“What are other companies doing about Software Assurance?”

Author: Steven Zolman

In their quaterly financials (Balance Sheet), Microsoft reports an item called “unearned revenue” and defines it like this: (This from the MSFT 10-K filed Jul 30, 2009.)

Unearned Revenue
Unearned revenue is comprised of the following items:

Volume Licensing Programs

Represents customer billings for multi-year licensing arrangements, paid either upfront or annually at the beginning of each billing coverage period, which are accounted for as subscriptions with revenue recognized ratably over the billing coverage period.

Undelivered Elements

Represents the right to receive unspecified upgrades/enhancements of Microsoft Internet Explorer on a when-and-if-available basis and free post-delivery telephone support. This revenue deferral is applicable for Windows XP and prior versions shipped as retail packaged products, products licensed to OEMs, and perpetual licenses for current products under our Open and Select volume licensing programs. The amount recorded as unearned is based on the sales price of those elements when sold separately and is recognized ratably on a straight-line basis over the related product’s life cycle. Product life cycles are currently estimated at three and one-half years for Windows operating systems. Undelivered elements include $276 million of deferred revenue related to the Windows 7 Upgrade Option program. The program, which started June 26, 2009, allows customers who purchase PCs from participating computer makers or retailers with certain versions of Windows Vista to receive an upgrade to the corresponding version of Windows 7 at minimal or no cost. In addition, purchasers of retail packaged Windows Vista may also qualify for a free or discounted upgrade to the equivalent Windows 7 product with participating retailers in participating markets when the product becomes generally available.

Other

Represents payments for post-delivery support and consulting services to be performed in the future, online advertising for which the advertisement has yet to be displayed, Microsoft Dynamics business solutions products, Xbox Live subscriptions, Mediaroom, and other offerings for which we have been paid upfront and earn the revenue when we provide the service or software, or otherwise meet the revenue recognition criteria.

So, in effect, Microsoft reports the actual dollar values of their Software Assurance sales.

In fact, you can download a spreadsheet of the actual numbers, here:

http://www.microsoft.com/msft/download/Unearned_Revenue_Trend.xls

So what’s it mean? Well that takes a bit more analysis. Here’s a chart based on data that Microsoft publishes for investors, broken out by product division:

[img]http://farm5.static.flickr.com/4029/4703512605_7e945d3397_b.jpg[/img]

So, the marketplace has been voting to not by Software Assurance for Windows (desktop), and gradually increasing with Servers (and CALs of course).

The Microsoft Business Division’s revenu is primariy the Office family of products. It’s interesting to note how the percentage sahre of unearned revenue is soft (under 40%) then trends upward starting “FY06 Q4” which is is June 2006 to normal people… that’s about the time that Office 2007 was nearing release, so customers would logically decide that Software Assurance is worthwhile at that time. You can see a somewhat similar pattern in the blue Windows chart.

So the common wisdom that customers buy more SA when they expect to get a new version in the next three eyars, seems somewhat borne out by this data.

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