Under the new licensing agreements, Microsoft will encourage customers to enter "software assurance" contracts that will effectively commit them to buying operating system and application upgrades for an annual fee. Additionally, Microsoft will also lease software through annual subscription contracts, rather than sell software outright. The giant will also sell more of its software directly to customers rather than through computer dealers or consultants.
Although Microsoft will continue to sell software the old-fashioned way, an increasing pool of customers will likely sign these lease-like agreements. While some of these programs will make it easier and cheaper for some customers to acquire software, it will also place many on a more rapid upgrade cycle.
The change is so dramatic that "for people that upgrade every four years, it would be cheaper to go out and just buy the full version of the product," said Guernsey Research analyst Chris LeTocq.
Microsoft's problem has been a slowing cycle of upgrades, which could hurt the company's revenue. The licensing revamp helps keep the revenue flow steady but also essentially penalises companies that don't upgrade every two years, analysts said.
"Looking forward, Microsoft saw many customers deferring upgrades, which would be a loss of revenue," LeTocq said. "So what Microsoft is doing is putting a pricing structure in place to protect those upgrades."
Bill Henningsgaard, Microsoft's vice president of worldwide licensing and pricing, attributed the changes to meeting customer needs. But he acknowledged the revenue advantage for Microsoft. "It does tend to smooth things out," he said.
Meta Group says Microsoft's licensing changes are an attempt to augment its revenue stream, which has suffered in the last year on slow upgrade rates to Office 2000 and Windows 2000.
"Many customers tell me the way we license software today is too complicated and requires too much administration," Henningsgaard said. The new program is simplier to manager and is more "a maintainence model, where you spread the cost of upgrades over a couple of years."
"Microsoft says they're simplifying software contracts," said Gartner analyst Neil MacDonald. "We believe they're confusing simplifying with removing options."
