Microsoft’s Software Assurance on trial

Many of Microsoft Corp.’s customers will get to pass judgment on its software maintenance plan this year when their current contracts come up for renewal. Some analysts see it as the biggest challenge yet for the much-critiqued Software Assurance (SA) program.

The main reason to buy SA is that it gives customers the right to the latest software at no charge over the three-year course of their agreement, users and analysts agreed. But with the next big wave of new Microsoft products not expected before 2006 — the Longhorn-timeframe, in Microsoft-speak — the software maker could see a customer backlash.

“We agreed to SA primarily because of pending upgrades and for the fact that it simplified things. Going forward, we will always weigh whether we should continue with SA or revert back to the pay-as-you-upgrade model, given the frequency of upgrades,” said Randy Keefer, vice-president of information systems at Microsoft customer NetJets Inc., a seller of partial ownership of private jets based in Woodbridge, New Jersey.

Microsoft wants to sell SA because it guarantees revenue. Last year it made significant changes to the plan to appease customers who complained it cost too much and offered too little. Now, analysts at Gartner Inc. believe Microsoft may ship interim releases of Windows and Office to make SA more attractive.

“The primary reason to buy SA is to get the right to future upgrades. If Microsoft continues to elongate release cycles, it could be that customers won’t get an update in their contract period and would be upset that they are not getting a new version for what they pay,” said Gartner Research Director Alvin Park.

Microsoft has no current plans for an interim release of Windows, a company spokeswoman said.

Many Microsoft customers are on two-year Upgrade Advantage (UA) contracts, which they purchased just before Microsoft retired that option in July 31, 2002. At that point, SA was introduced and became the only volume upgrade option, apart from buying a brand new license. Those two-year licenses will be up for renewal this year, as well as a number of Enterprise Agreements (EAs), which include SA.

Microsoft recently lowered its expectations for SA sales. The company expects between two-thirds and three-quarters of customers with EAs to renew their contracts. It predicts no more than 30 per cent of UA customers will buy SA, Chief Financial Officer (CFO) John Connors said last month. There are more than 200,000 UA contracts, he said.

Although it questions the value of SA, Gartner estimates that as many as 70 per cent of EA customers will renew and that as many as half of Open and Select license buyers, which includes UA buyers, will sign up for the plan.

Microsoft charges some of the highest rates in the industry for software maintenance and buyers should calculate whether SA is worth their money, Forrester Research Inc. vice-president Julie Giera said.

“Educated customers are in a much better negotiating position. There is too much money at risk here not to do your homework,” she said.

“The bottom line is that the benefits are worth the cost of SA, but you have to use and deploy them,” Giera said.

Absent a guaranteed upgrade during the three-year contract period, a customer could decide that the software they have is good enough and postpone an upgrade until a new version is actually released, said Paul DeGroot, a lead analyst at Directions on Microsoft.

“If you don’t think Microsoft is going to come out with anything compelling enough that you will want it, you will wait. The industry is maturing. People are happy with older products,” he said.

Some customers may also defer the three-year SA contract because it gives them the option to switch to non-Microsoft products. “Without locking yourself in for an upgrade, it becomes easier to switch away from Microsoft. My guess is that the Linux desktop will look a lot better three years from now than it does today,” DeGroot said.

At Landmark Theatre Corp. in Los Angeles, paying for maintenance and upgrade rights has been a given in the past because it has been budgeted for. However, with licenses for Office coming up for renewal in May, the company will price out SA to see if it makes sense, said Victor Go, vice-president of technology at Landmark. “This is something that I am definitely going to look into,” he said.

Ironically perhaps, Microsoft will be there to help him. It plans to offer a tool developed by Forrester Research to help customers determine the value — or lack thereof — of SA, said Sunny Charlebois, product manager for licensing and pricing at Microsoft. The tool runs in Excel and examines data such as the SA benefits a customer plans to use, license prices and IT staff salaries, she said.

To be sure, Microsoft talks up a lot of the SA features as reasons to buy into the program. “Upgrades are just one of the many benefits associated with Software Assurance. There are a lot of reasons a customer would sign up, including tools, support, home use rights and training,” Charlebois said.

Analysts expect Microsoft to continue to sweeten the SA offering to entice customers to make the commitment to their software.

Microsoft and its partners will launch a broad outreach campaign to persuade customers to buy SA. However, the company does not expect to be able to measure the success of such a campaign until late 2005, CFO Connors said.

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