Volume Licensing: It's a Buyer's Market

At a cursory glance, Microsoft would appear to have the advantages of a seller's market when negotiating volume license contracts.

During Microsoft's 2007 second fiscal quarter, unearned revenue reached $11.9 billion, up from $10.1 billion a quarter earlier, mostly buoyed by stronger-than-expected license contract renewals. New Office and Windows versions contributed to renewals.

In a report published yesterday, Goldman Sachs analyst Sarah Friar broke down the revenue sources for Microsoft cash cows Office and Windows.

"About 40 percent of Office revenues are from fully packaged product and volume license agreements, 40 percent are from annuity contracts, and 20 percent are from OEM sales, compared with about 5 percent, 15 percent, and 80 percent for [Windows] client revenues, respectively," she wrote.

But Office and Windows are not growth products, in that most companies already use some version of the software. The big sales pull is on the server, where upgrade resistance is growing.

In a 2005 Yankee Group survey of IT decision makers, representatives of three out of five organizations said they would upgrade server software and hardware in four years or more.

In a survey conducted this year, "Seventy-nine percent of respondents said they will hold onto server hardware and software for four, five or six years," said Laura DiDio, a Yankee Group research fellow.

Similarly, only three out of 10 businesses "are planning major or network server upgrades," DiDio continued. She said that right now most IT managers "would rather have a root canal than do a network upgrade."

In addition to industry trends, Microsoft product cycles also contribute to the upgrade malaise, much of which could ease up in 2008 after the release of Windows Longhorn Server and Windows Vista Service Pack 1.

Under the "Big Bang Theory," many IT organizations are holding off until the release of both products, after which would come a rush of desktop, server and network upgrades.

Meanwhile, IT organizations are working through new version, licensing and CAL (client-access license) changes associated with Microsoft's 2007 product release cycle. Early resistance to Exchange Server 2007 is surprisingly strong.

"Twenty-three percent of the survey respondents may migrate away from Exchange and will look at open-source or Linux alternatives," DiDio said.

"That's a lot of revenue Microsoft could be leaving on the table, so Microsoft has incentive to sweeten the pie" during licensing negotiations, she asserted. "It's a buyers market."

The Time to Deal Is Now
Buyer's reluctance, particularly regarding the server, is good for hard bargainers. The best time for getting the deals is now, as Microsoft looks for a good close to fiscal 2007 on June 30.

Microsoft's big sales kick is still months away. Friar projected that new versions of Office, Windows and Windows Server "should provide a notable uptick to revenue growth in the upcoming September and December quarters, with our estimates showing 18 percent and 26 percent year-over-year growth."

But it is still uncertain when Windows Server Longhorn will ship; Microsoft has only said to expect it to be released, which means the code will be complete, some time this year. However, Microsoft has committed to shipping the publicly available Longhorn Server Beta 3 sometime in the first half. The software's release would be a catalyst for volume licensing renewals going into the September quarter, which would be in line with Friar's expectations.

Microsoft released Longhorn Server Beta 2 during last year's WinHEC. Last week's Longhorn Server CTP (Community Technology Preview) suggests that the timing is right for a Beta 3 release at next month's WinHEC.

The current lull, with uncertainty about Windows Vista sales and the quiet before Longhorn Server Beta 3, puts more pressure on Microsoft to deal favorably at the negotiating table.

However, any Longhorn shipping delay would forestall the "Big Bang" and create even more pressure on Microsoft for a longer time when negotiating volume licensing renewals.

Be a Tough Negotiator
Successful software negotiation is all about preparation—particularly given the party on the other side of the table. Microsoft is a notoriously tough negotiator and one that gives up very little during the bargaining process.

The most important information Microsoft customers should have on hand is an accurate accounting of software licenses. Microsoft negotiators have in the past used uncertainty about licensing compliance as a means of pushing for favorable deals. No enterprise negotiator should want to risk an audit for pirated software. The best deterrent and opening for negotiating with confidence is accountability, the knowledge that all licenses are in order.

Negotiators also must come to the bargaining table with a clear understanding of what the organization wants and what benefits Microsoft generally offers.

"They have their cheat sheet," DiDio said. "You have to go in with your own list of three to five things. Maybe you want some free CALs or 50 free copies of Office. You have to be specific."

If the business negotiator fails to set the agenda, the Microsoft bargainer will take the lead instead. Microsoft has the greater need to make the sale: Its stock price is languishing, there is some short-term sales uncertainty and the company needs to keep generating that unearned revenue. So there is good opportunity for the business negotiator to squeeze as much out of Microsoft as he or she can get, if prepared.

DiDio said there is even wiggle room on Vista, particularly given the number of organizations planning to put off deployments until 2008—or later.

Microsoft may also concede some risk around upgrade protection. Software Assurance is no assurance that Microsoft will deliver a new version during the contract period. Negotiators should push for extra benefits should Microsoft fail to ship a new version during the Software Assurance contract.

"Microsoft named accounts have an 'in,' but that doesn't mean the small business should give up without a fight," DiDio said. "You have to be a tough negotiator."

Even after the deals are cut, many organizations lose the benefits. Over the last four years, Microsoft has added many extras for customers buying annuity contracts that offer upgrade protection—the discounted upgrades are only one of the benefits. The goody bag often includes training credits, technical support and discounted or free home-use licenses for employees.

"Some organizations really do themselves a disservice," because "negotiators don't always pass along information" to IT organizations, DiDio said.