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Interesting article I read today on thestreet.com.
By Jim Seymour
Special to TheStreet.com
8/7/01 2:22 PM ET
I've been working for more than a month on a column on Microsoft's (MSFT:Nasdaq - news - commentary) behind-the-scenes software-licensing changes for its corporate customers. But every time I have it about ready to go, the company changes plans yet again, partly because of its ongoing struggles with Washington regulators and antitrust enforcers.
Here's the inside skinny, plus some notes about Microsoft's licensing and copy-protection steps aimed at individual PC users.
This is obviously important stuff for PC users and corporate IT managers. But it's even more important for investors, I think, as we watch Microsoft tread an incredibly fine line here between increasing its revenues and infuriating its customers. Tip too much toward the former, and the latter group goes ballistic -- with resulting impacts on quarterly earnings and the share price.
Microsoft, like other software companies, wants to escape the boom-bust, boom-bust, boom-bust cycle of software releases. By moving away from one-time fees, Microsoft could level revenues, provide better predictability on earnings ... and, of course, pocket more dough per user.
The amounts involved in this year's shenanigans are not trivial. By one estimate, the swing between what customers might do one way vs. the other before year-end 2001 is as much as $3 billion.
First, a little background: As you probably know, you don't own the commercial software running on your PC, just as corporations don't own the commercial software running on their fleets of PCs. In both cases, you and they didn't buy the software (though you may have thought you did); rather, you both bought licenses to use the software. And only under very narrowly defined terms.
You can't buy one copy, for example, and then install it on multiple machines. You can't reverse-engineer it, peeling back the digital lid to see how it works. You can't, with a few exceptions, sell it to others. Again: You don't own it; you're merely using it, under a strict licensing system that has withstood many court tests.
For corporations, which don't buy, say, 5,000 shrink-wrapped boxes of Microsoft Office, then run around their offices installing those copies, the nature of the license terms, and the means of paying for that license, vary substantially from how an individual user acquires and uses an Office license.
Once you buy a copy of Office, or buy a PC with Office preinstalled, you can, legally, use it 'til the cows come home. That license doesn't expire; you don't owe any subsequent payments to Microsoft.
To get you to upgrade -- i.e., to get you to pay them more money for using Office -- Microsoft has to deliver a new version so compelling that you're willing to go out and spend $250 or so for an upgrade. That's unreasonable, Microsoft believes.
Microsoft hates the cyclicality of software upgrades: In terms of revenues, it's a constant up-down, up-down, up-down cycle. Worse, as existing software has become more and more "fully featured," there often isn't much left to add to new versions -- which is why there are so many more or less happy users of Office 4, Office 95, Office 97 and Office 98 out there. Say "why upgrade if you have everything you need in your present 4-year-old version?" to a 'Softie and watch him start grinding his teeth. What, he may finally ask, is Microsoft supposed to do for revenues during those years, while you decline, thanks very much, to upgrade?
Users have spoken pretty clearly here. Revenues from Office sales have fallen from 46% of total Microsoft revenues during fiscal year 2000 to 40% during the fiscal second quarter of 2001 to just 37% in the third fiscal quarter of 2001. Lots of copies of Office are going out the door (most, preinstalled on new PCs). So what's the explanation? Simple: We've just stopped upgrading so often.
Unlike that shrink-wrapped-copy paradigm for individual-user and small-business sales, corporations get a master copy of a new software package, then use so-called "push" technology to mass-install it on hundreds or thousands of PCs. For that flexibility, software licenses for corporations typically involve additional payments over time.
Microsoft has developed and pushed several different forms of software licenses over the years, none particularly generous to its corporate customers. You can buy "per-seat" licenses, getting the right to put Office on, say, exactly 1,217 PCs. (Add more PCs and you owe more.) Or you can buy annual licenses, which require annual payments. Or you can buy "maintenance agreements," which involve annual payments but include copies of all major updates released during the license period.
A few months ago, Microsoft announced in its charming, unilateral way, that license terms were going to change for Office XP, Windows 2000, Windows XP and succeeding products. This would be the end of those buy-once/use-forever corporate leeches, the company in effect said. If you wanted to use, and go on using, Microsoft software, you'd pay ... and pay ... and pay.
