Microsoft has revamped its software license structure that could cost some business customers an extra US$1.6m in upgrade fees.
Analysts say the software giant is penalising companies that don't upgrade every two years.
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."
Forced upgrades
The changes affect the most popular type of Microsoft's licensing programs, Select Agreements. Under the old terms, most companies could purchase upgrades one of two ways: through a two-year maintenance contract called a Upgrade Advantage, or by buying one of four common version upgrades - the most popular option. Microsoft eliminated both plans and replaced them with a new program called Software Assurance.
"They've eliminated the most popular way that midsize organisations upgrade their software and raised the upgrade price in the process," MacDonald said.
Gartner estimates that medium-sized businesses upgrading software every three years will pay anywhere from 33 percent to 77 percent more under the new plan than they did with the old. Four-year upgrades would cost 68 percent to 107 percent more.
"We went through a typical organization with 5,000 desktops that runs Microsoft Office and uses version upgrades," MacDonald said. "The increase in cost with the elimination of version upgrades ranges from US$900,000 to US$1.6 million."
"The message here is if you're a good Microsoft customer, you will be rewarded, but anyone pushing off upgrades will pay more," LeTocq said.
MacDonald disagreed. "Most people don't upgrade for at least every three years," he said. "For Microsoft Office, it's every four years."
