by Scott Berinato

SOFTWARE LICENSING – Microsoft’s New Subscription Plan: CIOs Just Say NO!

Jan 15, 200216 mins

On May 10, 2001, Microsoft announced that it was changing the way companies would pay for Windows, Office and all other Microsoft software. The new plan, called Volume Licensing 6.0 and Software Assurance, would take effect on Oct. 1, 2001.

Microsoft said Licensing 6.0 would simplify software licensing for both the vendor and its customers. It would propel Microsoft and corporate IT into a new era in which software became a service rather than a commodity. And, in spite of Microsoft’s stance, both CIOs and analysts noted it would also goose revenues on the aging Windows and Office franchises.

Licensing 6.0 was a seminal idea and not just because businesses everywhere run Microsoft software. Underneath this seemingly simple plan to change how companies pay for software lay a not-so-simple plan to turn Microsoft into a utility that provided the electricity to power businesses, now and forever.

Once that was understood, a strange thing happened. CIOs began to say no. No to Licensing 6.0. No to Software Assurance. And no to Microsoft’s vision of the future. And it may be that it is this general and spreading refusal to play ball with Redmond that will change the business landscape, not Licensing 6.0.

In many ways, the licensing plan had failed by the time it was launched in October. Microsoft judged five months to be a sufficient amount of time for customers to figure out the program and then sign up. It was right about the first part. Licensing 6.0 replaces confusing upgrade rules and options with a yearly fee, a subscription plan known as Software Assurance (SA). Pay the original license and the yearly fee, and you’re covered for all upgrades. That’s it. (More or less. The options that take you to the land of annual fees are wildly complex. See “Upgrade Options for Microsoft Office,” Page 62.)

But the Redmond, Wash.-based vendor was wrong about users signing up. In fact, a CIO October survey of 122 IT executives revealed that only 15 percent of respondents were planning to enroll. In an October Giga Information Group survey of 4,550 technology professionals, 32 percent said they would not enroll in the new licensing plan compared with 7 percent who would; another 41 percent said they would wait and do nothing.

Five months, it turns out, is not nearly enough time when a vendor tells its customers to dig into their wallets right away. When Microsoft announced SA last May, many CIOs already had approved budgets for 2001. And those budgets did not include the added costs Licensing 6.0 and SA would entail. And when companies were told they also had to upgrade their software to the latest version (such as Office XP) before they could enroll in Licensing 6.0, CIOs took to calling themselves hostages.

“Typically, the large vendors we work with give us time when a significant pricing change comes along,” says John Voss, CTO of Marshall & Ilsley, a Milwaukee-based banking and financial services company that manages $27.3 billion in assets. “Microsoft acted like a retailer in a corporate market. They just made a unilateral move, without consulting us.”

If the timing was awful, the deal’s details, as they emerged, were even worse. Corporate customers had these options:

  • Upgrade their software (Office, Windows, SQL Server and so on) to the latest version and enroll in the Software Assurance program by Oct. 1, 2001.
  • Buy Upgrade Advantage, which expires in 2003. This option automatically enters customers into the Software Assurance plan.
  • Sign up for an Enterprise Agreement, which entitles customers to discounted Microsoft software in exchange for agreeing to use Microsoft products instead of rivals’ wares.
  • Do nothing. Buy new licenses for new software products when implementing an upgrade.

    Fees from Here to Eternity

    CIOs who studied the cost of Licensing 6.0 were first shocked, then angered. The Software Assurance subscription fee meant taking their one-time license costs and paying an additional 29 cents on the dollar every year. (That 29 cents is for PC software under Software Assurance; the rate for server software is 25 cents on the dollar.) If corporate customers declined to sign up for Software Assurance, they would have to pay full price for new software licenses the next time they wanted to get a product upgrade from Microsoft.

    That bill was too much for CIOs like Larry Shutzberg of Atlanta-based Rock-Tenn Co., a $1.5 billion packaging maker. Shutzberg says that the 29 percent annual rate for Software Assurance was twice what he thought was justified for a subscription.

    Shutzberg says he expected to pay Microsoft approximately $1 million for upgrades without Licensing 6.0 and Software Assurance. Under the new pricing and licensing plans, Shutzberg says that he figures, “Either I pay $1 million extra now [to sign up for 6.0 and Software Assurance], or $8 million three years from now,” which is when he would prefer to get a Windows or Office upgrade.

