These Licenses May Be a Colossal Blunder

Microsoft faces a serious backlash from customers, especially small and midsize businesses, angry with its XP pricing policies

Stodgy old England would hardly seem the place for a revolt against the status quo. But that's precisely what has erupted over the past few months as Britain's corporate powerhouses have squared off against the Colossus of Redmond.

At issue are the new software-licensing policies Microsoft has introduced for Windows XP, its new operating system that officially comes to market on Oct. 25. A British trade group called the Infrastructure Forum (known as .tif) claims that the changes constitute price gouging that could increase software costs for its 98 member companies by $1.25 billion over the next four years.

Microsoft begs to differ, claiming that the pricing changes would result in savings of 15% or more each year for big customers that upgrade systems regularly. The large companies that make up .tif dispute this conclusion. The complainants include 45 publicly traded entities, such as global megabrands Lloyds, British Airways, and beverage maker Allied Domecq. Each .tif member spends an average of $2.85 million annually on Microsoft products.


  And things aren't any better for Bill Gates & Co. back in the good old U.S., where companies are lodging similar complaints. Some corporate technology managers and industry analysts are asking whether Microsoft, long known for its tough-guy tactics, has finally gone too far.

The changes involve complex rules that dictate how companies and individuals pay for software licenses and the rights that come with those licenses. Before Windows XP, Microsoft had a hodgepodge of licensing options. With XP, it has reduced the possibilities to three tiers -- for small, medium, and large businesses.

More important, Redmond is pushing a new payment system called Software Assurance. It requires an annual fee that's 29% of the price of the original license for a desktop OS and 25% of the original cost for a server OS. Those percentages are high for the software industry, where customers tend to pay a negotiable annual maintenance fee of up to 20%. For their money, Software Assurance subscribers will get "free" upgrades of XP during the term of their contracts, which will generally run for several years.


  Companies that choose to buy the initial license but not the Software Assurance plan can't upgrade their systems later without buying an entirely new license. (In the past, Microsoft has issued upgrades at intervals of 18 to 21 months.) That's less of a problem for the largest Microsoft customers, those buying licenses for 250 computers or more, because Software Assurance is built into those contracts.

However, for medium and small businesses as well as for government organizations and academic institutions, the advent of Software Assurance means the end of one-shot, on-demand upgrades and could be akin to paying the entire original price each time a customer decides to install a Microsoft enhancement.

Microsoft itself says customers who upgrade less frequently than every three-and-a-half years will likely be better off buying one-time licenses. It claims that only one-fifth of its current customers will end up paying more as a result of the new pricing plan. For the others, "Software Assurance gives them the comfort level of knowing that they won't have budget spikes when they deploy new software," argues Rebecca LaBrunerie, the worldwide licensing and pricing-program manager for Microsoft.


  Still, many technology managers are uncomfortable with the timetable Microsoft's pricing schedule sets for them. If they wait until after July, 2002, to upgrade to Windows XP, companies could pay the full retail price for more licenses rather than the current discounted price designed to entice rapid adoption.

That stipulation will be the bane of chief information officers, who prefer to battle-test operating systems and software over long periods before deploying them across fleets of PCs and servers. "The way Microsoft is pricing XP to enterprises is putting a lot of pressure on them to buy it as soon as possible. That's causing a lot of tension," says one corporate IT manager who prefers to remain anonymous.

The indignation seems most pronounced in Britain, where a host of companies argue that Microsoft's new pricing policy will in essence let it force unwanted upgrades on tech managers -- for a hefty fee. These and other companies have asked the British government to investigate what critics have dubbed the "Window's Tax." David Roberts, .tif's chief executive, calls Microsoft's move a "slap in the face" to companies that collectively run 2.2 million desktop PCs and 52,000 Microsoft servers.

Redmond could also find itself in hot water with the European Union, which is investigating Microsoft for monopolistic tactics and could fine it billions for, among other things, its pricing policies.


  U.S. tech managers are being just as vocal. Strong objections from domestic customers have already forced Microsoft to make three alterations to its pricing policy. In early October, it pushed back the date by which companies must upgrade to XP in order to enjoy the lower prices from Oct. 1, 2001, to July 31, 2002.

Gartner analyst Alvin Park has spoken to hundreds of customers about the XP pricing schedule since May. "I have yet to have a customer say, 'We really like these changes Microsoft has made,'" he says. "They feel like they're being forced to pay more. Several have mentioned that they're going to look at alternatives, such as Sun's StarOffice or Linux."

Consumers have also voiced objections to the product-activation system that's supposed to lock out pirates. According to numerous reports, it has also succeeded in locking out legitimate customers who want to switch their XP license from one machine to another. Further, Microsoft is intent on limiting home users of XP to only two copies. That could mean more profits for Redmond -- and more expenses for households that have more than two computers.


  Microsoft says it's still fixing the glitches in XP and that it's paying close attention to the marketplace. "We are concerned about what the customers are saying. We do listen to them and we have listened to them," says LaBrunerie. To the company's credit, it has altered the licensing policy significantly in response to customer demands. Microsoft backed off in a dispute with customers over so-called reimaging, where companies reconfigure new PCs to conform with their corporate systems. Initially, Microsoft wanted customer to pay once to buy XP and a second time for the reimaged version.

Also, Microsoft has lowered the requirement for its top-level license agreements from 500 computers to 250. That could benefit midsize businesses by allowing them to buy into a program with Software Assurance included.

Still, herding customers toward a higher-priced subscription model could end up sending them in search of viable alternatives. It could also hurt Microsoft's efforts to win market share in back-office computing and other commercial software that's packaged with XP. And it could prove a boon to Microsoft alternatives such as Sun Microsystems, which provides Web infrastructure software, and Linux, the open-source OS that's free to all comers.


  Oracle Corp. learned that lesson the hard way in the spring of 2001, when it stopped supporting popular older versions of its software to try to push customers toward newer versions. Partly as a result, Microsoft and IBM have made significant inroads into the database software market.

What's more, issuing ultimatums to customers rarely builds good rapport and loyalty, analysts say. In an October survey of 500 IT managers conducted by trade publication Information Week, 61% of respondents said Microsoft doesn't understand their business needs. And only 52% have plans to install XP anytime soon. Those numbers underline XP drawbacks that even a $500 million marketing campaign may have trouble overcoming.

By Alex Salkever in New York

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