REDMOND, Wash., May 10, 2001 — When large businesses need to buy Microsofts software for hundreds of computers, they dont back up a truck to the door of their local computer store. They sign volume-licensing agreements. Not only are these agreements more convenient than buying hundreds of individual boxes of software; they are also less expensive. Microsoft today announced changes to its volume licensing programs, making it easier for organizations to upgrade and maintain their software, providing increased flexibility through a new Enterprise Agreement (EA) Subscription program, and maintaining or reducing licensing costs for the vast majority of Microsofts enterprise customers. The changes take effect Oct. 1, 2001.
PressPass spoke with Bill Henningsgaard, vice president of Microsoft Worldwide Licensing and Pricing, to discuss them.
PressPass: Do the licensing changes you are announcing affect all users of Microsoft software?
Henningsgaard: No. Sixty percent of our customers wont notice any change in the way they license or purchase our software. These are customers who purchase Microsoft software from a retailer or Original Equipment Manufacturer (OEM). The new licensing programs affect only Microsofts volume customers -- businesses with five or more PCs that purchase our software for their servers and employees desktops. These customers represent the remaining 40 percent of our overall business.
PressPass: Why is Microsoft changing its licensing programs?
Bill Henningsgaard: We are responding to requests from our enterprise customers to better meet their licensing needs, by offering simpler licensing programs with more choices. In addition, our new Enterprise Agreement Subscription program is a first step toward offering software-as-a-service -- this is something some of our customers already want, and that we anticipate many more will expect in the coming years.
PressPass: What do enterprise customers say they want in a software-licensing program?
Henningsgaard: Enterprise customers want programs that are simple to understand and administer. They want programs that provide enough choices to meet their changing needs, with options such as subscription licensing. And they want a more complete package of services, one that combines licensing, support and other options. The changes we have introduced address these requests.
Until now, our licensing programs have been hard to compare to one another. If you look at our Open, Select and Enterprise Agreement offerings, each offers excellent licensing options. But its hard for businesses to weigh the benefits of one next to those of another, and even harder to choose the option thats best for them. To increase simplicity, we have created some common offerings with common pricing that run across all of our licensing programs. The new model has two core components: License and Software Assurance. Software Assurance will replace our previous, sometimes confusing assortment of software-upgrade licenses, making it easier to track all of the licenses companies acquire and simplifying how they upgrade to the most current versions of Microsoft software.
In adding more choices in the way that customers license software, we will offer the Enterprise Agreement Subscription option to subscribe for software for a fixed period of time, as opposed to acquiring the rights to use a particular version of the software forever. This option is what we call the Enterprise Agreement Subscription, and it allows customers to more easily increase or decrease the number of desktops and servers they cover with Microsoft software. The Enterprise Agreement Subscription really is a "rental" of software, allowing those customers who choose it to lease software in much the same way that many now lease computer hardware.
Another improvement in the choices we are offering is to make Enterprise Agreements and the Enterprise Agreement Subscription available to companies with 250 or more total desktops. Until now, the entry level for Enterprise Agreements was 500 desktops, but the demand from smaller companies for these offerings was clear, leading to our making them much more broadly available.
To provide a more complete package of services, we have made it possible to purchase licenses and support at the same time, and have included a broad range of services with our support. Starting in October, Enterprise Agreement customers who want Microsoft Premier Support will be able acquire both licenses and support in the same agreement, with a single invoice. This is a step in the direction of much more integrated license and support offerings, moving forward. We also have revamped our sales process so customers can work more closely with Microsoft while being supported by Enterprise Software Advisors (ESAs) who will provide license program support and basic softwareasset-management services.
PressPass: How do the licensing changes fit into Microsofts overall plan for serving enterprise customers?
Henningsgaard: We are really trying to improve every aspect of the way we work with our enterprise customers. The licensing changes are the latest in a series of announcements and improvements we have made to our enterprise products, partnerships and services to better serve the needs of our enterprise customers. Over the past year, weve stepped up our commitment to the enterprise by delivering products such as Windows 2000 Server and the .NET Enterprise Servers. All of these products deliver the kind of scalable, reliable and manageable foundations needed to run todays most demanding business applications. Weve also boosted our commitment to key partners, such as Commerce One, Pivotal, Onyx and Manugistics, so that together we can deliver the deep solutions that customers want. Also, Microsoft has created a single, worldwide support and services organization to deliver the kind of service that customers demand.