    If Shutzberg upgrades when he wants to, on a timetable that makes sense for Rock-Tenn, it will cost his company $7 million more than if he upgrades now, when he doesn’t want to.

    Shutzberg’s sentiment is typical. CIOs argued that Software Assurance would raise software costs as much as 107 percent per year for an average company, according to a Gartner report. Not signing up for Software Assurance by the deadline would cost companies two to three times more later when they are forced to buy the new licenses. That’s the calculation reported by Netherlands-based Netwerk Gebruikersgroep Nederland (NGN), a group of more than 4,000 IT managers at global companies.

    What Microsoft supposed would be a smooth five-month transition turned into a drama pitting protagonist Redmond against CIOs and their companies.

    Redmond had its own calculations: Only one in every five customers would see a cost increase; 30 percent would see a decrease. The rest would see no change at all?except to enjoy predictable annual fees.

    CIOs were unmoved, and a raft of user surveys shows why. The Infrastructure Forum (TIF), Britain’s largest IT interest group, said its average member would see a 94 percent cost increase under the program. Giga’s survey showed four of five respondents expected their licensing costs to rise with the subscription plan, while one in 10 anticipated costs would be flat or dip. So it’s no wonder that CIO’s survey last fall found no rush to sign up. Sixty-two percent of IT executives said they would not enroll in Software Assurance by Microsoft’s deadline, which had already been extended from October to February. Additionally, 69 percent said they had no plans to upgrade to Office XP.

    Greg Fox, vice president of technology services and CIO of The Burlington Northern and Santa Fe Railroad Co., a $9 billion railroad based in Fort Worth, Texas, simply says his company will not sign up for the program because his analysis indicates that it is not in Burlington’s best interest. “We plan to continue to purchase licenses for new equipment as that equipment is deployed,” says Fox. In other words, Fox refuses to ad-just his rollouts to accommodate Microsoft’s software licenses. If that means huge cost increases in the future, well, he will cross that bridge when it’s dropped in front of him.

    Microsoft heard Fox and others. By the end of October 2001, Microsoft made five concessions on the terms of the program.

    • The enrollment deadline was extended from Oct. 1, 2001, to Feb. 28, 2002.
    • Microsoft’s highest level of support, Premier, would be available to customers not fully enrolled in Software Assurance.
    • Customers could “reimage”?delete a copy of Windows that came with new hardware to put their own copy on?without buying licenses for both copies of Windows. That is, they wouldn’t have to pay again for software they had already licensed.
    • The enrollment deadline was extended again, to July 31, 2002.
    • Companies with Office 2000 would not have to upgrade to Office XP before enrolling in Software Assurance.
    Those concessions, such as allowing Office 2000 users to enroll in Software Assurance, were costly for Microsoft to make. But even with these changes, that gave companies more time and significant savings, CIOs were still not willing to accept Licensing 6.0. In fact, it seemed that Microsoft’s concessions only whetted CIOs’ appetite for more, and it seemed to doom Microsoft’s plan to ultimate failure.

    How Licensing 6.0 Failed

    Three forces came together?the economy, Microsoft’s corporate culture and the IT community?and from the start they kept Licensing 6.0 from succeeding.

    The Economy

    In part, Licensing 6.0 was created to offset a recession. A subscription service has a predictable revenue stream. But companies cut spending in recessionary times. This is a problem that Software Assurance could, to an extent, redress.

    It would be one thing if customers perceived value in the change, but Software Assurance, customers say, bolsters Microsoft at their expense. “Its clear intent is to drive money out of companies that had no intention of giving them more money this year,” says Jerry Evans, director of technical services and the man who purchases Microsoft licenses for Kansas City, Mo.-based Butler Manufacturing, a $1 billion commercial construction company.

    But Microsoft did have one other carrot to dangle: the Enterprise Agreement, which gives discounts on licensing?as much as 50 percent?and automatically enrolls customers in SA. But joining means CIOs must also sign a contract that bars them from using any competitive products.