This was part of Microsoft's long-term goal of weaning us all off what it considers unfair licensing expectations. The company thinks that if you go on using its products over time, you need to keep paying for that right. In other words, no matter how much you paid up front, Microsoft wants to convert you to a kind of annuity for them: a continuing source of revenues, whether you like it or not, and whether you want to upgrade to each succeeding release or not.
It irritates the dickens out of 'Softies that so many people are still using -- still using, dammit! -- products such as Office 95, or Windows 95, still getting lots of value out of them ... but not paying Microsoft an additional dime for the privilege. Harrumph!
Microsoft knows that a campaign to turn individual PC users into "reverse-annuitants" is not going to fly: The outcry would be long and loud. So the stealth plan is to first move corporate Microsoft customers to annual-payment licenses, then, with that precedent pretty well established, go after the individual user. Surely, Mr. Businessman, you wouldn't mind paying, say, a hundred bucks a year for each of your employees to use all those nice Office programs, would you? Especially if you could then finally feel good inside about being able to thank Microsoft every year, in the form of sending those nice checks, and no longer feel like a cheat? I thought so...
Microsoft's assault on corporate clients has been based on first getting them to move to the current version of products, especially Office, with a carrot-and-stick program that says that if you've upgraded to the current version of a product, when the new releases and new licenses come along this year, you'll get a nice discount on those releases.
Otherwise -- if you're one of those tightfisted old meanies who is perfectly happy with, say, Office 97 -- when the new stuff comes along this fall and you want to upgrade to new software, and one of the (required) new corporate licenses, BOOM! you're going to be treated like a new, out-of-the-blue customer. And guess what? In that event, you are going to pay much higher prices for these new, 2001-version upgrades.
First, Microsoft killed its "Select Agreements," then its so-called "Upgrade Advantage" program, and replaced them with the new, Draconian, "Software Assurance" plan. (Don't you love these warm, fuzzy names?) Under the latter, customers not at the current release level on all Microsoft products in use in the firm get clobbered.
The penalty for not playing the game the Microsoft way (read: buy every new release) is huge. Corporate consultancy the Gartner Group estimates that companies upgrading software on a three-year cycle will pay 33% to 77% more under the new Software Assurance plan than they have been paying. Companies upgrading on a four-year cycle will pay, Gartner says, from 68% to 107% more.
Can you say g-o-u-g-e?
So much for exercising your own business judgment on when to upgrade.
As ugly as this muscling of its customers may be, a fair question is where will the unhappy customer go? This is a splendid example of Microsoft's monopoly power at work because you basically have nowhere else to go.
Office productivity software? While Corel's WordPerfect and IBM's Smart Suite office-applications suites remain on the market, they're no longer competitive with Microsoft Office. Jump to the Linux and Unix universes, and such freeware as Sun's StarOffice is available, but even less competitive.
Operating systems? Yes, you could migrate to "free" Linux (with a far smaller universe of applications packages available) -- but at a huge cost in user productivity during the changeover, and a similarly huge cost in retraining existing system engineers and hiring consultants to make the change. Or you could move to pure Unix, from whatever source -- with exactly the same drawbacks.
So what will Microsoft customers do? They'll pay up -- and get even angrier about how they've been treated by their purported "partner."
Investors, who had better hope that the nowhere-else-to-go scenario I've sketched holds true, can see Microsoft's bullylike moves in licensing as a good thing: increased license revenues, a flattening of the upgrade-revenue cycle, better visibility and "forecastability."
But you can push only so far, no matter how unpleasant customers' alternatives may be. The dramatic stretch-out of its biggest customers' upgrade cycles, the reduced "take rate" on the new release of Office during the past few years and the general lack of enthusiasm among corporate IT managers for Office XP should, at minimum, raise warning flags for Microsoft holders.
And Microsoft managers.
--------------------------------------------------------------------------------
While we're on the subject of Microsoft licensing, let me address a small flood of reader mail from the past couple of months regarding Microsoft's efforts to reduce illegal copying of Windows XP.
