BackOffice Licensing Blues

• 10/21/1998

"The financial impact can be considerable," says Alexa Bona, research analyst for Gartner and one of the authors of the report. "We think that some customers may pay 50 percent more per year for their BackOffice licenses. … BackOffice licensing costs have remained flat, but what’s really making a difference are the changes Microsoft is making to licensing rights."

BackOffice client licensing can come in two variations: per seat and per server. Licensing per seat means that an organization buys a client license for every workstation using a BackOffice product. Licensing per server is a concurrent use strategy that allows a company to license a set number of connections to each BackOffice product.

Microsoft’s Select agreement contract, a typical volume-purchasing arrangement, includes pricing plus "terms and conditions" and "product use rights." Customers who have negotiated their Select contract with Microsoft often believe that they have locked in constant costs over the life of the contract. However, the agreement allows Microsoft to change the product use rights at any time, including changing the licensing requirements and costs for BackOffice clients. A typical clause included with the Select contracts from Microsoft says that the Product Use Rights document "may be amended by Microsoft from time to time."

For example, consider Microsoft Exchange. Prior to Exchange Server 5.5, Microsoft customers could choose to license per server for the largest number of concurrent users of their messaging server. For instance, a company with 2,000 employees might estimate that only 10 percent of them would be using messaging services at any time and thus would buy 200 Exchange licenses. With the introduction of Exchange Server 5.5, customers can no longer license per server. Instead, they must license every workstation at a cost of $40 to $53 per desktop.

Other critical BackOffice components have seen their product use right evolve. According to Gartner’s report, "in July 1997 Microsoft announced that SQL Server for intranet applications would no longer be licensed based on unlimited use, [and the software] now requires client access licenses for each user." Gartner estimates that the cost for this licensing change is between $91 and $123 per user.

Bona reports that many of her clients have seen "their software bills continue to climb while retail pricing remains flat." She cites an example where a 10,000- to 12,000-desktop corporation went through changes in licensing rules for Microsoft Office. The company witnessed an overall price increase of 220 percent while the per-unit cost of the software remained stable.

Microsoft is not alone in using licensing terms to generate more revenue from software sales. According to Gartner, as software products mature and have less room for growth in sheer numbers of licenses, vendors must become more ingenious at producing revenue growth. Many companies have used the terms and conditions section of contracts to generate revenue. "The difference is that we see Microsoft activating this option more often than any other vendor in the product space," says Bona.

Microsoft has a different take. Peter Boit, general manager for U.S. enterprise customer unit licensing at Microsoft, says, "Customers see the current license model as one that provides simplicity and value for price. The changes we have made were intended to make our programs and license models more simple and fair.

"We believe, based on our customer information, that the changes impacted a much smaller group of customers and to a much lower extent than what Gartner is claiming," Boit continues. But Boit doesn’t deny that some Microsoft customers have been adversely impacted: "We have been working with these customers over a year to provide some equitable transitions to our current programs and policies."

In the same report, Gartner indicates that it expects Microsoft to unbundle Internet Information Server (IIS) by the year 2000. IIS is currently offered as a component of Windows NT Server and doesn’t require any additional expense beyond the purchase of the Windows NT Server license. Unbundling IIS would mean that customers building Internet/intranet applications on IIS might face unexpected increases in licensing costs. While not denying the prediction, Microsoft’s Boit says, "Currently, we have no plans to change our product offering regarding IIS."

To avoid surprise licensing changes, Gartner’s Bona suggests that "larger companies should lock in their product use rights at the time of contract negotiations. Both large and small customers should work to understand the cost exposure [of] the product use rights clause and plan for additional expenses. We’re telling our customers to plan to allocate for additional costs of up to 50 percent per year. For truly large customers, we’re advising using their install base to leverage more favorable licensing agreements."

Gartner is advising smaller customers to examine whether the single-vendor solution is really the most favorable. "Given the exposure to financial risk posed by the product use clause, we tell [smaller companies] to examine other options for providing these services on their network," says Bona.