Deconstructing Microsoft’s View of Your Money

Author: Steven Zolman

We don’t often discuss topics of morality in business, and we think that’s both a shame and a serious governance error.

What are the characteristics of a “fair” business deal? Is there value in “holding the moral high ground” in a negotiation? What does “moral high ground” even mean, in the context of a large business transaction?

Let’s take a typical Microsoft Enterprise Agreement (EA) contract renewal as a case study.

For most EA customers, the proposed renewal order would consist almost entirely of Software Assurance (SA) coverage for the client’s existing licenses. New licenses are typically added during the annual True-Up process, and so unless entirely new products such as the Enterprise CAL Suite are under consideration, the EA renewal decision is primarily a discussion of whether or not to continue to invest in Microsoft’s Software Assurance protection; a pre-payment for planned software upgrades that may occur during the next term of the agreement.

Microsoft’s Software Assurance is often confused with traditional software maintenance, which includes both tech support as well as rights to new software versions. Software Assurance, however, includes relatively little tech support value; the majority of the cost associated with SA should be considered as pre-payments for future software releases that may or may not occur during the next term of the agreement (typically 3 years). Of course, Microsoft makes no guarantee that there will be any future releases during the SA coverage term at all, so in effect SA is best thought of as an insurance policy to “protect” clients from not getting caught in a situation where they want to do a quick upgrade, but can’t due to the large one time licensing cost associated with such a transaction.

Insurance against what, exactly? The potential (increased) cost of future upgrades, for one obvious example. It’s simple math to analyze SA pricing to find that if you plan to upgrade versions less frequently than every three-and-a-half years or so, SA can be viewed as a bad bet. There are other ‘benefits’ associated with Software Assurance, but most clients tell us those so-called ‘soft’ benefits offer very little actual value.

Microsoft, of course, understands that math as well and so they’ve fortified the strength of the SA value proposition with a number of carrots and sticks. The carrots include benefits such as home use rights, and expanded functionality of some versions (Windows 7 Enterprise is a notable example).

The sticks, which seem to be on the increase lately, include the obvious – Microsoft does not offer version upgrade SKU’s to volume customers. Period. So if you skip SA and later want to upgrade, you must re-purchase the full license. It’s only by requiring this enormous expense that Microsoft can come close to justifying the relatively high SA costs in comparison to other suppliers’ offerings. It’s a “pay me now or pay me later” business model, and that’s fine, morally speaking – Microsoft deserves fair compensation for its products.

Other sticks: different licensing rules for non-SA customers; the Windows OS is a great example. Every other Microsoft product allows version “downgrades” – except Windows. Why? Because many companies would prefer to buy new PCs with Windows 7 and downgrade them to XP in order to support existing apps and standards. Microsoft doesn’t want that; it wants customers using the new products (the reason why is another blog post). So, the stick: soon you won’t be able to downgrade from 7 to XP unless you have SA for Windows.

Yes, that is correct: you will have to pay Microsoft SA upgrade fees, for the privilege of down-grading your OS. Craziness. Is that morally right? You make that call.

In general, the trend has been that if you don’t buy SA, you’re going to be worse off in the future when you do decide to buy Microsoft’s future software again.

Another stick that’s not often mentioned: the use of Fear, Uncertainty, and Doubt (FUD) tactics in the sales cycle. Like many things Microsoft sells, FUD was not invented by Microsoft, but the company has refined it into an art form.

For example, we constantly hear Microsoft sales reps say (with a straight face, mind you) things like “if you don’t purchase SA, you will be abandoning the investments you’ve already made”. Or “you won’t be able to image your new hardware”. And our favorite: “we just want to help our customers make the best licensing choices so they can succeed.”

Bold-faced whoppers like these are commonplace, and easily dis-provable, but they are so consistent across the globe that we can only assume Microsoft is training its people to use these tactics and phraseology.

And now we are back to morals and fairness. Is it moral and fair to use lies, half-truths, and mis-directions to sell? Is it moral for a sales rep to claim with a straight face that they seek the customer’s best interests, when any sensible business person knows that any sales rep’s first job is to increase sales, and more to the point – commissions – period?

And Software Assurance: the only plausible explanation for Microsoft’s tactics and approach is that Microsoft is essentially asking customers to bet that pricing and terms for their software will get worse in the future, not better. By insuring the value of the underlying Microsoft assets, by betting on SA, clients are betting against the idea that Microsoft will be easier to deal with in the future than they are now. How is that a moral position for any business to take – especially a company that claims to be dedicated to helping people work smarter and more productively?

We believe that fairness and morality are key requirements in any sustainable supplier relationship. Apparently, Microsoft disagrees. How do you feel about that?
This is some interesting food for thought. Certainly misleading sales tactics are objectionable. However if Microsoft’s position is that new products are good / upgrades and customers must pay for upgrades, then their position makes sense. If software assurance is a revenue assurance method that fills Microsoft’s coffers with cash in between upgrades and pays for upgrade development, and it is a way that makes upgrades less expensive for customers, then it is a win / win. The problem it seems is that a lot of firms aren’t really convinced they need upgrades. They don’t want Vista or Windows 7. For many firms Microsoft’s XP and Office 2003 products work just great. (I definitely like them.) These are seven years old. In 2003 though few would want to use seven year old windows products. Arguably even Windows 2000 and Office 2000 are all many people need. There’s not a lot of value add in upgrades in 2010. Perhaps the change in Microsoft’s ability to create must have upgrades is the problem rather than the SA? If upgrades were must have enterprises would be smart to pay Microsoft money each year in return for a substantial discount. Abandoning SA could be abandoning an investment. Regular payments to MSFT is different from but similar to firms paying monthly for applications in the cloud. For obvious reasons MSFT can’t easily say that upgrades just don’t make a lot of sense, so it is easy to see why they may appear immoral for drinking their own kool aid.

by Anders Mikkelsen on Thu, November 18, 2010 – 7:34pm

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