Corporate users question Microsoft's Software Assurance

The long gap between product releases is making some customers query the programme's benefits

Microsoft faces a revolt among enterprise customers over its Software Assurance maintenance programme, one analyst says, because of long stretches between upgrades and simple economics.

In recently-published research, Forrester analyst Julie Giera says that based on interviews with 63 Microsoft customers, 25% won’t renew their maintenance contracts and another third remain undecided.

Software Assurance is the Microsoft programme that gives corporate customers software upgrade rights and other benefits during a multiyear contract in exchange for a flat annual fee. It’s an important part of the company’s revenue picture; based on Microsoft’s own numbers for the programme’s contribution to the bottom line, Software Assurance delivered about US$4.1 billion (NZ$5.2 billion) in the January-March quarter.

“There are a number of customers who are looking for alternatives to SA,” says Giera. A huge wave of potential Software Assurance renewals — Giera says 60% of the outstanding contracts had refresh dates during the first six months of this year — could wreak havoc with Microsoft’s financials if companies decide to take one of those alternatives, which range from dropping the programme entirely to postponing contract renewal.

The problem is self-inflicted, Giera adds, and in large part is a timing issue. With Windows Vista and Office 2007 both released in January, and Windows Server 2008 expected before the end of the year, there’s less motivation for customers with rights to those products to renew, she says.

Also a contributor, she says, is the long time span between Microsoft upgrades. Even though the company has committed to producing a major update to its operating system every four years, with minor interim upgrades between each, organisations are wondering if Software Assurance is smart economics.

“Upgrading every two years is just not feasible” for most of Microsoft’s corporate customers, she says. “I’m going to be putting up a major or minor every two years? I don’t think so.” In fact, given companies’ normal six-to-18-month delay in rolling out an operating system update after its release, it’s impossible for most to upgrade more than once every four or five years. For Microsoft’s purposes, that’s too long; companies are on to the fact that they may be better off simply buying licences, since four years of Software Assurance for desktop products ends up being more expensive.

Under Software Assurance, customers pay 29% of the normal licensing fee annually for desktop software, and 25% annually for server products.

“The thing of it is, Software Assurance is a bit of a shell game with the way customers actually deploy,” Giera argued. Of the customers interviewed who admitted that they weren’t going to purchase the same level of SA as before, 74% said one reason was because it just didn’t make economic sense.

To make matters worse for Microsoft, companies are pushing out updates even further. “If a customer drops SA, that’s a three-year blip for Microsoft revenues,” says Giera, referring to the typical three-year Software Assurance agreement. But factor in longer stretches between upgrades, and “that becomes a four- or five-year blip” before an customer might reconsider.

Giera has several recommendations for companies considering the programme — ranging from pushing for discounts and negotiating early, to specifying concessions and crunching the numbers — as well as advice for Microsoft itself.

“Microsoft has to find a way to enrich Software Assurance, and get customers to use its [non-upgrade] benefits,” she says. “There’s no way it can back off SA. It’s just too dependent on the revenue.”

One angle Microsoft could pursue, she says, would be to put even more emphasis on linking some software and technologies to Software Assurance. “MDOP [Microsoft Desktop Optimisation Pack] is a good example. The stick is that they’ll begin tying these things to SA. I expect that they’ll continue to pursue this strategy.”

The question, of course, is whether — and, if so, when — corporate customers will balk at any arm twisting. “Microsoft has to demonstrate ongoing value to Software Assurance, not just at upgrade time,” says Giera.

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