Microsoft flirting with antitrust again? Dana Hayter, attorney, Fenwick & West

A new licensing program being put in place by Microsoft will force the majority of its business customers to either upgrade to Office XP before Oct. 1 or pay a heftier purchase price later, analysts say.

The Redmond, Wash.-based software company on Thursday revamped its licensing program--in the process raising fees anywhere from 33 percent to 107 percent for the majority of customers, according to Gartner.

As part of the revamp, Microsoft eliminated the most popular licensing plan for upgrading to new versions of its software, replacing it with a new program called Software Assurance. The new program guarantees customers access to the latest versions of Microsoft's business software, including Office and Windows.

But to participate in the program--to take advantage of discounted upgrade prices--businesses must be running what Microsoft terms the "current" version of its software. For Office, that is version XP, which the company won't formally launch until May 31. If customers upgrade to Office XP, they are eligible to receive future versions of the software at a reduced price.

However, if customers don't upgrade all of their machines to Office XP before an Oct. 1 deadline, they in essence have to buy Office licenses at full price, as if they were new customers.

"You're being forced to do an upgrade to get into (Software Assurance)--or you can just wait, and at some point in the future you can rebuy the license at full price," said Gartner analyst Alvin Park.

The new rules boil down to a huge spike in revenue for Microsoft as companies rush to upgrade to Office XP before Oct. 1. For customers, the new program amounts to a major price increase, just when Microsoft needs it most.

Software Assurance means that overall, Microsoft's U.S. customers will spend an additional $1.7 billion because of the program, according to Guernsey Research. The market researcher calculates U.S. businesses will spend $5.4 billion spent on upgrades, rather than $3.7 billion under the old upgrade program.

Worldwide, the change means Microsoft will pull in an extra $3.6 billion in revenue the first year the program is in place--or about 15 percent of the company's fiscal 2000 revenue, according to Guernsey Research.

Analysts said the move also indicates concern within Microsoft that license revenue is headed for a dip. "I have never seen a price increase like this from Microsoft," said Guernsey Research analyst Chris LeTocq. "With the upgrade leverage they're putting in place here, internally Microsoft has to be forecasting lower revenue for the future. Given the lengthening cycle of upgrades, this would seem to make sense."

"Essentially, what Microsoft is doing is bringing forward revenue from two years out," LeTocq said.

In Microsoft's fiscal 2001 third quarter, Office accounted for 37 percent of revenue--more than any other product. That is a decline from 40 percent in the second quarter and about 46 percent during fiscal 2000.

The upgrade situation applies to all Microsoft products, not just Office. For example, businesses using Windows versions before 2000 or XP before the deadline would have to upgrade to one or the other to join Software Assurance.

Gartner estimates that more than 80 percent of Microsoft customers will have to decide whether to upgrade to Office XP before the deadline.

Guernsey Research estimates that there are about 25 million business users on Office 2000, 40 million on Office 97 and 7 million on Office 95. The figures do not include consumers, which typically buy at retail rather than through license agreements.

Software Assurance, which replaces version upgrades and the Upgrade Advantage maintenance program, already represented as much as a 107 percent price increase for Microsoft customers, Park said. But to avoid an even greater increase--paying full price instead of discounted upgrades--Microsoft customers must have Office XP first.

LeTocq agreed that Microsoft is forcing an upgrade. "If you want to participate in their Software Assurance program, that's exactly what it is," he said.

Microsoft spokesman Dan Leach rebuffed that contention. He did, however, acknowledge that people must upgrade to the current version of Microsoft products to be eligible for Software Advantage. When asked if XP is the current version for Office, he responded, "That is correct."

But Leach emphasized that "customers have a number of choices, and that's why the announcement is so far in advance."

Biting budgets
Deciphering the cost to businesses is difficult, analysts say, because much comes down to how long companies are willing to hold on to their current versions of Office before upgrading. Businesses planning an Office XP upgrade anytime in the next three years from Office 97 or 2000 may have to bite the bullet "and buy the upgrade to participate in the upgrade program," LeTocq said.

Microsoft figures about 40 percent of customers are on Office 2000, with the remainder using either Office 95 or 97. Given that many of the remainder would have upgraded to Office XP eventually, they may simply be forced to accelerate their plans.

But that also means unexpectedly budgeting for an upgrade at a time when many businesses are throttling back purchases because of the economy, LeTocq said.

Microsoft's biggest problem in recent years has been getting businesses to upgrade to the newest version of Office. Though the company insists that most businesses upgrade every two and half to three years, the cycle is much longer, Park said.

"If 50 percent of Microsoft customers are still on Office 97, that's four years old," he explained. "Some of these folks don't upgrade but once every four or five years."

Added LeTocq: "People are not upgrading to Office as frequently as they once did, and this clearly hurts Microsoft's bottom line."

Choice or no choice?
Not everyone would be forced to consider an upgrade. Microsoft offers three licensing programs--Enterprise, Select and Open--with the majority of businesses subscribing to the latter two programs. Enterprise Agreement customers already get free upgrades.

"All people on Enterprise Agreements that don't expire before Office XP comes out, they'll be current and ready for Software Assurance," Park said. "We think that is about 10 to 15 percent of the population."

Gartner figures another 5 percent would be covered under Upgrade Advantage, a two-year upgrade contract that Software Assurance replaces. But that still leaves 80 percent of customers facing the question of whether to upgrade or not.

Many face one of two choices: Upgrade Advantage or version upgrade. Upgrade Advantage costs anywhere from 60 percent to 80 percent of the full purchase price of the program, version upgrades between 57 percent and 72 percent. Most companies opt for the latter option, according to Gartner.

Gartner sees four options for customers considering how to handle Software Assurance: Enroll in Upgrade Advantage, which would roll onto the new program later on; buy a version upgrade and Software Assurance; get a version upgrade to Office XP and pay full price for a new version later on; or pay full price now or later on.

LeTocq says many businesses face difficult choices.

"If you're planning to upgrade in the next year, if you have Office 2000, you should purchase a version upgrade," LeTocq said, adding that the same applies to Office 97. But because Microsoft doesn't offer version upgrades to Office XP from Office 95, those customers must either join Upgrade Advantage or pay full price for the newest version to be eligible for Software Assurance.

Guernsey Research recommends that companies with Office 2000 or 97 planning an upgrade within two years buy a version upgrade. For three years, businesses should get Upgrade Advantage and then Software Assurance. Companies planning to upgrade in four years should just wait and pay full price.

To LeTocq it's clear that "many people will be forced to upgrade."