PressPass: How do the changes affect the cost of licensing Microsoft software?
Henningsgaard: Different customers will be affected differently, depending on the kind of agreement they have today and the decisions they make on how to use our software in the future. But, based on the way most of our enterprise customers now license software, the vast majority will pay the same or less.
We expect that about 30 percent of the purchases made through our volume licensing programs -- those made through Enterprise Agreements and Upgrade Advantage -- will cost enterprise customers less over time. Customers with expiring Enterprise Agreements will have the option to renew their agreements at a lower price than before, with pricing based on Software Assurance. Another 50 percent of the purchases made through our programs -- those made through Open or Select for full licenses or for upgrade licenses when upgrading at the average rate -- will cost customers the same as they do today.
There are some customers -- we estimate about 20 percent of our purchases -- who may pay somewhat more than today because they upgrade less frequently than the average. They have the choice to continue to buy standard licenses for new versions of products or they can take advantage of the new Software Assurance offerings. Software Assurance will allow them to acquire the rights to new versions of the software released during the term of their agreement.
PressPass: Why has Microsoft cut in half the minimum number of desktops a customer must cover with Microsoft software to qualify for Enterprise Agreement?
Henningsgaard: Customer feedback was the primary motivation. Regardless of whether customers have 25,000 desktop computers or 250, they want a simple agreement that provides the rights to run the latest versions of a standard set of Microsoft products on all the PCs in their organization. This change will allow thousands of smaller enterprise customers to take advantage of the Enterprise Agreement and the Enterprise Agreement Subscription.
PressPass: Why eliminate the current upgrade options if, as you say, Microsoft is trying to increase choices for enterprise customers?
Henningsgaard: Customers have told us that the upgrade options available under the current programs are too complicated to understand, manage and administer. There are Version Upgrades, Competitive Upgrades, Product Upgrades and Language Upgrades. There is also a plan called Upgrade Advantage. Each has different eligibility criteria. If you are eligible for a Version Upgrade, you are not eligible for a Competitive Upgrade, and vice versa. It can be hard for us to recommend the right option for customers unless we have detailed information about their needs. Plus, customers often dont know the differences between the offerings.
In addition, as companies with thousands of desktops have accumulated these different upgrades and licenses, it has become a real challenge to determine what they are entitled to, unless they go back and check the records for each individual PC. Some customers were finding it difficult to understand the logic for determining whether to put multiple upgrades on a single machine or spread the upgrades across their machines. We believe that Software Assurance will allow our upgrading customers a much simpler way to administer their software and keep it up-to-date.
PressPass: How did things get so complicated?
Henningsgaard: When we created our initial licensing programs for business customers, we simply adapted the model we had for retail customers who buy one or two desktop PCs from their local computer store. We took that model and simply made it available to enterprise customers at better pricing. The original Select program we developed 10 years ago offered all the same licenses and all the same offerings. Over time, the enterprise model got more complicated as we added options and tried to respond to the additional needs of enterprise customers.
To make the changes we are announcing today, we looked at what our enterprise customers really value and made sure these offerings are available across all of our licensing programs, so we can have a more coherent and simple program and a stronger foundation for future changes.
PressPass: How do the new programs make things less complicated?
Henningsgaard: In addition to replacing the current hodgepodge of upgrades with a simpler way to upgrade, our new licensing programs will provide customers with online license-management tools, including statements of their purchase histories and their license rights. Right now, customers must keep track of their license agreements and produce their own summaries. Customers will be able to access online statements, maintained by Microsoft, that summarize their worldwide purchase history. They will be able to quickly and easily review their license rights and more easily determine the most appropriate and cost-effective way to acquire the rights to future versions of software that meets the needs of their business
PressPass: What about enterprise customers who dont want the latest version of Microsoft software?
Henningsgaard: Customers arent required to upgrade. If it makes sense for a customer to upgrade relatively infrequently, they still have the option to buy standard licenses, which continue to provide perpetual rights to a specific version of a product. Remember, we are designing licensing for the way the majority of our customers upgrade. We are providing what will essentially be a cost-neutral or better option for the vast majority of our customers. But we are not eliminating the options for people who want to license in a different way. They will still have the ability to do that.
