Windows' 'XtraPrice' alienating companies

By John Pletz American-Statesman Staff Friday, August 31, 2001

Two months before the launch of Windows XP, Microsoft Corp.'s latest version of its desktop software, some business customers already are unhappy.

And it has nothing to do with the software's new features. Instead of paying for upgrades only when they actually install them, as they do now, some corporate customers would be paying an annual fee for the right to upgrade, regardless of whether they actually upgraded.

Some corporate buyers say those fees in Microsoft's new licensing agreements could cost them an additional 30 percent to 50 percent per year over the next four years, according to research firm Gartner Dataquest.

"There's been a fairly severe backlash," said Rob Enderle, an analyst with Giga Information Group, a research firm that advises companies and government agencies on technology purchases. "About 30 percent of our clients went fairly ballistic, . . . everything from foul language to one of the larger accounts going into detail in planning how they'd yank every Microsoft product out by its roots."

Microsoft doesn't dispute the numbers and says those customers who wouldn't benefit from the new plans can choose other alternatives. The company maintains that it simply overhauled a confusing array of upgrade programs to simplify licensing for customers, said Rebecca Lebrunerie, program manager for licensing at Microsoft.

Microsoft also says that despite big cost increases for some customers, only two of every 10 business customers would pay more under the new "subscription" program.

"Our analysis shows that for 30 percent of our customers, there will be a distinct decrease," Microsoft spokesman Dan Leach said. "For 50 percent, it's neutral. For about 20 percent of customers, they would see increases."

For Microsoft, the new fees mean a steady stream of revenue instead of relying on unpredictable upgrade choices of individual customers.

But for customers who don't upgrade annually, it would drive up the price of owning Microsoft software because the total of the annual fees would be more than they pay now by spending money only when they upgrade.

The timing couldn't be worse for the 20 percent crowd that's facing higher costs. The potential cost increase comes as many companies are drastically trying to cut spending, and most information-technology budgets have been frozen or cut back after years of expansion.

Those most unhappy about the change are customers with less expensive upgrade plans that are being eliminated, which don't require annual fees.

"We are not pleased with the licensing strategy," said Robert Jackson, global information systems director for DuPont Photomasks Inc., the Austin-based company that makes quartz plates used by semiconductor manufacturers. "We're working with Microsoft to come up with some arrangement."

Jackson oversees about 1,000 computers running Windows. He doesn't yet know the size of the increase his company will face.

The changes take effect Oct. 1, about three weeks before the launch of Windows XP, although many customers under existing plans have until Feb. 28 to upgrade to the new plan.

To understand what all the fuss is about requires some explanation of how corporations -- which generally have hundreds or thousands of desktop computers and file servers -- pay for software differently than individual consumers.

Companies generally pay a fee to license a software program based on the number of seats, or computers, they have running the software, instead of buying the same number of shrink-wrapped disks or CDs.

For high-end software that runs key corporate business systems, the costs can be thousands of dollars per seat. For off-the-shelf products like Windows, it's usually hundreds of dollars.

When a Microsoft upgrade comes along, such as Windows 2000 or XP, and the company wants to install the new software, it might pay a percentage fee -- less than buying the new software outright -- to upgrade its older versions. The cost is paid only when the upgrade takes place, and the company then owns the new version of the software.

Now Microsoft is changing some versions of its pay-as-you-go structure, offering an alternative that would require companies to pay an annual fee, equal to about 29 percent of the price of buying new software, for the right to upgrade to the latest version of Windows, regardless of whether they actually upgraded or not.

For instance, a company might pay $110 or so per seat annually for software maintenance, compared with a one-time expense of about $350 to $400 to buy the new software outright.

Another Microsoft plan offers a rental agreement. If companies upgrade and then choose not to renew the plan, their licenses revert to the last version of the software they bought outright.

Many of the biggest customers, who have what Microsoft calls "enterprise agreements," already pay a yearly fee for upgrade privileges. The University of Texas has such a plan and is unaffected by the licensing changes.

The state's information-technology office, the Texas Department of Information Resources, has chosen an enterprise agreement because it upgrades frequently, said Patrick Hogan, director of business operations. But the more than 150 state agencies will make their own choices, depending on how frequently they upgrade.

"I suspect a lot of these agencies will just hold off (on upgrades) and make changes on about a three-year cycle and buy new licenses then," Hogan said. "Three years is the break-even point on (the fees)."

That strategy has worked well for Golfsmith International Inc., an Austin-based maker and seller of golf equipment.

"We buy full-packaged products," said Ted Popp, the company's director of information technology. "We just don't upgrade that often."

Because Golfsmith and others upgrade infrequently, the one-time cost of paying full price for new software is cheaper than the total of the yearly fees.

Microsoft argues the new plan saves money for those customers that upgrade frequently. But many companies don't upgrade every time a new version comes out. Instead, many companies upgrade every three to four years, about as often as they buy new hardware.

-- Anonymous, August 31, 2001