by Christopher Koch

Fighting Microsoft’s Subscription Plan

Mar 15, 200310 mins
Enterprise Applications

For all its warring with competitors, Microsoft’s relationship with its corporate customers had been relatively peaceful. Until October 2001.

That’s when Microsoft’s new licensing scheme started going into effect.

Redmond’s decision to shift from a business plan that let its corporate customers decide when to upgrade each PC or server to a subscription plan that exacts a yearly fee for the software?whether you upgrade or not?has fueled a new kind of anger.

It’s a dangerous kind of anger, the kind that flares up when you think you’ve lost control over something that was once yours.

Of course, CIOs long ago ceded control over the desktop to Microsoft, but they held on to the power to decide when and how they would upgrade. And they had the leverage to negotiate on price when they did. The new scheme, called Licensing 6.0, requires enterprises to buy a two- or three-year subscription that covers any number of upgrades. Those who don’t buy a subscription can still buy individual licenses, but they’ll pay the full license price the next time they want to upgrade.

Microsoft defends the plan by saying that it simplifies its old byzantine pricing structure, which customers had complained about. Customers say simplicity is fine?but not at the cost of control.

Anger about the new licensing plan reached a fever pitch in late 2001, when 15 percent of 122 respondents to an October 2001 CIO survey said they planned to sign up (see “The Meter Is Running,” More than a year later, that anger is still simmering, even in customers that went with the new program.

“We caved,” says Tom Jeffery, vice president of IT at Pittsfield, Mass.-based retailer KB Toys, who estimates that KB will pay $135,000 per year more for Microsoft products under the new plan. “We felt strong-armed into doing this. But because we don’t have any other option, we felt we just had to play the game.”

But many still aren’t playing. Though Microsoft’s deadline for customers to sign up for the new licensing plan passed at the end of July 2002, by November a new CIO survey of 375 IT executives found that 51 percent of respondents still had not upgraded to Microsoft’s new product line, XP. Now, if they do, they’ll have to pay the full price, even if they already have older versions of Windows software.

Who wouldn’t be angry?

Anger used to be a wasted emotion when it came to the colossus of Redmond. You had no choice, so you paid your money and you moved on. But this time Microsoft’s high-handedness, combined with an intensely cost-conscious economic environment, and the arrival of an increasingly viable competitor in GNU/Linux and other open-source software products (see “Your Open-Source Plan,” Page 52), has encouraged CIOs to dig in their heels. Judging from the CIO survey and our interviews with respondents and others, many CIOs have chosen to play chicken with Microsoft. They’re freezing their Microsoft infrastructure investments and buying new licenses only as needed, waiting to see if in the next few years Redmond blinks.

A year ago, no bookie in his right mind would have given odds on that. But in 2003, the bet that Microsoft will give in on licensing terms or price or both has made the leap from no-hoper to reasonable long shot. And that’s good enough for many CIOs, low on resources and unimpressed by Microsoft’s latest offering, to take that wager.

Microsoft’s Big Squeeze

Microsoft’s new plan isn’t unusual. Big ERP and CRM vendors make their customers pay a yearly subscription fee?typically 10 percent to 22 percent of the license price?when they buy the software. For that, they get free upgrades and support. But Microsoft’s take is higher?29 percent of the license price per year, according to Gartner. Indeed, cost is a big factor in CIOs’ anger. Even if you signed up for Licensing 6.0 before the deadline, chances are you’re paying more than you did before. The fare hike depends on how often you like to upgrade your computers, according to Gartner. If you’re accustomed to dumping things every three years, you pay at least 50 percent more; four years and it’s 100 percent more for desktop and server software. Microsoft’s calculations say that 20 percent of customers will pay more, 50 percent will see no change and 30 percent will actually pay less under the new plan.

No matter whose numbers you believe, it’s clear that the new plan favors companies that upgrade more often. But in these economic times, CIOs are less likely than ever to upgrade. Especially since analysts and CIOs alike call XP at best an incremental improvement over Windows 2000. And most corporate customers haven’t even gotten that far yet. Most are just now considering upgrades from Windows 95 (which Microsoft stopped supporting in 2001) and Windows 98 (support ends in June 2003), says Gartner. There’s a pattern emerging here that CIOs don’t like: Microsoft’s upgrades have become more frequent and more incremental over the years, just like the other major enterprise software vendors.

Kathy Tamer, vice president and CIO of United Space Alliance, the Houston-based prime contractor for the space shuttle program, has a timetable for upgrading her company’s 10,000 desktop computers that doesn’t match Microsoft’s. “We upgrade the desktop every three to four years and the operating system every four to five,” she says. “That gives us time to get everything stabilized and gives us the best return for our investment.”