    Microsoft was telling CIOs to gamble: pay a little more now, or risk paying a lot more later. Or take a deep discount in exchange for prohibiting yourself from looking at alternative products. Startlingly, most are taking the risk and putting off Software Assurance for as long as possible.

    David Duvlea, information services manager for Witcher Construction, an Eden Prairie, Minn.-based subsidiary of the $1 billion Dunn Construction Group, won’t enroll in the new program. “I don’t see anything in the next five years on these products that’s so critical I need to upgrade,” he says. “It won’t happen. And if it does happen, great, it will be worth the cost of starting over at that time.”

    If this trend continues, then Microsoft’s new licensing program will have failed, says Gartner Analyst Alvin Park. “I’ve talked to 350 to 400 clients in the past month, and many are considering holding off totally,” Park says. This, plus the fact that Microsoft extended the enrollment deadline nearly a year, is a good indication the revenue numbers the company projected weren’t as high as expected, Park concludes. “The new licensing hasn’t had the effect they thought it would,” he says.

    CIO asked senior Microsoft executives to address this assessment directly. While CEO Steve Ballmer declined our interview requests, Rebecca LaBrunerie, program manager of worldwide licensing and pricing, insisted the program simplifies licensing, something customers were asking for. “The purpose of Software Assurance is to give the customer an easy way to buy and deploy Microsoft products across an enterprise and reduce the confusing array of upgrade options that derive from the retail licensing model,” she says.

    But Microsoft’s representatives ignored the revenue part of the question.

    The Attitude

    If Microsoft were a camel, it would be bearing a heavy load of straw: an antitrust case that remained active in spite of the Nov. 2, 2001, Justice Department settlement; a growing European Union antitrust investigation; a woeful economy; consumer groups protesting Windows XP privacy features?the list goes on.

    Licensing 6.0 may be the last straw. The uncompromising attitude that took the company to the top of the software world is now working against it.

    In his book, World War 3.0: Microsoft and Its Enemies (Random House, 2001), Ken Auletta describes the Microsoft attitude as “hard-core.” It’s a kind of fervent zeal for Microsoft’s rightness no matter who disagrees.

    A hard-core Microsoft advocate would argue that subscription licensing wasn’t meant to grow revenue, but rather to simplify licensing and prepare users for the future. Indeed, other software vendors face revenue erosion. They, too, have explored subscription licensing, and none have been met with such angry remonstration. (See “Let’s Stop Wasting $78 Billion a Year,” Oct. 15, 2001.)

    This kind of fervent attitude encouraged Microsoft to apply expensive subscription licenses to products customers don’t see as strategic, but where they have few other options. Several CIOs explained it by saying, “They’re doing this because they can.”

    Microsoft says that in the future it will drizzle out upgrades and that the more frequently a company upgrades under Software Assurance, the more valuable Software Assurance is. In one respect, this makes sense. If two people pay the same for a magazine subscription, but one person gets twice as many issues, he got more for his money. But while Microsoft assumes that drizzled upgrades are good, users want to extend the life of their commodity software, not shorten it.

    Microsoft’s point woman for Licensing 6.0, LaBrunerie, says, “When we preannounced this in May, it was a heads up. These are our plans. Software will be a service.” LaBrunerie intended the message to be a “heads up.” But customers felt like they were being told, not asked.

    Not everyone hates the new licensing plan. Pillsbury, the $6 billion food company in Minneapolis, is saving significant money with Licensing 6.0 because it opted for the Enterprise Agreement with its discounts, says former CIO Alex Gibbons. Gibbons, who spoke with CIO in October, just before General Mills bought Pillsbury, said he was pleased with Microsoft’s products and his meetings with Ballmer, who explained how Software Assurance would work for Pillsbury. So Gibbons was puzzled when his peers, who had the same meetings with Ballmer, asked him if the program would be bad for him too. Microsoft said only 20 percent of CIOs would see an increase in costs; the CIOs Gibbons talked to were saying the opposite.

    Gibbons asked his licensing guru, Christine Eaton, why Pillsbury’s situation was special. Eaton reported that Pillsbury negotiated a discount-laden Enterprise Agreement at just the right time.