I've had a lot of outraged letters from RealMoney.com readers that go something like this:
Do you know about the incredible scam Microsoft is trying to perpetrate on its users in Windows XP? Microsoft now expects us to buy separate copies of Windows for every single PC in our office! There's some kind of "activation code" buried in Windows XP that makes it stop working if it's put on more than one PC. This is outrageous ... and somebody should DO something!
Here, I'm afraid I'm on Microsoft's side. There's absolutely nothing new in the idea that customers are supposed to buy (or acquire with new machines) separate licenses for every PC in their office that runs Windows. Microsoft just hasn't enforced this much, at least on the individual and small-business levels.
Yes, I know very well that many small businesses have been accustomed to buying a single copy of new Windows releases, then going around the office -- and maybe even their home -- installing it on every PC they have.
Wrong-o! This has always been illegal -- and should be illegal. Microsoft deserves to get paid for its work, even as thee and me.
What's happening now is that Microsoft has embedded an activation system in each copy of Windows XP that requires users to register that installed copy, online, with Microsoft. If you don't register, the PC simply stops working after a fixed period (apparently, 14 days in Windows XP), or after a certain number of launches (50 in Office XP).
And if you try to register a number of machines using the same copy of the software, the subsequent registrations will simply be rejected.
Because the software builds and uses a profile of the internals of your PC -- a composite of the ID numbers from the hard disk and other universal components -- privacy advocates have worried that Microsoft is building a secret profile of the PC's user. And some computer buffs have worried that when you make substantial configuration changes to your PC, the activation system may fail.
The privacy issue is a nonstarter -- there are no secret user profiles being created -- and Microsoft has done a fairly good job of accommodating configuration changes. (It will also issue a new activation code over the phone if you make many changes, or if you move the software, legally, to another machine.)
I agree that systems such as this new activation scheme -- soon to be standard across all Microsoft products, by the way -- are potentially a big nuisance, and we'd be better without it. But I think Microsoft has generally been pretty benign in its previous efforts to avoid illegal copying, and that approach just didn't work. So much for the carrot, now comes the stick.
If you're offended that Microsoft expects you to buy software for each computer in your office, I sympathize, but I also disagree: That's their right.
Even the Evil Empire isn't always wrong.
By Jim Seymour
Special to TheStreet.com
8/7/01 2:22 PM ET
I've been working for more than a month on a column on Microsoft's (MSFT:Nasdaq - news - commentary) behind-the-scenes software-licensing changes for its corporate customers. But every time I have it about ready to go, the company changes plans yet again, partly because of its ongoing struggles with Washington regulators and antitrust enforcers.
Here's the inside skinny, plus some notes about Microsoft's licensing and copy-protection steps aimed at individual PC users.
This is obviously important stuff for PC users and corporate IT managers. But it's even more important for investors, I think, as we watch Microsoft tread an incredibly fine line here between increasing its revenues and infuriating its customers. Tip too much toward the former, and the latter group goes ballistic -- with resulting impacts on quarterly earnings and the share price.
Microsoft, like other software companies, wants to escape the boom-bust, boom-bust, boom-bust cycle of software releases. By moving away from one-time fees, Microsoft could level revenues, provide better predictability on earnings ... and, of course, pocket more dough per user.
The amounts involved in this year's shenanigans are not trivial. By one estimate, the swing between what customers might do one way vs. the other before year-end 2001 is as much as $3 billion.
First, a little background: As you probably know, you don't own the commercial software running on your PC, just as corporations don't own the commercial software running on their fleets of PCs. In both cases, you and they didn't buy the software (though you may have thought you did); rather, you both bought licenses to use the software. And only under very narrowly defined terms.
You can't buy one copy, for example, and then install it on multiple machines. You can't reverse-engineer it, peeling back the digital lid to see how it works. You can't, with a few exceptions, sell it to others. Again: You don't own it; you're merely using it, under a strict licensing system that has withstood many court tests.
For corporations, which don't buy, say, 5,000 shrink-wrapped boxes of Microsoft Office, then run around their offices installing those copies, the nature of the license terms, and the means of paying for that license, vary substantially from how an individual user acquires and uses an Office license.
Once you buy a copy of Office, or buy a PC with Office preinstalled, you can, legally, use it 'til the cows come home. That license doesn't expire; you don't owe any subsequent payments to Microsoft.