Tamer is in the process of upgrading to Windows 2000 from Windows 95 and 98. She purchased all the licenses before the new plan came along and is rolling out the new stuff as she buys new machines, turning over about 25 percent of the machines per year. She is a fan of Windows products in general, she says, but saw no reason to sign up for the subscription plan simply to hedge her costs on a future upgrade. “With our timetable, it made no sense to go with the new plan,” she says. “The price to us was going to be $3 million, and we had four months to pay [before the deadline]. We told Microsoft to go pound sand.”

Larry Shutzberg, CIO of Rock-Tenn, an Atlanta-based packaging maker, is hoping to go even longer until his next upgrade: four to six years. Shutzberg skipped an entire generation of Microsoft’s desktop software suite, Office, sticking with Office 95 until finally moving to Office 2000 in 2001. Even then, he saw no significant feature improvements that warranted the move. He did it, he says, because his customers did it and started sending Rock-Tenn Office 2000 documents that his businesspeople couldn’t open with Office 95. “There have never been real business drivers to upgrade,” says Shutzberg. “The only drivers have been compatibility issues.”

Shutzberg says it would have cost Rock-Tenn $2 million to sign up for the new licensing plan for its Microsoft infrastructure, which includes 2,500 desktops. “That’s cost prohibitive,” he says. “That’s why we’re going cold turkey on Office 2000. Office 11 [the next version of the productivity suite] is nice, but not to the tune of $2 million. I love their products, but I can’t stand that my hands are tied behind my back.”

He admits, however, that he and his colleagues had a hand in tying the knot. “They got us used to paying low amounts for this stuff, and we all went along,” he says. “Now they want more, and we don’t want to pay. I used to have Lotus 1-2-3, but Microsoft cost less so I bought it. Now I look around for competitors, and I don’t see any. With their predatory pricing, they’ve killed everyone who could’ve offered us an alternative.”

Open Source as License 6.0 Killer

Well, not everyone. Microsoft may have killed off its traditional competition, but it has been unable to eliminate a pesky threat that is immune from pricing pressure: open-source software. The movement that began as a hobbyist effort to create a free alternative to the Unix operating system has grown to become a threat to all pieces of Microsoft’s business: the server, the desktop, the Web. Viable and free, open-source alternatives now exist for the products that constitute at least 70 percent of Microsoft’s revenue: a desktop and server operating system in Linux, an office productivity suite in’s OpenOffice, and an e-mail client and server in Ximian’s Evolution product. After long dismissing Linux, top Microsoft executives now acknowledge the threat. “Linux is absolutely a competitor to Windows?no question,” says Jim Allchin, group vice president for platforms at Microsoft.

How much of a competitor remains to be seen. Most big company CIOs are so heavily invested in Microsoft that few are considering switching wholesale to open source. Like angry, jilted lovers who can’t bear to separate, CIOs are looking to open source not as a replacement but because they want to make Redmond jealous. “I read an article about OpenOffice this morning,” Tamer says. “I’m considering my options.”

“This puts open source on my radar screen,” says Tom Shelman, CIO of Northrop Grumman, a Los Angeles-based defense contractor and shipbuilder. Indeed, 60 percent of respondents to the latest CIO survey said they had decided to begin using open source as a direct response to Microsoft’s new licensing plan.

Shelman is considering open source reluctantly, he admits. But he feels trapped because he could not create a business case to justify signing up for Microsoft’s new licensing program. He tried, but his IT staff found that the licensing plan could increase the cost of an upgrade 60 percent more than in the past. “If you’re going to increase the license cost, you have to look at three things to balance it,” Shelman says. “Will the support cost go down? Does it increase functionality? Does the ability to use it let you win more business? Right now, I can’t demonstrate business value for doing it based on those things.”

So in December, Shelman, who controls 100,000 desktops at Northrop Grumman, made a decision that could represent a turning point for Microsoft. He decided he needed an alternative. “We decided to explore whether it’s feasible to move a $25 billion company onto open source,” he says. He has no problem with Microsoft software, he says, nor is he at all sure whether open source can work, but if it can demonstrate more business value than what he’s using now, he’ll consider it for part of his desktop population.

“We don’t chase the latest release of anything,” he says. “For any type of software, you have to ensure that what you’re doing is adding value. You can’t automatically pay just because a vendor raises prices or changes strategy. You have to think carefully. The reason costs were spiralling out of control for years was CIOs said, Hey, we gotta buy the new stuff.”

Peter Houston, Microsoft’s senior director of server strategy, says Microsoft will not give up the new licensing plan, although last month it extended some support provisions for NT Server 4.0 through 2004. Nor will it give away its software?as some analysts have speculated it will. But it is reasonable to speculate that if the company begins to feel enough pressure?from open source, from its customers, from the economy?it will respond. Most likely, Microsoft will simply drop its prices to meet or beat any perceived cost advantage that emerges from Linux and open source.

And that could mean that those who have taken the bet against the new licensing plan might wind up with something to show for their troubles.