Software licensing 101

Microsoft's new software licensing schemes are just another phase in the evolution of the company's product licensing, according to its New Zealand sales and marketing director, Ross Peat.

An explanation of how Microsoft's new licensing system works can be found here.

Microsoft’s new software licensing schemes are just another phase in the evolution of the company’s product licensing, according to its New Zealand sales and marketing director, Ross Peat.

It is matching advances in technology, as it has in the past, but this time it’s being done in anticipation of software becoming a service with customers paying for it as such. It’s an evolution that began back in the good old days, says Peat, when Microsoft sold the DOS operating system and point solutions in a box together with a software licence.

With the advent of Windows 3.0 in 1990 the company began moving from the retail market to a much more business-to-business selling space. The arrival of Windows 3.1 two years later saw it moving into licensing programmes, that were more than just end-user agreements, and eventually Select and Open licences were introduced.

IT managers struggling to manage software assets moved very quickly to licensing agreements because they delivered a price break, were simpler to manage and intellectual property ownership became paper-based. Now Microsoft is stretching beyond the early stages of the internet revolution with what it calls .Net, that is based on the notion of software as a service, according to Peat.

“So we’re trying to keep the licensing programmes in parallel with technology,” he says. “And that’s really why we’re moving to a subscription service because it reflects what we’re doing with .Net, software as a service.”


The underlying factor is customers are looking for more value that is partly price, but also easier management, easier maintenance and easier collation of their information. If a customer acquires a licence and wants on-going access to the product, and the set of technologies that evolve through different versions, he or she may want to some sort of ongoing subscription, such as Microsoft Software Assurance.

Replying to concerns about the complexity of the new system, Peat admits there is a challenge in Microsoft’s intellectual property licensing programme but argues that licensing in general is complex. He believes the company is making some progress in simplifying it.

“We’re doing everything we can to make it as simple as we reasonably can,” he says. “The challenge comes through in the transition from one programme to another. There’s change involved and change creates some displacement and some confusion can come out of that.”

Microsoft accepted the need to work hard, talk to customers and partners, to keep evolving the new licensing system so it becomes simpler for customers, says Peat. The company has provided customers with multiple choices but it doing so it had added complexity. It could dumb down the new licensing programme, but choice and flexibility would be lost and customers will not like that to happen.

“So we’ve got this challenge, almost a paradox, of trying to maintain flexibility while making the programme more simple,” says Peat.


Peat admits to having trouble in understanding that, as one CIO has claimed, the new regimen transfers the risk inherent in a corporate upgrade from Microsoft, where it lay in the past, to the customer.

“It depends on how you look at it,” he says. Does a company acquiring a software licence also look at Software Assurance or does the company simply wait to see what happens to its business and what its business needs are, he asks.

There is no compulsion for a company with a licence to deploy the technology in any specific period of time, but clearly if it’s got Software Assurance then it will want to get as much leverage as possible by deploying as early as possible.

“I’m not sure in terms of this transfer of risk,” says Peat. “There’s no obligation on them to deploy within a specific period of time that may incur more business risk for them.”

Peat says all Microsoft is suggesting is that if an organisation tends to leverage the technology on a regular basis, maybe following a two to three-year upgrade cycle, then Software Assurance is the smartest way to go. In his opinion Software Assurance smoothes out payment streams and makes overall management of intellectual property assets much easier.

He doesn’t agree that upgrade risks have moved from Microsoft to the customer. There’s been no change there, he says.

But he concedes that the new licensing system perhaps puts more of an onus on a company IT manager to think a little bit more strategically with respect to where the organisation is going with its software assets.

He accepts making assumptions about what’s going to happen in the future entails risk, but argues that if a company is paying upgrade costs upfront, and then perhaps three months later when deploying the technology it finds it’s not the right thing, it’s “done its dough as well”.

Microsoft does not believe a more strategic view of intellectual property is necessarily a negative in terms of the way businesses look ahead although he concedes that what a company decides to do is literally its own business. But, he says, companies do plan ahead on perhaps on a two- or three-year basis and it’s likely they’re looking at tools and platforms for business units, customers, partners and employees. “We’re suggesting you can map your licensing programme to that,” says Peat.

As Microsoft evolves its .Net product suites it’s likely there will be more in that way of what the company calls streaming products or products as services. Peat claims the trend is already evident in home Windows update technologies that automatically provide users with the latest patches and drivers for example.

“It’s the sort of service we’re looking at moving towards and it seems logical that if you’re have that sort of software as a service, you have a subscription regimen that goes with it,” he says.

Microsoft is moving from perpetual to subscription licensing, he says. It’s what its customers have been asking for. It is where the future lies. The whole notion of .Net is about software as a service. What he calls “big bank upgrades” in his opinion had some virtue in the days when a company moved, for instance, from Office 4.2 to Office 95.

But when there’s fairly substantial change in what the products can do, as is happening now in shorter periods of time, then there are training and platform issues and all the rest of it.

“What larger customers in particular would like to see a smoothing of cycles so it’s not big bang.” They want to get into the coming new versions of software smoothly and that’s why Microsoft is building its .Net platform. Subscription licensing is being run in parallel with .Net.


Commenting on claims that Microsoft sliced and diced its software licensing to make more money, he says the company’s drive was really to simplify the programme. “It was not seen as another means of driving up revenue.”

In some situations customers pay more and in some situations others pay less. “For what we think is a substantial number of customers, probably the majority, this [new system] is pretty price-neutral,” says Peat. Licensing is in transition and as it moves from A to B there’s always a challenge moving across to a new system and there are some opportunities for confusion that’s quite natural when people are moving from one world to another.

He believes the situation will settle down once the simple notion of a licence has been accepted and the customer decides whether to put his Microsoft software under a long term subscription arrangement.

Software Assurance

Peat says under the new licensing system a customer can commit themselves to deals that last 12 months, sometimes 24 months, and three years, and perhaps longer, if there’s an Enterprise Agreement. Customers can opt out at the end of an agreement, he says. Those doing so may have technical and training issues, and all those sorts of things, and they need to weigh them up.

“But there are always choices and you can still go out an live in a non-Microsoft world,” he says.

Discussing the choices customers have after investing millions of dollars in intellectual property in applications based on Microsoft technology, Peat says it’s a matter of value.

“The question is, is the cost of going to another platform greater than the cost of staying with Microsoft?” he asks. The company, he says, is very conscious of the huge responsibility it has to continue to deliver business value in the future as it has in the past.

“If we stop doing that we’re history,” says Peat. “In many ways we’re only as good as our last version.” If the company can’t do better with a new version than the old one, it has a problem.

Customers always have an option, says Peat. IBM had a very strong market presence, and still has, but its customers took parts of its business off to other computer platforms, so there are always opportunities for people to move.


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