Licensing Trends Come Under GartnerGroup Fire

In a presentation at the GartnerGroup Windows NT Conference held earlier this month, users were cautioned to prepare themselves for an evolution from perpetual to non-perpetual licensing schemes.

INDIAN WELLS, Calif. -- An old television commercial once quipped, "You can pay me now or you can pay me later." Through subtle but dramatic changes to its licensing terms, Microsoft Corp. may be planning for both.

In a presentation at the GartnerGroup ( Windows NT Conference held here earlier this month, users were cautioned to prepare themselves for an evolution from perpetual to non-perpetual licensing schemes.

GartnerGroup says the changing licensing terms are resulting from shifts in Microsoft's revenue streams. While desktop operating systems and personal productivity tools have accounted for the bulk of Microsoft's strong financial results for the past several years, expectations are that desktop and productivity opportunities will become primarily an upgrade business. Windows NT/2000 and BackOffice will become the company’s cash cows. For example, Microsoft productivity applications are predicted to grow from over $5 billion in 1998 to $10 billion in 2004. During that same window, so-called "IS infrastructure" revenues, which include Windows NT/2000 and BackOffice, will grow from about $2 billion to $16 billion in revenue.

"Unless you understand Microsoft's licensing program and licensing practices, you won't be able to protect your investment," cautions Alexa Bona, research analyst with GartnerGroup. She contends that by next year, most users will be paying as much as 50 percent more for their Microsoft licenses than they do today.

Microsoft now offers three basic licensing schemes: Open Agreement, Select Variable and Select Enterprise. The Microsoft Open License Program is the low-end program, which doesn't allow for aggregation of licenses on widespread desktop deployment or across international boundaries. The Select Variable agreement offers a two-year forecast option, where users predict the number of licenses they expect to buy and products are collected into three pools, including application products, system products and server products. The high-end program is the Enterprise Agreement, which is focused on sites with over 500 desktops. The Enterprise Agreement offers less flexibility and provides little detailed information on individual product licensing.

Bona says users should apply this rule of thumb: "The more flexible the agreement, the more it should cost you. The less flexible the agreement, the less it should cost you."

Microsoft is expected to steer more large customers toward the Enterprise Agreement, and discourage use of the Select Variable program. "We believe Microsoft will eliminate their standard Select Agreement by 2001," Bona adds.

As Microsoft coaxes large customers into the Enterprise Agreement, GartnerGroup predicts Microsoft will eliminate the concept of perpetual licensing. "Perpetual licenses give you the right to run that software forever. A non-perpetual license allows you to run the software for a given period. At the end of the term, you either rebuy the license or unload the software," Bona explains.

Bona advises users to prepare to negotiate aggressively with Microsoft, and to consider the option to not renew agreements with Microsoft for a two-year window, to achieve cost savings she estimates to be as high as 70 percent.

Along with the debut of non-perpetual licensing in the 2000 to 2002 time frame, GartnerGroup also expects Microsoft will price IIS as a separate product from Windows NT/2000, and will require BackOffice licenses to run Office applications. The analyst group also expects Microsoft to move to a server capacity- or processor-based licensing scheme for Windows 2000.

Peter Boit, general manger of worldwide volume licensing at Microsoft, maintains that Microsoft is not forcing change on users. He explains, "Today, what the marketplace is telling us is they would like to have the opportunity and choice to buy licensed products on a perpetual basis -- but we also see customers that want the choice to buy product on an annual basis."

Boit declined to predict whether Microsoft will discontinue the Select Variable licensing option or phase out perpetual licensing. "What we've been telling people for a while is that the marketplace will evolve. The only thing we can do is listen [carefully], and understand what people want, then respond with [licensing] that is simple."

Microsoft’s Changing Licensing Practices

  • Shifting revenue streams will cause Microsoft to increase reliance on BackOffice revenues
  • Select Variable 4.0 and 4.1 agreements to be eliminated by 2001
  • Microsoft will try to displace Oracle with SQL Server through inclusion in its Enterprise Agreements
  • Non-perpetual licensing will appear to be less expensive -- initially.
    • If perpetual licensing is desired, make sure contract includes the term "fully paid, perpetual and irrevocable licenses" is included in your contract.

    Source: GartnerGroup

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