Analysts slam impact of Microsoft licence pricing changes

Microsoft's recent price increases for its client-access licenses (CALs) is a 'lose-lose' deal for enterprise customers but likely a major revenue boost for Microsoft, analysts said.


Microsoft's recent price increases for its client-access licenses (CALs) is a "lose-lose" deal for enterprise customers but likely a major revenue boost for Microsoft, analysts said.

On 1 December, Microsoft overhauled its enterprise licensing price charts, most notably raising the cost of "user" CALs by 15 percent.

CALs are the licenses corporations must purchase so workers can legally access company application servers. Most of Microsoft's server revenue actually comes not from the software itself -- Exchange, for instance -- but from the ephemeral CALs it sells by the millions to enterprises.

Until last Friday, Microsoft priced both CAL categories -- "device" and "user" -- identically. The former, as the label implies, is a CAL tied to a specific device, typically a desktop or laptop PC. The latter is linked to an individual, who then can use the CAL to access the server from multiple devices, including desktop and notebook PCs, tablet and smartphones.

"Microsoft is looking for new revenue," said Daryl Ullman, co-founder and managing director of the Emerset Consulting Group, which specialises in helping companies negotiate software licensing deals. "[Their earlier prices] were very customer oriented, but now they are under revenue risk. Changing licensing is always a way vendors deal with a revenue problem."

Microsoft raised only the price of its user CALs, and left the device CALs alone. Experts like Ullman saw the change as a bid to cash in on the BYOD (bring your own device) movement to accommodate workers who use three or four devices to do their jobs. It's no coincidence, they said, that the increased revenue will come from the dramatic shift toward mobile.

If Microsoft can't make money on Windows -- which has virtually no presence in mobile, although the company's trying to change that with Windows 8 -- it will make money on the backs of mobile devices running others' operating systems.

"This has been brewing for quite a long time," said Ullman. "For years, they were selling user CALs knowing that companies would use them to their benefit. They knew they were leaving money on the table. But now they've realised that they can charge more for user CALs."

User CALs were a better deal for enterprises whose workers were armed with multiple devices: Rather than pay for three device CALs, one each for a notebook, desktop and mobile device, they could buy just one user CAL. Instantly, they slashed their CAL expenses by two-thirds.

But as more companies turned to user CALs to cut costs and deal with BYOD, Microsoft saw revenue slipping away.

"This will increase Microsoft's revenue," said Jeff Muscarella, a partner with Atlanta-based NPI, a firm that helps companies navigate technology purchasing and licensing. Muscarella declined to speculate on how much more it would bring to Microsoft's coffers, but in a report issued to its clients, NPI said it "could mean billions" to the Redmond, Wash. giant.

Others agreed. "I think this will raise more revenue for Microsoft," said Paul DeGroot, formerly an analyst with Directions on Microsoft, now a principal with Pica Communications, a consulting firm that specialises in deciphering Microsoft's licensing practices. "But while customers may not want to pay more, a 15 percent increase could be the lesser of two evils."

Many companies, DeGroot said, don't even realise that they are obligated to buy CALs to support non-PC devices. But if Microsoft audits a customer's licenses and find it's not bought enough, it can drop the hammer.

"If or when Microsoft comes in and starts asking how many devices in total are accessing Exchange email or using [Remote Desktop Services] sessions], it could get nasty," DeGroot said. "All those sent emails with the helpful signature 'sent from my iPad,' for example, are tip-offs to under-licensing."

Even with the 15% increase, experts like DeGroot continue to tell clients to switch to user CALs. As devices proliferate, they're still the better deal.

Microsoft justifies the higher prices by claiming it now offers increased support across multiple devices, said NPI's report. But not everyone agrees.

In an October blog post, Forrester Research analyst Mark Batrick took on Microsoft. "When I only have one version of Windows and Office but wish to access that version remotely or virtually via multiple devices, why should I have to pay more for the privilege?" he asked. "I am still only accessing my one version of Office, albeit it from different devices at different times, but I have to pay more?!"

Some see Microsoft's emphasis on user CALs as part of a larger strategy to shift customers to subscription-based licensing.

"They've thought this out," said Ullman "They're aggressively pushing the cloud, and changing their licensing to cloud terms and conditions. They using the licensing push to get customers to join their cloud wagon, and once you're hooked, they'll want to move you to subscription-based licensing."

Microsoft's Office 365 is an example of the strategy: Based on user licensing, an Office 365 subscription lets a worker run Office 2013 on up to five devices.

"This is a multi-fold strategy," Muscarella said. "They want to show the Street that they can compete on the cloud. They see where technology is going, and that their existing business model may die. So they're moving the oil tanker a few degrees each year."

Although the price increase went into effect Dec. 1, enterprises will continue to pay their already-negotiated fees until their current contract ends. When they next renew their volume licensing agreements, however, they'll face the higher user CAL price.

"Microsoft can't do a 180 and increase the price by some dramatic amount," said Muscarella of the 15% jump. "It's a game of inches for them. But [their licensing] is not less complicated. Whenever licensing is complicated, it benefits the vendor. A CFO once told me, and I've always remembered this, that 'Mystery equals margin.' That's true with Microsoft."

Muscarella called the increases and other licensing changes Microsoft has instituted a "lose-lose" for enterprises.

But it could be worse.

"Microsoft could, if they insisted, demand that a customer immediately purchase device CALs for all the devices that need them," DeGroot said of the many enterprises which now carry no CALs for many of the devices, like iPads and Android tablets, iPhones and Android smartphones, that BYOD is, no pun intended, bringing into the workplace. "That would generate more money, yes [but] it would also generate a great deal of ill will, and possibly less revenue in the long run."

By pushing too hard, in other words, Microsoft runs the risk of pushing enterprises toward alternatives. During a time when it's threatened from several sides -- the PC industry is in a slump, corporate IT budgets are pinched -- it can't afford to lose customers.

"This is a very, very smart move for Microsoft," said Ullman of the seemingly-small price increase. "There are a lot of customers out there with user CALs, so the impact is going to be substantial. It's not going to be just a couple of dollars."

Smart on the balance books perhaps, but not when it comes to treating its customers, who Ullman said have been hit with substantial increases -- in some cases double -- on all kinds of licenses this year.

Nor was the move unexpected.

"Microsoft is a licensing company," said Ullman. "They hate me saying it, but Microsoft is a licensing company, not a software company. It's driven by licensing."

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