Financial Users Balking at New Microsoft Pricing

By Maria Trombly | Securities Industry News | Oct. 21, 2002

Microsoft has always been the 800-pound gorilla when it comes to the desktop, but recent changes to its licensing policies have made relations with user firms somewhat strained. "It's sort of a love-hate relationship," said Rodric O'Connor, CTO at San Francisco-based Putnam Lovell NBF.

This past summer, Microsoft officially put an end to its old upgrade policy-if a buyer had an old copy of an operating system or an application, there was a steep discount on the new version. Now, customers have to pay annual fees if they don't want to pay full price for the upgrade, which doesn't sit well with everyone. In addition, Microsoft will cease support for older versions of applications and operating systems-sometimes well before those systems have outlived their usefulness.

"They were pushing very hard for software licensing upgrades in the summer before their licensing change," recalled O'Connor. "Their sales guys were ringing up, and their channel sales guys were ringing up, several times a week trying to persuade me to upgrade, and then they announced their withdrawal of NT support."

On top of that, Microsoft audits companies to make sure that they are in compliance with the licensing rules."Microsoft's auditing strategy is very annoying," O'Connor said. "Every time they ask you to do an audit, it costs you money. But you have to live with the pain that Microsoft is putting you through."

Microsoft, however, argues that its licensing moves are intended to benefit customers by saving them money on upgrades and enabling them to predict future IT costs more reliably.

Microsoft first announced the change to the way it will sell products a year and a half ago."We had a hodgepodge of many upgrade paths and licensing models," said Dan Leach, a Microsoft spokesman.

Previously, a computer buyer could upgrade an application or an operating system at a discounted price-no matter how old the previous version was. Under Microsoft's new licensing policy, corporate buyers can pay full price for an upgrade, can pre-pay for an upgrade a year at a time through a "software assurance" option, or can lease the software through a subscription. If they lease, they get free upgrades for the duration of the contract-but they have to stop using the software once the lease runs out.

The cost for software assurance is an annual fee of 29 percent of the total cost of a server product, or 25 percent of the total cost for a desktop product. By comparison, Oracle will upgrade software for just 15 percent of net license fees, according to Jacqueline Woods, vice president for global pricing and licensing strategy at Redwood Shores, Calif.-based Oracle Corp.

Microsoft's subscription-based prices are also high, according to Gartner analyst Michael Silver. "Basically, it's 15 percent discount off the regular enterprise agreement price," he said. In addition to paying a high price for software that they don't own, users also have to worry about getting tied down to an annual fee. "If you can't pay the fee, you have to take the operating system off your hardware," he said.

According to analysts, firms would need to upgrade every couple of years to save money under this new plan. Anything longer than that, they would have been better off under the old discount system.

Since both software assurance and subscription contracts can serve to lock in buyers, cost-conscious Wall Street firms might choose to avoid some Microsoft products as a result, said Damon Kovelsky, an analyst at Newton, Mass.-based Meridien Research.

"If prices are dropping, it would be a mistake to lock-in prices," he said, although he added that some companies might prefer to know ahead of time how much they are going to spend.

"On the other hand, depending on the contract, if something better comes along it might cost more to get out of the contract," he said. This is less of an issue with Windows, Office and other desktop products, where companies aren't likely to suddenly decide to switch to a competitor.

"For some products, the alternatives are slim-how many word-processing-spreadsheet combinations are there?" Kovelsky said. "But as you get to higher applications, I don't think Microsoft will be where it is today."

Some of the desktop-based alternatives include the Linux operating system, which currently has a miniscule-but growing-share of the operating system market, and StarOffice, a low-cost Office alternative from Sun Microsystems. Merrill Lynch has recently said it's exploring the use of Linux on the desktop-while virtually every Wall Street firm is already using Linux for Web servers and other network applications.

Putnam Lovell, for example, is already using Linux in its network infrastructure appliances, O'Connor said.

Another alternative to upgrading Microsoft products is to switch to Web-based applications. "They're reliant on the browser rather than your operating system," O'Connor said. "That's an interesting trend that Microsoft is probably worried about."

Users could switch operating systems to whichever was less expensive and significantly extend the time between upgrades.

"That's one of the advantages of Web Services," said Corey Ferengul, an analyst at Stamford, Conn.-based Meta Group. "That's why Microsoft is attacking them."

However, Web-based applications still have a lot of catching up to do, analysts say.

"A lot of people aren't there yet-most of their applications are still Windows-based," said Michael Silver, an analyst at Stamford, Conn.-based Gartner.

Meanwhile, these low-cost alternatives are underscoring the high costs of the Microsoft world. For example, it costs quite a bit of money to upgrade an operating system beyond the licensing fees. To upgrade, a firm has to determine the configurations of all existing systems and create migration paths for all applications and user data files. Then there's contending with the downtime when users can't do their work during the upgrade itself, and the ensuing headaches when peripherals unexpectedly stop working with the new systems or applications no longer work at the same time.

According to Ferengul, it can cost thousands of dollars per user to upgrade a system. As a result, some companies might be tempted to stay with existing operating systems long past their official expiration dates. But Microsoft will only offer full support for a product for three years after its release date, with limited, fee-only support for one additional year.

Of course, applications don't stop running just because support runs out. "But application vendors follow Microsoft's lead," said Silver. "They're not necessarily supporting or offering new versions of their application on the old OS and there could be some opportunity costs if users need to deploy a new application."

In addition, after three years, Microsoft will no longer license the old version of an operating system to hardware vendors. As a result, Silver said he recommends that Wall Street firms, in particular, stick relatively closely to Microsoft policies and move the most critical users off of unsupported operating systems. "Other users, who are not as important in terms of criticality and the cost of downtime, we can let them go a little while longer," he said.

O'Connor did upgrade from Windows NT to Windows 2000-just in time to watch support run out. Windows 2000 was released over two years ago and support is due to expire next spring. As a result, he's already facing the question of whether to upgrade to Windows XP-but the business reasons aren't there, he said.

"There's an enormous leap from NT to 2000 in reliability and stability," he said. "But there's no new feature from XP that affects the business applications that we have."

The only possible reason to move some machines to XP, he said, is for wireless use and security on laptops.

To reduce his upgrade costs, O'Connor went with a vendor, Chicago-based Spirian Technologies, that automates the desktop management and upgrade process. As a side benefit, license audits also become easier as Spirian automatically keeps track of which applications are in use where.

According to Silver, Microsoft's three-plus-one support strategy is too limited.

"Windows 2000 is scheduled to go into the extended phase on March 31, 2003," he said. "People don't like that. We're predicting that Microsoft will have to extend those dates."

Some companies, according to Silver, are choosing to avoid the whole licensing problem by upgrading through attrition-users get new operating systems and applications at the same time as they get new machines.