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When the other shoe drops

Microsoft’s proposed new licensing terms feel like a hobnail boot. 5/15/01 Enterprise Pursuits hed: When the other shoe drops dek: Microsoft’s proposed new licensing terms feel like a hobnail boot. Nelson King

Sometimes, when you’re waiting for the other shoe to drop, it turns out to be a hobnail boot. You just knew when Microsoft got serious about selling services and software to align with its .Net initiative that it was also an opportunity to repackage its existing services and software. In this realignment, the key concept will be that instead of buying entire applications, individuals or corporations will rent them or pay a usage fee. More likely, you’d rent or pay fees for portions of applications–presumably only those pieces you need.

Last week, two “trial balloon” messages seeped out of Microsoft. The first was that Microsoft is not going to sell its upcoming XP version of Office in pieces. The other was that Microsoft is considering a new form of licensing for Select and Enterprise Agreement customers. On the face of it, the two messages are contradictory. One says that Microsoft isn’t ready for unbundling all the features and modules in Office (no surprise) in order to rent pieces of it. The other says that even though the services and apps aren’t ready, Microsoft would like to start the rental licensing approach–now.

The current Office XP subscription idea was never real. With the XP version almost ready to roll, would Microsoft suddenly announce one of the most far-reaching and complicated changes in packaging, selling, and managing software ever? Not bloody likely. This was pure-and-simple testing of the waters; possibly also a means of softening up the market for something that is sure to be controversial.

The enterprise-level licensing scheme is much more real. Until now, most Microsoft licenses have carried the so-called “perpetual use” clause which says: “At the expiration of the terms, you have the rights to the most current version of the covered product. That is a perpetual license and can be installed at any time, even after the terms have expired.”

The new volume licenses, which are rumored to be ready for announcement perhaps as early as this week, will specify an expiration date. That means that after a certain date, the user of the software will presumably no longer have the right to reinstall it–or possibly even use it. The only options would be to re-rent (or re-subscribe to) it–including any upgrades that have occurred since the original rental; switch to an alternative or competitive product; or not use that type of product at all. These are all very typical rental options, as anyone who has done business with a local “A-One Rental” can attest.

But the typical rental scheme is almost invariably more expensive. Although rental or subscription fees may initially seem lower (like monthly car payments, for example), they usually carry percentages which, over the life of the license, make them substantially more costly than outright purchase. This is not a new concept at the corporate level, and some companies are willing to pay the difference to get the consistency and predictability. However, the inelastic turnover is new. Right now, if a company is strapped for cash, it can put off software upgrades or changes. Not with a rental license. If a company isn’t ready for a massive upgrade to a new version of the software–including all of the supplementary costs such as training, support, and hardware–well, I suppose Microsoft might negotiate. On the other hand, Microsoft likes the idea of incentives for companies to upgrade more regularly.

Of course, I’m speculating about the pricing. Microsoft isn’t a stupid corporation, and, despite its size, it too must walk the fine line between getting a fair return and angering its largest enterprise customers. Can we count on Microsoft to be fair? Somewhere around the negotiating table perhaps. I’m assuming that Select and Enterprise Agreement customers will still be able to haggle over the terms of the agreement, rental or otherwise, and even about the conditions surrounding the expiration date. However, I can foresee that it’s going to be a lot more complicated, not only to figure the costs and pricing involved, but also to deal with the endgame possibilities. The picture becomes even more complicated when the software and services start coming in much smaller pieces. Sounds like a job for a dedicated accountant, if a company doesn’t already have one.

Consider, of course, that Microsoft is not alone in the movement to break up products into smaller services and modules, change the pricing to fees and subscriptions, and put termination dates on licenses. Depending on how many software vendors a company relies upon for mission-critical software, the developing situation does not look like a pretty picture. Somewhere along the line, somebody needs to do some serious cost-benefit analysis from the corporate point of view.

Editor at Large Nelson King also writes Progamming, a six-part bi-monthly feature series for those considering the noble profession.

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