Microsoft licensing ends the PC ragtrade

Microsoft licensing ends the PC ragtrade

Microsoft Australia's relentless pursuit of second-hand PC dealers threatens to destroy a once profitable IT niche.

At stake is the possibility that "PC ragtraders" will have to pay for an operating system licence for each second-hand PC that does not come with the original licence documentation.

Such an arrangement would potentially see Microsoft collect a second licensing fee for the operating system on PCs, which had been "OEM'd" with Windows 3.11 or Windows 95, according to industry sources.

Microsoft is currently pursuing a number of high-profile second-hand PC retailers before the Federal Court in New South Wales, including Business Boost, Passions, and Wally's Computer World.

Microsoft is seeking damages and injunctions to restrain all three businesses from selling unlicensed Microsoft software. According to Microsoft, the action follows an unprecedented number of complaints to its anti-piracy hotline.

One well-informed channel source, who did not wish to be named, believes that Microsoft wants to end the trade in so-called re-marketed PCs. He claims it will make it unviable to sell a second-hand PC.

"There was a window of opportunity open for a while, but it's closed now," he told ARN.

The opportunity relates to the resale of ex-corporate and government multinational brand PCs such as Compaq, and which were licensed under a special arrangement, dubbed the Royalty OEM program.

One trader said the special deal saw multinationals pay as little as $10 per system to Microsoft. It is estimated that 50,000 such PCs came onto the market in the last year, and this is just the tip of the iceberg.

In fact, Ran McDonald, general manager for RentWorks, reported that it alone has remarketed around 60,000 brand name PCs over the last two years. "These are PCs for which we have the original invoices and equipment schedules, but less than 5 per cent of our clients return the original documentation or media," he told ARN.

Many of these PCs have been subsequently sold to naïve customers on the basis of having licensed software, and at least a licensed operating system on them, even though they may have never been supplied with the original media and/or documentation.

Microsoft wants anyone who buys such a PC to ensure it has all of the original documentation and media or buy a new licence.

Used PC dealers say this plan makes the PC ragtrade business untenable.

One explained that if any wholesaler pays around $100 for a used PC and then has to pay an extra $130 for an operating system licence, the sell price to the customer will not be attractive enough. This is now the case especially when compared to some of the new PC/Internet bundled deals being offered at present.

But Wrathall would not be drawn on the business viability of used PCs, saying: "Microsoft is not going to compare the value of an operating system with a second-hand personal computer."

Although he acknowledged the confusion with the resale of these "royalty licensed PCs", Microsoft OEM sales manager Dave Wrathall restated the vendor's warning against using software without having the necessary proof of licensing. He said that the terms of use of the software are clearly spelt out in the End User Licence Agreement (EULA). "OEM product has always been shipped with a EULA," he claimed.

The terms and effectiveness of the EULA is what could be the most significant part of Microsoft's current legal actions.

"The terms and conditions have changed over time and the EULA is specific to the product," Wrathall conceded.

It is understood that not only have these terms and conditions changed with different operating systems such as Windows 3.11 and Windows 95, but that there have been changes as updates of the OEM version of Win 95 have been incorporated. But Wrathall insisted that the licensing arrangements have had to adapt to the market requirements, saying "Microsoft is constantly looking at ways to license to OEMs."

Another industry source believes that the pursuit of second-hand traders is about retrieving lost revenues on previously supplied OEM licences, even going as far as calling it double-dipping by the software giant. This was strongly denied by Wrathall, however.

"Why we license the operating system for PCs and have arrangements with OEMs is to provide a [satisfactory] standard of end-user experience," he insisted.

According to Wrathall, the OEM loads and tests the operating system, "and this is why we maintain close control over the licensing . . . At the end of the day we want to ensure that users get the experience they want," he said.

But he was scathing in his comments on the remarketed PC business. "The second-hand market encourages [software] piracy, with users making copies of our software and some dealers sourcing counterfeit product."

And Alex Mercer, spokesperson for Microsoft's Law and Corporate Affairs department, backed up his comments. "Software is just as important as hardware, despite the fact that it is easier to duplicate. Intellectual property should be protected just as much as the more tangible things," she said.

According to one observer, the future of the potentially massive remarketed PC business could be determined by the outcome of the current litigation.

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