Microsoft cuts software leasing costs to retain companies

By Eric Lai, Computerworld |  Software, Microsoft, Office 2007

In an attempt to retain recession-hit companies seeking to opt out of their software maintenance contracts, Microsoft Corp. is wooing them by cutting the price of leasing software by as much as 26%.

Until July 3, large companies and organizations can sign up to subscribe to Microsoft Office 2007, Windows Vista, or two bundles of client access licenses (CALs) for server software and save more than a quarter off the list price, according to the Web site, MicrosoftIncentives.com.

That would mean that a company that pays about $155 a year per PC for its license and maintenance contract for Microsoft Office could save about $40 per PC, according to Paul DeGroot, an analyst with the independent firm Directions on Microsoft.

Microsoft's maintenance contract is called Software Assurance. Aimed at large customers, SA is a requirement of several Microsoft licenses, such as Enterprise Agreement and Open Value, and adds between 25% to 30% of the license cost per year, in addition to the license itself.

Cutting maintenance or support contracts with software vendors has become a popular way for corporate users to cut costs during the downturn.
"A lot of enterprises will say, 'You're not giving me anything anyhow, so kiss that revenue goodbye,'" an analyst told Computerworld last fall.

While cutting maintenance contracts can lead to trouble down the road with some software vendors, it's relatively painless for companies to cut SA and stay on the current version of software, which they own the right to run indefinitely, anyway, DeGroot said.

Microsoft's discounts for its Enterprise Subscription Agreements are an all-out effort by the vendor to retain customers on some sort of plan, DeGroot said.

"One reseller I talked to says he has never seen Microsoft doing this level of promotion and price cutting in the enterprise space," he said. And "from Microsoft's point of view, they'd rather have a low-priced subscription customer than a customer who simply didn't renew their Software Assurance. They're still making lots of money off it."

Companies with 250 or more PCs are eligible for Enterprise Subscriptions in three-year terms.

With Microsoft's heavy discounting, the subscriptions should be attractive to many customers, DeGroot said.

"If you're going to be using the Microsoft desktop and CALs for the foreseeable future, it's the least expensive way to do it, and actually would have been a really good choice for companies in a downturn: as your seats go down, so do your annual costs," DeGroot said. "The tradeoff is that if you stop the subscription [because of employee layoffs, for instance], you lose the licenses," which a company may need later when it starts rehiring.

There are also tax and accounting advantages for some companies to lease, DeGroot said, due to the fact that leasing is considered an operational expense, while software purchases are typically recorded as capital expenditures.

"In this economic climate, I think many more companies might be looking at it," he said.

The subscription price cuts mirror some of the aggressive deals Microsoft has in the consumer space for Office 2007.

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