PressPass: Explain how the Enterprise Agreement Subscription works.
Henningsgaard: Its pretty easy. Customers sign up for a three-year agreement to subscribe to individual Microsoft products or a standard suite of products. They simply tell us each year how many PCs they need to enroll and pay a subscription fee based on that number.
PressPass: When should a customer choose Enterprise Agreement Subscription?
Henningsgaard: Weve had some experience with pilot programs over the past year or so. Some customers who are leasing their hardware tell us they prefer the subscription model, especially when they treat software as an operating expense rather than an asset. When they are already paying annually for their PCs and servers, it makes sense for some enterprise customers to treat software the same way. Customers may be able to obtain tax advantages in certain countries for software accounted for in this way.
Customers may also prefer subscription if they have a lot of expected volatility in their business. Look at the shakeups in the dot-coms: if they had rented their software through a subscription, they wouldnt have invested as much upfront and could have more easily reduced their costs when they needed to downsize. Software subscription provides customers the flexibility to respond to changing business environments when sales and revenues go up or down.
PressPass: How does the cost of traditional -- or perpetual -- licensing compare to subscription?
Henningsgaard: An Enterprise Agreement Subscription is somewhat less expensive than a new Enterprise Agreement -- about 15 percent a year -- because the customer never purchases the underlying license. Also, we designed our EA Subscription program to reduce the initial costs of licensing our software. Our customer feedback says five or six years is the normal planning horizon. If customers keep their software less than five years, subscription is less expensive. However, companies that keep their software more than five years will pay slightly more through EA Subscription over that time.
PressPass: Why are you offering a new option for EA customers to purchase licenses and support as a package?
Henningsgaard: There are a number of reasons. First, our experience shows customers who have access to our enterprise-level support are far more satisfied and get far more value out of the software than customers who dont have access to that support. Thats why our enterprise customers acquire Microsofts Premier Support. We also find that customers who dont acquire the support tend to come back a year or two later asking to enroll. So, we are really trying to provide customers with more complete solutions that offer support options they can acquire through a single transaction at the same time they acquire their licenses. A single contract also saves administrative time and effort.
PressPass: How is Microsoft changing the way it sells licensing agreements?
Henningsgaard: Historically, Microsoft has sold Enterprise Agreements through partners we call Large Account Resellers. In recent years, customers and our channel partners have said we need a different model, especially as we offer more subscription-based licensing programs and services. Negotiating first with Microsoft and then the reseller to come up with the right solution for a given customer takes too long. So, we are reengineering the way these agreements are sold. The customer will work directly with Microsoft to determine pricing and terms of the agreement. Our Enterprise Software Advisors (ESAs) will provide support services during that decision process, as well as ongoing support services of these agreements. They will answer software questions, provide discs and documents, help customers with annual maintenance of the agreement and provide other vital services. The net result is customers will have a more direct relationship with Microsoft and will still have the ESAs to provide related services.
PressPass: How will the new volume-licensing agreements affect Microsoft's academic customers in K-12 schools and higher-education institutions?
Henningsgaard: As with our enterprise customers, simplicity and choice are extremely important to educators when making decisions about technology. With Microsoft's improved volume-licensing subscriptions, School Agreement and Campus Agreement, educators will be able to choose the software that best fits their needs. In addition, always being able to give students access to current technology helps schools better prepare students for success in the future.Through the expanded School Agreement Subscription student option, K-12 schools can now license their students to use the most current technology on a personally owned computer, their home computer or a school computer dedicated to their individual use. This feature previously was available only to higher-education institutions. This option allows students to take advantage of powerful software tools for learning throughout their day.
PressPass: Are the changes you are announcing today the licensing model for .NET?
Henningsgaard: No. But they are the first step in that direction. They introduce some of the characteristics that a licensing model for .NET might have, including a predictable annual fee, rights to the latest version of the software at all times, and the ability to rent rather than own the software. So, in a sense, you can see the beginnings of that direction. Our licensing and offerings are going to evolve dramatically between now and when all of our .NET offerings arrive on the market. Youll continue to see changes to accommodate those new offerings and the ways customers will use them.