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January 5, 2004

Uncertainty for Microsoft on licensing contracts

Licensing threatens to again haunt Microsoft Corp this year, as business customers evaluate whether to renew the company's Software Assurance (SA) for the first time.

By CBR Staff Writer

This summer will see the first round of two-year SA licenses, signed in 2002; begin to expire, with little incentive for customers to renew their contracts.

That fact has led one licensing expert to judge that Microsoft is facing a dark window over renewals while predicting the company may introduce SA changes to win customers.

This is going to be a critical year, said Directions on Microsoft analyst Paul DeGroot.

Microsoft introduced SA in July 2002, following an outcry from business users that saw the company’s original date for the program’s introduction in late 2001 postponed.

Many believed SA would increase their Windows software licensing prices, as the program put customers on either a two- or three-year annuity-based renewal cycle.

Microsoft sold SA on the basis that customers are entitled to upgraded versions of their current products, if upgrades are released during a customer’s two- or three-year contract.

When SA was finally introduced, many customers jumped onto the older Upgrade Advantage (UA) program, before it was cancelled. Microsoft subsequently moved these customers onto two-year SA contracts. It is these contracts that will expire this summer.

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DeGroot, though, points out there are no clear incentive for customers to renew SA on client operating systems or Office. The next major product is Longhorn, whose launch dates ranges from 2005, according to Microsoft, and 2006 or 2007, according to analysts.

Businesses who renew SA this summer for another two years will not be guaranteed a new desktop operating system product or Office suite during the lifetime of their contract.

There’s a dark window where there’s not going to be significant upgrades to either the client or Office suite until, say, 2006, DeGroot said.

A lot of people jumped on Upgrade Advantage in 2002. It was an opportunity to get an upgrade on the Office side [Office 2003]. That was a smart move, but I don’t see the same advantages for renewing.

The year ahead stands to be a particularly telling one, as Microsoft is expected to face growing pressure from Sun Microsystems Inc and open source. Sun last year launched Java Desktop System (JDS), comprising StarOffice, Mozilla browser and client operating system.

Already, the company has signed up government bodies in China and the UK to JDS, with Israel announcing it would not buy Microsoft’s latest Office products and focus on OpenOffice.

StarOffice and OpenOffice are not expected to challenge Microsoft’s core desktop business, especially in the US, but do look like nibbling away at large, public bodies that have restricted IT budgets. Another potential target are the millions of Office 97 customers who have yet to adopt a more up-to-date desktop productivity package.

Microsoft, who tweaked SA in 2002, could introduce more changes this summer if the first round of renewals is not working out, according to DeGroot. He believes the biggest opportunity for change is SA’s failure to guarantee customers any actual upgrade.

Microsoft said it would continue to add enhancements to SA, such as Office Solution Accelerators, due this month. However, it would not go into details about plans for the middle of 2004.

Renewing agreements is a huge priority for Microsoft. We want to keep customers on our program, and we work towards making those programs attractive, said Cori Hartje, Microsoft’s director of marketing and readiness for the worldwide licensing and pricing group.

This article is based on material originally produced by ComputerWire.

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