Microsoft faces a revolt among enterprise customers over its Software Assurance maintenance program, an analyst said Monday, because of long stretches between upgrades and simple economics.
In research published today, Forrester Research analyst Julie Giera said that based on interviews with 63 Microsoft customers, 25 percent won't renew their maintenance contracts and another third remain undecided.
"There are more in the 'mad as hell' category than I've ever seen," said Giera regarding customers' feelings about Software Assurance. "A number of companies, higher than I've seen since 2001 when I started to track this, are deciding to buy [licenses] later."
Software Assurance is the Microsoft program that gives corporate customers software upgrade rights and other benefits during a multiyear contract in exchange for a flat annual fee. It's an important part of the company's revenue picture; based on Microsoft's own numbers for the program's contribution to the bottom line, Software Assurance delivered about US$4.1 billion in the quarter that ended March 31.
"There are a number of customers who are looking for alternatives to SA," said Giera. A huge wave of potential Software Assurance renewals -- Giera said that 60 percent of the outstanding contracts had refresh dates during the first six months of this year -- could wreak havoc with Microsoft's financials if companies decide to take one of those alternatives, which range from dropping the program entirely to postponing contract renewal.
"This clearly points to trouble for Microsoft," she said.
The problem is self-inflicted, Giera added, and in large part is a timing issue. With Windows Vista and Office 2007 both released in January, and Windows Server 2008 expected before the end of the year, there's less motivation for customers with rights to those products to renew.
Also a contributor, said Giera, is the long time spans between Microsoft upgrades. Even though the company has committed to producing a major update to its operating system every four years, with minor interim upgrades between each, enterprises are wondering if SA is smart economics.
"Upgrading every two years is just not feasible" for most of Microsoft's corporate customers, said Giera. "I'm going to be putting up a major or minor every two years? I don't think so." In fact, given companies' normal six-to-18-month delay in rolling out an operating system update after its release, it's impossible for most to upgrade more than once every four or five years. For Microsoft's purposes, that's too long; companies are on to the fact that they may be better off simply buying licenses, since four years of Software Assurance for desktop products ends up being more expensive.
Under Software Assurance, customers pay 29 percent of the normal licensing fee annually for desktop software, and 25 percent annually for server products.
"The thing of it is, Software Assurance is a bit of a shell game with the way customers actually deploy," Giera argued. Of the customers interviewed who admitted that they weren't going to purchase the same level of SA as before, 74 percent said one reason was because it just didn't make economic sense.
To make matters worse for Microsoft, companies are pushing out updates even farther. "If a customer drops SA, that's a three-year blip for Microsoft revenues," said Giera, referring to the typical three-year Software Assurance agreement. But factor in longer stretches between upgrades, and "that becomes a four- or five-year blip" before an customer might reconsider Software Assurance.
Giera had several recommendations for companies considering the program -- ranging from pushing for discounts and negotiating early to specifying concessions and crunching the numbers -- as well as advice for Microsoft itself.
"Microsoft has to find a way to enrich Software Assurance, and get customers to use its [non-upgrade] benefits," she said. "There's no way it can back off SA. It's just too dependent on the revenue."
One angle Microsoft could pursue, she concluded, would be to put even more emphasis on linking some software and technologies to Software Assurance. "MDOP [Microsoft Desktop Optimization Pack] is a good example. The stick is that they'll begin tying these things to SA. I expect that they'll continue to pursue this strategy."
The question, of course, is whether -- and, if so, when -- corporate customers will balk at any arm twisting. "Microsoft has to demonstrate ongoing value to SA, not just at upgrade time," said Giera.
Microsoft officials were not immediately available for comment.