    “We were pleased. It cost less and simplified the way we would move forward,” Eaton says. “But I remember clearly, when they showed us the general presentation and we saw the base pricing, and the 29 percent and 25 percent [annual fees]. It leapt out at me. That number is way out of line with the rest of the market. I consider 15 percent a standard maintenance fee. To see those numbers was a shock.” (Eaton spoke from her vantage point at Pillsbury, shortly before the company said that it would merge with General Mills.)

    Gibbons understands his peers’ frustrations, even though he praises the new model’s effect on his own company. “One of the problems was it came out of the blue. But I just think [Microsoft] made a big mistake. Their spreadsheets were wrong. Their feeling for its acceptance was wrong. They were [hurting] people more than they thought,” he says.

    The camel’s back broke with the Licensing 6.0 straw. The company’s hard-core attitude stopped working. The new licensing plan just made people mad.

    “Microsoft is acting in a way that says ’We own the desktop. We make the rules,’” says TIF CEO David Roberts. “But this time, corporations are saying ’No. You’re a supplier. Act like one.’”

    An Empowered Community of CIOs

    What’s the greatest surprise to emerge from the Microsoft licensing saga? It forged a community consciousness among CIOs.

    They communicated through user groups and threatened boycotts. Some helped others find alternatives to Microsoft. In many cases it wasn’t just one company telling Microsoft to “change or else.” It was dozens of large companies with billions in spending power.

    Microsoft bowed in the face of such overwhelming disapproval. But instead of placating CIOs, the concessions empowered them.

    No one group has been more effective at maintaining pressure on Microsoft than TIF in the United Kingdom. The average TIF member has 16,000 Windows desktops; one has 110,000. Between May and October 2001, Roberts found that his members would spend $1 billion extra over four years on Windows desktops. Roberts’ group referred the issue to the U.K.’s Fair Trade Office after meetings with Microsoft stalled, and it organized workshops to explore alternatives to Microsoft’s plan. In all, the actions spurred Microsoft to extend its enrollment deadline to July 31.

    There were other examples of activism. In the Netherlands, NGN sent Microsoft an open letter of protest comparing Licensing 6.0 to a “knife to the throat.” In November, the Dutch group sent a formal complaint to the Netherlands Competition Authority, the country’s antitrust watchdog agency. In Murray City, Utah, Director of Information Services David Larsen decided to switch from Windows to Linux, and he expected to have desktops deployed by March. In Kansas City, Lee Lichlyter, vice president and CIO of Butler Manufacturing, even floated the idea of organizing a three-month boycott on buying Microsoft products in a discussion forum for CIOs. “I was being a little bit flippant,” Lichlyter says of the boycott, which never materialized. “But I started thinking, Hey, we have some power here; customers can really impact them.”

    Just the way CIOs were talking about Microsoft represented a shift in this customer-vendor power balance. “We’ve got executives taking interest. It’s become a topic in the boardroom,” Roberts says. “I mean, what is [talk of] the Windows desktop doing in a boardroom meeting? Something is happening.”

    So How Does It End?

    Microsoft customers did in five months what it took the Department of Justice five years to do. They forced Microsoft to pull back on some of its hard-line business practices. In this sense, Licensing 6.0 and Software Assurance have already failed. The question now is, How far will customers take it? What more will change between now and the time the enrollment deadline passes?

    This much is clear: Microsoft believes this fight is over. Microsoft’s customers do not.

    “If I could turn back the clock to May, I would have put the changes we ended up making into the original announcement,” says Bill Landefeld. Landefeld, Microsoft’s vice president of worldwide pricing and licensing, is the chief architect of Licensing 6.0. “We could have done a better job in terms of anticipating [the problems]. On the other hand, we are listening to customers. I’m very confident the new program will be successful. We’ve laid the foundation, and we don’t anticipate changing anything else for the foreseeable future.”

    TIF’s Roberts says it must change more. “Our protest is still about costs. We need to try and find a solution that will enable them to regain the goodwill they’ve lost,” he says.

    Robin McMullen, help desk manager at WETA-TV in Arlington, Va., reduces the situation to its essence: “It won’t stop until they radically change Licensing 6.0. We used to have this attitude in IT that Microsoft was a bunch of SOBs, but if you wanted to be successful, you’d better play along. Now, the sentiment is very different. They need us more than we need them.”