Microsoft Corp. announced a number of pivotal changes in its software licensing model Thursday, including the way it sells products to grade schools, that will increase the cost most customers pay for its software.
In addition to launching subscription offerings — or nonperpetual agreements — for corporate customers Thursday, Microsoft expanded a similar offering to grade schools and high schools that use its desktop software and operating systems [see story: Microsoft revises corporate licensing scheme].
Considered the first major shift toward the company’s software-as-a-service initiative, Microsoft has marketed the deal as the most cost-effective way for users to stay up-to-date with its products, noting that 80 percent of its customers will save money compared to what they pay under current contracts. The changes also allow schools to customize their software implementations. Some analysts, however, see these new agreements as a way for the software maker to reinvigorate its revenue stream from upgrades and new licenses, which has dwindled recently as Microsoft saturates the desktop software market.
“Their long-term goal is to get organizations on to subscription pricing and eliminate the cheaper options for upgrading,” said Alexa Bona, a research analyst at Gartner Group Inc., who advises corporations on how to negotiate with Microsoft’s range of licensing offers. “I would expect that they would announce these more broadly by year end.”
Microsoft’s Classroom Agreement 3.0, an extended version of a licensing model that colleges and universities have commonly used for the past several years, is now available to schools serving kindergarten through 12th grade, the company said Thursday. The agreement gives those academic customers access to three-year subscriptions for software products and includes free upgrades during the length of the deal. Once the contract runs out, schools can renew the subscription and keep the software, buy out the contract for previously agreed upon terms, or cancel the agreement and return the software to Microsoft.
The Classroom Agreement for schools serving kindergarten through 12th grade will be available on Aug. 1.
Microsoft also announced a new model for corporate customers that will take effect Oct. 1. That program has been under pilot with some of Microsoft’s European major customers with 5,000 or more desktops for the past six months, Bona said. The new Enterprise Agreement will slowly replace low cost perpetual agreements – licenses that give corporate customers the right to keep software once their contract runs out.
A company with about 5,000 desktops will pay anywhere from 60 percent to 94 percent more to keep up with new versions under the licensing changes compared to the old licensing agreement, according to Gartner estimates. Large corporate customers using Microsoft Office, for instance, have typically paid about $900,000 to upgrade. Bona said they would pay about $1.7 million under the new licensing terms.
The Redmond, Washington software maker also used Thursday’s licensing announcement to plug its Software Assurance licensing model, one of the most expensive perpetual license models Microsoft offers to customers. That model gives customers access to free upgrades during the length of a contract and allows them to keep the software when the contract runs out. Software Assurance, however costs customers about 10 percent to 20 percent more than regular version upgrades, Bona said, and has proved difficult for most corporate clients that don’t have the means to stay current with software upgrades.
Also included in the announcement was the elimination of some version upgrades, which are the most inexpensive way for customers to buy software, Bona said. Many companies that used older versions of Microsoft software and operating systems – only upgrading with new major versions – will be forced to stay current with the latest products.
“Right now customers have a choice on which model they can choose, but going forward I would bet there’s really not going to be much of a choice,” Bona said. “I think organizations are really going to struggle to justify these agreements, but unfortunately most will be locked in.”
Microsoft in Redmond, Wash., can be reached at http://www.microsoft.com/.