Microsoft Corp.'s plan to alter the way it licenses software to large corporate
users is an attempt to increase and stabilize license sales revenue, according
to analysts.

The company's strategy is reportedly to begin eliminating "perpetual use"
contracts, which allow enterprises to continue using Microsoft products after
their multiyear purchase agreements expire. Currently, companies using Microsoft's
enterprise agreement sign an initial license with Microsoft for a fixed term,
generally three years. After the contract ends, they need only pay Microsoft
again if they wish to upgrade their software or initiate a new contract. Under
the new licensing terms, according to analysts, companies will need to continue
licensing Microsoft's software or quit using it.

Talk of the new licensing structure surfaced recently at research firm Gartner
Group Inc.'s annual Windows conference. Microsoft's product pricing will remain
relatively constant over the next few years, but customers could end up paying
as much as 50 percent more each year for the software because of changes in
Microsoft's licensing model and the addition of subscription fees for upgrades
and maintenance, Gartner analyst Alexa Bona predicted at the conference.

UBS Warburg LLC analyst Don Young issued a report Monday offering further details
of the coming change. "We believe Microsoft will shortly announce new license
terms and conditions. We believe a critical aspect of the new licensing agreement
will be the elimination/reduction of perpetual licensing," he wrote. "We
have confirmed with multiple global accounts that Microsoft is now proposing
new enterprise agreements that provided a limited three-year software license
unlike the prior perpetual license proposal. In some cases Microsoft is buying
back existing perpetual licenses."

The change will affect companies with enterprise agreements, which are contracts
designed for large businesses with at least 500 users. Young hailed the proposed
alteration as good news for investors. Requiring customers to renew licenses
eliminates the risk that users will choose to stick with older versions of Microsoft's
software and save the cost of upgrading. It would also reduce volatility in
Microsoft's licensing revenue and give the company a steady and recurring source
of sales.

However, the plan would force users to keep pace with upgrades and pay for
software on an ongoing basis, which might not be such a good deal for the customers
themselves.

The planned license switch is currently tied only to enterprise agreements,
Young wrote. No change is currently planned for Microsoft's open and select
licenses, intended for small and mid-sized businesses, although such a change
may not be far off. "We expect all site license (open and select) will
eventual migrate to non-perpetual status," Young wrote.

A Microsoft spokesman said there are "no plans to make a change like that,"
but hedged on whether such a switch might happen in the near future. "It's
probably a safe bet to say that Microsoft is always looking for ways they might
improve licensing," he said.

Microsoft is already taking small steps toward a subscription model in some
of its product lines. The company said Monday it will make Office XP available
through subscription in Australia and New Zealand when the software is released
in those countries, although it delayed plans to offer a subscription option
in the U.S.

"We have been predicting that they're going to do more in subscriptions
as time goes on," said Gartner analyst Michael Silver on Monday, in response
to the Office XP news. "From a corporate point of view, having an annuity
stream is a really attractive alternative. It's a really nice way to make revenue
a bit more predictable and not really have to worry about massive upgrades for
new revenue."

ITworld.com

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