record of meeting its release timelines for any product is pretty dismal, and any regular reader of this column knows that buying Software Assurance based on Microsoft's release date promises is a risky bet.

A more effective option is to raise prices -- which Microsoft does frequently, usually just before a major new release (see my November column, "Microsoft's Stealth Price Hike").

And there's more than one way to raise prices. You can simply change the numbers on the price list -- which customers would notice immediately -- or you can tighten the terms of sale. In Microsoft's case, you change the license terms so the net effect is that customers have to spend more money with Microsoft.

I believe the two articles I cited above are cases of Microsoft tweaking licensing terms in order to (effectively) raise prices. In the case of Exchange CAL, it's a clear ploy to make more customers buy Software Assurance. Since it took four years for the last major version of Exchange to be released, today is not a smart time to buy SA -- unless, of course, you have to buy SA to get the functionality you really want.

In the case of Vista virtualization, it's a no-lose bet for Microsoft. The company still gets paid for practically every desktop that ships from an OEM, and if customers want to virtualize their desktops, Microsoft gets paid again.

These are just two examples out of several dozen that I could point out to you. The pattern is clear, so you should build it into your planning assumptions:

1. Expect significant price increases just before major new versions are released.
2. Expect license term changes that, in effect, increase the price or total cost of ownership, also when new versions are released.

So, "Why do the licensing terms change constantly?" Well, to make more money, of course.

And "Why does their stuff cost so much?" Because the theory of raising prices basically dictates raising prices until your total revenue or earnings start decreasing.

And as for my personal favorite, "Why do they wait until the last minute to make an offer?" Well, that's a topic for another column. 'Til next month, keep up the good work.