To get you to upgrade -- i.e., to get you to pay them more money for using Office -- Microsoft has to deliver a new version so compelling that you're willing to go out and spend $250 or so for an upgrade. That's unreasonable, Microsoft believes.
Microsoft hates the cyclicality of software upgrades: In terms of revenues, it's a constant up-down, up-down, up-down cycle. Worse, as existing software has become more and more "fully featured," there often isn't much left to add to new versions -- which is why there are so many more or less happy users of Office 4, Office 95, Office 97 and Office 98 out there. Say "why upgrade if you have everything you need in your present 4-year-old version?" to a 'Softie and watch him start grinding his teeth. What, he may finally ask, is Microsoft supposed to do for revenues during those years, while you decline, thanks very much, to upgrade?
Users have spoken pretty clearly here. Revenues from Office sales have fallen from 46% of total Microsoft revenues during fiscal year 2000 to 40% during the fiscal second quarter of 2001 to just 37% in the third fiscal quarter of 2001. Lots of copies of Office are going out the door (most, preinstalled on new PCs). So what's the explanation? Simple: We've just stopped upgrading so often.
Unlike that shrink-wrapped-copy paradigm for individual-user and small-business sales, corporations get a master copy of a new software package, then use so-called "push" technology to mass-install it on hundreds or thousands of PCs. For that flexibility, software licenses for corporations typically involve additional payments over time.
Microsoft has developed and pushed several different forms of software licenses over the years, none particularly generous to its corporate customers. You can buy "per-seat" licenses, getting the right to put Office on, say, exactly 1,217 PCs. (Add more PCs and you owe more.) Or you can buy annual licenses, which require annual payments. Or you can buy "maintenance agreements," which involve annual payments but include copies of all major updates released during the license period.
A few months ago, Microsoft announced in its charming, unilateral way, that license terms were going to change for Office XP, Windows 2000, Windows XP and succeeding products. This would be the end of those buy-once/use-forever corporate leeches, the company in effect said. If you wanted to use, and go on using, Microsoft software, you'd pay ... and pay ... and pay.
This was part of Microsoft's long-term goal of weaning us all off what it considers unfair licensing expectations. The company thinks that if you go on using its products over time, you need to keep paying for that right. In other words, no matter how much you paid up front, Microsoft wants to convert you to a kind of annuity for them: a continuing source of revenues, whether you like it or not, and whether you want to upgrade to each succeeding release or not.
It irritates the dickens out of 'Softies that so many people are still using -- still using, dammit! -- products such as Office 95, or Windows 95, still getting lots of value out of them ... but not paying Microsoft an additional dime for the privilege. Harrumph!
Microsoft knows that a campaign to turn individual PC users into "reverse-annuitants" is not going to fly: The outcry would be long and loud. So the stealth plan is to first move corporate Microsoft customers to annual-payment licenses, then, with that precedent pretty well established, go after the individual user. Surely, Mr. Businessman, you wouldn't mind paying, say, a hundred bucks a year for each of your employees to use all those nice Office programs, would you? Especially if you could then finally feel good inside about being able to thank Microsoft every year, in the form of sending those nice checks, and no longer feel like a cheat? I thought so...
Microsoft's assault on corporate clients has been based on first getting them to move to the current version of products, especially Office, with a carrot-and-stick program that says that if you've upgraded to the current version of a product, when the new releases and new licenses come along this year, you'll get a nice discount on those releases.
Otherwise -- if you're one of those tightfisted old meanies who is perfectly happy with, say, Office 97 -- when the new stuff comes along this fall and you want to upgrade to new software, and one of the (required) new corporate licenses, BOOM! you're going to be treated like a new, out-of-the-blue customer. And guess what? In that event, you are going to pay much higher prices for these new, 2001-version upgrades.
First, Microsoft killed its "Select Agreements," then its so-called "Upgrade Advantage" program, and replaced them with the new, Draconian, "Software Assurance" plan. (Don't you love these warm, fuzzy names?) Under the latter, customers not at the current release level on all Microsoft products in use in the firm get clobbered.
