Microsoft is facing a user rebellion as thousands of customers threaten not to renew software maintenance contracts amid claims they have received nothing in return for tens of thousands of pounds.
The issue, which is coming to light as contracts expire in July and Microsoft delays various product shipment dates, could explode and may cost Microsoft billions of dollars, observers say. Hundreds of thousands of customers are thinking twice about renewing their maintenance contracts with the software giant.
With the renewals so critical to Microsoft's balance sheet, and its battle with open source alternatives, end users might have the best negotiating opportunity they will ever see, the experts say.
Scott Matthews, CTO for Digitech Systems says he hopes that is true. In June 2002, he spent $30,000 (£16,200) on a software maintenance contract for SQL Server under Microsoft's new annuity licensing program (called Software Assurance). The program was introduced two years ago to reduce Microsoft's tangle of software maintenance offerings to a single plan.
When Matthews signed the contract, a new version of SQL Server code-named Yukon was slated for release in 2003 but the ship date slipped into early 2004 and then to the end of this year, which is beyond the expiration date of his contract.
"We were specifically planning to upgrade to Yukon, which we had been expecting for ages," Matthews says. "It leaves a bad taste in your mouth. As the CTO, it puts me in a bad position to go into the CFO and tell him we got nothing for this and this and this."
With his contract expiring in June, Matthews says he also got nothing for the tens of thousands of dollars he spent on Windows XP, but added he saw value in Software Assurance contracts on Windows and Office with the shipment of Windows Server 2003 and Office 2003.
Microsoft and every other major vendor do not guarantee software upgrades as part of their maintenance contracts. But users view upgrades as the meat of their contracts.
Matthews says Software Assurance was marketed from the start as the way to guarantee rights to new software. Howls of customer protest greeted the 2001 introduction of Software Assurance and Microsoft's new Licensing 6.0 program. In addition to fears of higher licensing costs, critics said one of Software Assurance's pitfalls could be Microsoft failing to deliver new software during a contract.
"We didn't buy [Software Assurance] just for that reason," says Jason Givens, senior systems analyst for Southwestern Energy in Houston. "We don't upgrade on a fast cycle, and by the time Software Assuranceexpired we would have been in the same boat as Digitech." He says phone, Web and other support services subsequently added to Software Assurance are of no value to him.
Microsoft, however, says those offerings are significant to Software Assurance, which has been revamped over the past two years to offset customer complaints about its value and cost.
Microsoft's software maintenance costs are the highest in the industry, at 29 percent of the full retail price for desktop software and 25 percent for server software. A $368 (£199) Office license would carry nearly a $107 (£58) fee for Software Assurance. The industry average is 21 percent, according to Forrester Research Inc.
"We learned a lot since launch, and we are trying to take that feedback and act on it," says Sunny Charlebois, product manager in Microsoft's worldwide licensing and product group. She disputes that Digitech received nothing for its $30,000, saying Microsoft shipped Notification and Reporting services for SQL Server as well as SQL Server CE, which were available to Software Assurance customers. But Digitech does not use that technology.
In September, Microsoft added training, support and software tools, and home-use rights for Office to the Software Assurance menu, but did not cut the price, noting that Software Assurance was now more "than just upgrade protection".
"The majority of the reason they added all this stuff is they anticipated upcoming renewals, and customers questioning the value of [Software Assurance] and why they didn't get upgrades in their previous contracts," says Julie Giera, vice president of IT management and services at Forrester. "Microsoft has boatloads of renewals coming up."
Microsoft CFO John Connors told financial analysts in January that more than 200,000 Upgrade Advantage software maintenance contracts will expire by July. Upgrade Advantage is one of the programs Software Assurance replaced two years ago. At the time, many users rushed to sign new Upgrade Advantage deals to avoid Software Assurance, with those contracts providing Microsoft with $1.8 billion (£970m) in fiscal 2003 and $1.1 billion (£594m) in fiscal 2004 (which ends June 30).
"Basically we've got a $1.1 billion hole we have to fill going into (fiscal year) 2005 from Upgrade Advantage," Connors told the financial analysts. "We definitely do have a tougher hurdle going into 2005 than we had going into 2004, and we've got to figure out how do we make progress against that hill when we know it sits there."
One problem is that Upgrade Advantage customers under Microsoft's Open and Select licensing contracts tend to be smaller companies that buy software on a license-only basis, which means they buy licenses when they need them. Software Assurance is an annuity program, in which users pay a recurring fee for upgrade rights. Microsoft will have to try to change the mindset of those users. Typically 75 percent of users re-sign for Microsoft's other licensing program, Enterprise Agreement, which is for larger companies and includes Software Assurance.
Connors said Microsoft would be disappointed it if moved only 10 percent of those Upgrade Advantage customers onto Software Assurance and surprised if it topped 30 percent. "If we didn't get 10 percent, it's probably an indication that the market isn't valuing our Software Assurance offering," he said.
To combat that notion, Microsoft recently said it was working on something called XP Reloaded, which appears to be an interim release of the desktop operating system before the big upgrade to Longhorn now slated for 2006. It also lets Microsoft put some software in the pipeline for Software Assurance customers. A similar upgrade is rumored for Office, which won't be revised again until the Longhorn time frame. Those two products are Microsoft's historic cash cows.
"This is a thorny issue for Microsoft," says Laura DiDio, an analyst with The Yankee Group. Case in point: Exchange users became upset when Microsoft recently released its Intelligent Message Filter but made it available only to Software Assurance customers.
DiDio says the software maintenance issue is not good for Microsoft in these days of tight IT spending and pressure from open source software. "The chief reason to buy into the Software Assurance program is to get upgrades, the rest is icing," she says.
DiDio and Forrester's Giera say now is the time to sharpen negotiating skills. "We don't say wholesale that customers should renew their contracts, that would be crazy," says Giera, who has developed an ROI calculator on Software Assurance for her clients. "Look at the Software Assurance features - how often do you call support, how much do you spend on training. Prepare a top 10 list of your needs."
She says Microsoft is giving concessions. "Customers can use this situation to their advantage," she says.