Vista, Office 2007 Plan Will Drive More Annuity Deals

The complex set of products and licensing options include new Enterprise product client access licenses (CALs) required to access Information Worker server advanced features and a controversial provision would make Windows Vista Enterprise available only to those who buy Software Assurance (SA) or have volume Enterprise Agreements (EAs).

In an effort to extract more revenue from customers, Microsoft is also adding other new CALs that were not previously required, sources said.

Microsoft plans a new and separate Enterprise CAL Suite – which includes both Standard and Enterprise product CALs customers can mix and match. This offering, the planning for which was first reported by CRN two years ago, is also designed drive more EA deals and included software maintenance, partners said.

For example, according to company documents, Microsoft also will make its forthcoming System and Application Security Service part of the volume licensing Enterprise CAL Suite only. News about that planned enterprise security service being offered as a subscription and part of EAs was reported early last year.

The new SA benefits and requirements are slated to go into effect in mid-March, Microsoft said. Vista and Office 2007 are not expected to ship until the second half of 2006.

One East Coast VAR said he believes Microsoft will cut better deals with customers buying EAs and SA for Vista and Office 2007. The SA benefits for 2006 go into effect on March 13.

“For businesses, all the big EA accounts, we’ll recommend the customer buy the full boat … the Enterprise or Enterprise Plus editions of both Office and Vista,” said the partner, who requested anonymity. “That way we can ensure they have the full integrated stack that we can build upon. I think Microsoft will make the pricing very attractive to them.”

One large account reseller said the provision to make Windows Vista Enterprise available to only those who buy Software Assurance will cause a stir.

“There’s already been pushback on buying Software Assurance because there’s no guarantee [software] will be released during the term of a customer’s contract, said David Orvis, license management services strategist at Software Spectrum.

“In some cases, it’ll help Microsoft get Software Assurance contracts. But Vista Enterprise being an entitlement only on [Software Assurance]? It’ll be a major issue.”

It has also raised concern in the channel. Some partners, meanwhile, are upset because EAs are negotiated directly by Microsoft and handled by a handful of authorized large account resellers and direct marketers. If Microsoft is encouraging adoption of EAs and Software Assurance, they say, it could cut their margins and threaten their control of the customer accounts they have nurtured. “More and more, we are going after midrange and enterprise business, and we are going to have to walk away from it and lose margin,” said Pete Busam, vice president and COO of Decisive Business Systems, a Pennsauken, N.J.-based solution provider.

Observers said Microsoft is trying to slow the growing tide of Windows and Office sales made on a per-transaction basis and through Select licensing agreements without SA maintenance contracts. That trend has undermined the company’s efforts to move to an annuity-based revenue model, analyst said.

Gartner, the Stamford, Conn. researcher, estimates that only 50 percent of Microsoft's business customers buy Software Assurance. Microsoft's plan may backfire if customers object to the new rules, one Gartner analyst said.

"Microsoft is making Windows Enterprise an entitlement of Software Assurance and before you could buy it separately," said Gartner Group Vice President Alvin Park. "This affects a significant number of [Gartner] clients that have presences across the globe, multinational companies."

Windows Vista Enterprise offers unique features such as a multi-lingual user interface (MUI) used by multinational firms and Virtual PC Express and Unix subsystem to run legacy Windows applications and Unix/Linux applications on Vista.

Microsoft claims the majority of its corporate customers have EAs and won’t be impacted by the Vista Enterprise decision. Sunny Jensen Charlebois, product manager for worldwide licensing and pricing at Microsoft, said most multinational companies have EAs but if they chose not to buy SA they could buy language packs to get the multi-lingual user interface.

She said Software Assurance 2006 has more benefits such as desktop deployment services and is much "more than a maintenance program.”

Steve Bryant, founder of The Pro Exchange, a Peachtree City, Ga.-based Microsoft partner, noted that the higher-end versions of Office 2007 are only available in volume deals. “They’ve got a huge number of offerings, but if you look at them, really, some are only available in EAs, the Enterprise version of Office,” he said. “There’s no public pricing for things like the Groove Server and Office Communicator.”

Paul DeGroot, analyst with Directions on Microsoft, a Kirkland, Wash. research firm, said the matrix of new product and license offerings is mind boggling. And it will cause some discomfort to customers that want to upgrade to Vista as part of their PC refresh cycle, and to channel partners who sell PCs and Microsoft's Select Agreements.

"Windows Vista versions are differentiated by channel as well by audience. It's a complicated matrix, " DeGroot said, noting that the software giant is likely making these changes as unearned revenue from Windows continues to go down. "Microsoft has abandoned the notion of the general operating system and will allow users to add features for their own requirements. But there are compromises.

He pointed out, for example, that Microsoft will offer a lower-end version of Windows Vista for businesses -- which can be purchased without Software Assurance – but it lacks features most businesses want, such as BitLocker encryption and application capabilities features.

In this case, customers can buy Vista Ultimate but most businesses don't want to give employees access to the Windows Media Center entertainment features built-into that SKU.

Additionally, customers can purchase a core CAL for Information Workers products and get Additive CALs to add services incrementally, but the discount on those types of CALs will be much less than for the Enterprise CAL, DeGroot noted.

Microsoft is also trying to push consumers to its more expensive premium versions of Vista, sources said.

In Vista, for example, Microsoft has integrated a new feature called Windows Anytime Upgrade that would allow a Home Basic user, for example, to easily upgrade to Home Premium from the same CD by simply accessing a referred partner site and paying an extra license fee.

Some partners said Microsoft's expanded product lineup and licensing options will be good for the channel.

"I am not sure if two product versions for business customers are enough. I think there should be at least three versions to map to the enterprise, mid-tier, and small business traditional business segments," said Tom Richer, CEO of NY-based DevLogics, an IT consultancy. "There needs to be a way to fill the gap for mid-tier customers."

Margo Day, a vice president of Microsoft's U.S. partner program, said the matrix may be confusing but is designed to meet the unique needs of each customer. Day said Microsoft will equip partners with new tools and resources to help them navigate the new matrix.

"At the end of the day customers want flexibility. And so you sometimes trade off complexity for flexibility," Day told CRN ."If we had simplified licensing then everybody would complain that it is not flexible enough to meet their business needs. But it does have inherently some underlying complexity with it. There is no doubt about it."

BARBARA DARROW AND STEVEN BURKE contributed to this story.