Changes in Microsoft Licensing Rules Will Bring Additional Expense

September 2001

The Great Technology Slump

Everyone who's involved in the high-technology industry, or whose business depends on it, has noticed that the growth rate is dropping. In some cases it is not just the growth rate: Dell Computer Corporation expects to see less revenue this year than last. Technology spending has been growing so rapidly for so long (typically 15%/year) that it will be difficult for companies to adjust to its decline and pull in their belts.

The decline will be especially hard for the two cooperating motors of the PC industry, Intel and Microsoft, commonly called the Wintel Duopoly. As regularly as Moore's Law doubled the computing power on PC chips, the two companies pumped out new products. Intel produced larger, faster chips, and Microsoft wrote the larger software suites that demanded more power, more memory, and more money. So long as the software industry produced enough innovative software that buyers believed they had to have, buyers would pay for the newer, larger machines necessary to run it. While the price of these machines tended to remain constant or fall--even as they grew more powerful--the price of the Microsoft software to run on them has risen steadily.

The problem today is that buyers do not see any software they believe they have to have but cannot run on their current machines. Buyers are also feeling the constraints of contracting economies. At the moment, most people are sticking with their current hardware and software solutions and studying the future to see which options will lead them into a future of increased functionality at the same or lower cost. Microsoft Office is now a mature product.


Microsoft Needs to Raise Revenues and Earnings

This is an unfortunate situation for Microsoft because most people are Microsoft users. Because of Microsoft's slowing earnings, and because the company needs to raise its stock price continually in order to attract legions of bright employees, it has already put plans in place to raise near-term revenues. Microsoft plans to spend US $700 million to promote upgrading to the XP platform, and to realize about US $3 billion from the first year of upgrades. This is not a bad investment when you remember that XP contains the foundations of the Microsoft .NET and Hailstorm strategy designed to tie every Microsoft desktop user into Microsoft Web services.

But if you are like 60% of Microsoft users, you have not even upgraded to Office 2000, and are probably not thinking very hard about Office XP. Windows XP must be even further from your thoughts. Because your reluctance has seriously depressed Microsoft expectations, the company has new licensing plans for you. You will have to evaluate them carefully against your own situation to see whether you will be able to save any money. At the same time, like an increasing number of companies, you will want to look at alternative applications and operating systems, including Linux and BSD solutions.


The New Licensing

Under the old licensing plans, you could choose to wait and see about upgrades. It is true that the old plans were complex, and that in order to qualify for quantity discounts the buyer had to prepare and continually update an inventory of all Microsoft software in the company, along with the proof of purchase for each piece of it. Nevertheless, none of these plans required the buyer to pay for an upgrade he didn't want to install. New rules will require a copy of the immediately preceding version in order to qualify for an upgrade. Because of customer complaints, Microsoft extended from 30 September 2000 until 28 February 2001 the Upgrade Advantage Plan, an interim measure which allows upgrading from designated prior versions of software. Upgrading directly to Windows XP from Windows Millennium Edition and from Windows 98 will be allowed until that date. Microsoft is scrapping all the previous upgrade programs that gave customers a break, and additional licenses for staying where you are on those versions will not be available under any discount plans, but will have to be purchased as individual units. If you can forecast your needs for these old versions, the volume plans still have another month to run, I believe--until the end of September.

The good news is that you will not have to prepare an inventory and proof of purchase because the single-box license doesn't require you to admit software auditors, but a court order procured by the Business Software Association, operating on behalf of Microsoft, might make you wish you had, so prepare it anyway.

One way of hanging onto discount plans for earlier versions of Windows is to buy upgrade licenses for Windows 2000 Professional and apply them in "downgrade" mode to further deployments of the earlier versions. This will not be as cheap as you would have liked, but it does put you on the upgrade path for future purchases.

The new licensing plans are intended to push customers onto software subscriptions for continual upgrading, preferably over the Internet, although you won't have to install the upgrade so long as you pay the fees. This is the Software Assurance program. Customers who buy machines with Windows 2000 pre-installed will hold a Perpetual License to that OS, but can subscribe to an upgrade plan as an option. Open Agreement holders be converted two a two-year contract for Software Assurance, and Select Agreement holders will be put on a three-year Software Assurance contract. The annual rate is 29% of the price of a desktop license, and 25% of a server license. You will have to take these figures, schedules, and your own plans and see what options and timeframe make the most sense for your company. Microsoft claims the whole effect will not be a price shock, but some analysts estimate an effective price increase of 22% to 68% as a result.

For large-quantity buyers of licenses, Microsoft is willing to disable the remote registration that individual users find so annoying. Microsoft is dropping the eligibility requirement from 500 users to 250 users because it knows that it is not the larger companies that practice unauthorized copying of its works, but smaller companies and individuals who either do not have the funds for methodical policing of their own compliance, or who feel the expense for additional copies is too high. Now that Microsoft is the standard, the company's former tolerance for those propagating its standard has declined.

The Gartner Group reports one final licensing wrinkle that occurs for many customers on the Microsoft Select Agreement program. Companies who buy computers with Windows already installed and then install their own corporate-approved version of Windows under the Select Agreement may find themselves paying for the operating system twice, once under each buying program. That's right, says Microsoft. In order to avoid paying twice the buyer should have the computer manufacturer install the corporate-preferred version of Windows on the machines before they are shipped.

This toughening of Microsoft's position is possible now that it controls some 94% of the desktop market and does not have to court its customers. There is, of course, an upper limit to the prices it can charge: remember Colbert's caution that the wise taxing authority will figure out how to remove the maximum number of feathers without making the goose hiss.

In the meantime, as you consider your options and the possibility of adopting something other than a Microsoft solution:

* Be sure to centralize your software audit so that your departments don't duplicate your central licensing payments

* Keep employees from installing their own Microsoft software and thus confusing the count

* Consider using remote software install/management with centralized records.


Copyright © 2001 by Donald K. Rosenberg, Stromian Technologies (

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Don Rosenberg will be speaking on Open Source and Linux from a business point of view at the following events in Europe this fall:

Orbit/COMDEX Basel (26 Sep)

Wizards of OS2 Berlin (11-13 October)

LinuxWorld Expo Frankfurt/M (1 November)