The penalty for not playing the game the Microsoft way (read: buy every new release) is huge. Corporate consultancy the Gartner Group estimates that companies upgrading software on a three-year cycle will pay 33% to 77% more under the new Software Assurance plan than they have been paying. Companies upgrading on a four-year cycle will pay, Gartner says, from 68% to 107% more.
Can you say g-o-u-g-e?
So much for exercising your own business judgment on when to upgrade.
As ugly as this muscling of its customers may be, a fair question is where will the unhappy customer go? This is a splendid example of Microsoft's monopoly power at work because you basically have nowhere else to go.
Office productivity software? While Corel's WordPerfect and IBM's Smart Suite office-applications suites remain on the market, they're no longer competitive with Microsoft Office. Jump to the Linux and Unix universes, and such freeware as Sun's StarOffice is available, but even less competitive.
Operating systems? Yes, you could migrate to "free" Linux (with a far smaller universe of applications packages available) -- but at a huge cost in user productivity during the changeover, and a similarly huge cost in retraining existing system engineers and hiring consultants to make the change. Or you could move to pure Unix, from whatever source -- with exactly the same drawbacks.
So what will Microsoft customers do? They'll pay up -- and get even angrier about how they've been treated by their purported "partner."
Investors, who had better hope that the nowhere-else-to-go scenario I've sketched holds true, can see Microsoft's bullylike moves in licensing as a good thing: increased license revenues, a flattening of the upgrade-revenue cycle, better visibility and "forecastability."
But you can push only so far, no matter how unpleasant customers' alternatives may be. The dramatic stretch-out of its biggest customers' upgrade cycles, the reduced "take rate" on the new release of Office during the past few years and the general lack of enthusiasm among corporate IT managers for Office XP should, at minimum, raise warning flags for Microsoft holders.
And Microsoft managers.
--------------------------------------------------------------------------------
While we're on the subject of Microsoft licensing, let me address a small flood of reader mail from the past couple of months regarding Microsoft's efforts to reduce illegal copying of Windows XP.
I've had a lot of outraged letters from RealMoney.com readers that go something like this:
Do you know about the incredible scam Microsoft is trying to perpetrate on its users in Windows XP? Microsoft now expects us to buy separate copies of Windows for every single PC in our office! There's some kind of "activation code" buried in Windows XP that makes it stop working if it's put on more than one PC. This is outrageous ... and somebody should DO something!
Here, I'm afraid I'm on Microsoft's side. There's absolutely nothing new in the idea that customers are supposed to buy (or acquire with new machines) separate licenses for every PC in their office that runs Windows. Microsoft just hasn't enforced this much, at least on the individual and small-business levels.
Yes, I know very well that many small businesses have been accustomed to buying a single copy of new Windows releases, then going around the office -- and maybe even their home -- installing it on every PC they have.
Wrong-o! This has always been illegal -- and should be illegal. Microsoft deserves to get paid for its work, even as thee and me.
What's happening now is that Microsoft has embedded an activation system in each copy of Windows XP that requires users to register that installed copy, online, with Microsoft. If you don't register, the PC simply stops working after a fixed period (apparently, 14 days in Windows XP), or after a certain number of launches (50 in Office XP).
And if you try to register a number of machines using the same copy of the software, the subsequent registrations will simply be rejected.
Because the software builds and uses a profile of the internals of your PC -- a composite of the ID numbers from the hard disk and other universal components -- privacy advocates have worried that Microsoft is building a secret profile of the PC's user. And some computer buffs have worried that when you make substantial configuration changes to your PC, the activation system may fail.
The privacy issue is a nonstarter -- there are no secret user profiles being created -- and Microsoft has done a fairly good job of accommodating configuration changes. (It will also issue a new activation code over the phone if you make many changes, or if you move the software, legally, to another machine.)
I agree that systems such as this new activation scheme -- soon to be standard across all Microsoft products, by the way -- are potentially a big nuisance, and we'd be better without it. But I think Microsoft has generally been pretty benign in its previous efforts to avoid illegal copying, and that approach just didn't work. So much for the carrot, now comes the stick.
If you're offended that Microsoft expects you to buy software for each computer in your office, I sympathize, but I also disagree: That's their right.
Even the Evil Empire isn't always wrong.
