Microsoft To Launch Special Financing Deal To Push SMB Crowd To Licensing 6.0

The Open Annuity Financing program, planned to be discussed at Microsoft's Top VAR Summit in Scottsdale, Ariz., later this week, will introduce 7.9 percent financing for software orders, the company said. It is designed for small businesses that opt for Microsoft's new Open License 6.0 program and will run from April 1 through July 31, 2002, the effective date of Software Assurance, according to the company.

Open License 6.0 is one aspect of Microsoft's controversial Licensing 6.0 annuity-based licensing model that was unveiled last May and scheduled to go into effect on July 31.

Customers have until July 31 to upgrade to current versions of Microsoft software using the existing Upgrade Advantage program and then sign up for the new Software Assurance annuity-based licensing deal. Or, small business can opt to bypass the program and pay the full license price as they upgrade from one version of Microsoft software to the next.

The Open Annuity Financing program requires a purchase of at least $2,000 in software and will be offered in conjunction with Household Finance and resellers. It is aimed at pushing Microsoft's approximate 50,000 small-business customer accounts and 63,000 medium-size customer accounts that currently hold Open License 5.0 contracts to upgrade to Open License 6.0.

Microsoft plans an aggressive campaign to court small businesses to Licensing 6.0, including a Small Business Annuity campaign beginning in April that will continue through May. The company first launched special financing deals to systems builders in 2001. The expansion to small businesses is a first and is now in pilot mode, sources said. The list of participating resellers in the Open Annuity Financing program is still being finalized, sources added.

Microsoft recognizes that many small businesses view the annuity-based licensing plan as a "tax." The financing is aimed at softening these complaints while also pushing adoption at a time when cash flow is weak, said sources familiar with the Open Annuity Financing offer.

However, solution providers said they don't expect the special financing to have a dramatic impact on small businesses' acceptance of Licensing 6.0.

"I don't think it will make any difference. It is rare to find a customer that is price-sensitive enough to license acquisition that they would even ask about financing," said Michael Cocanower, president of ITSynergy, Phoenix, claiming that many small business don't yet realize the implications of Licensing 6.0. "There has not been a lot of pushback on Licensing 6.0, but I don't think customers view purchasing upgrade advantage as any different than in the old days when they would purchase [current upgrade programs. I think the real shock will hit once they realize that [these programs are gone,I'm not sure many SMB customers have realized that."

While many in the industry continue to question the viability of the annuity-based payment model, Microsoft remains committed to an effective date of July 31.

Sources said the final details are still being worked out by Microsoft and some changes are possible, but the core annuity-based revenue stream model is not up for debate. Industry observers have mixed feelings about the risk Microsoft faces in forcing the new licensing.

"I think Licensing 6.0 is too inflexible for small companies, and large companies are already on some type of bulk licensing so it's not as hard for them," said Brian Bergin, president of Terabyte Computers. "It's supposed to make licensing more simple, but it doesn't. I do believe that companies will look at alternative desktops as the need approaches. Even after the DOJ fiasco, which I sided with Microsoft on, Microsoft is still a very arrogant company that feels it can push around anyone they wish."

"Right now customers see this much like income tax,they don't want to pay it in the first place and the process is incredibly painful," said Rob Enderle, a vice president at Giga Information Group. "The SMB market, much like the enterprise market, is questioning the use of Microsoft products and looking ever more longingly at reducing their commitment to the company. The cost of moving is being seen much like the cost of a tax reduction process and at some point, unless something changes, a large number of these people will move and move suddenly. If the market continues to signal movement away from Microsoft, channel partners will increasingly have to move toward the alternatives, like Linux, and this transition could be incredibly painful to Microsoft and the industry."

However, Wall Street analysts contend that even with the price hike, the risk to Microsoft is not so great.

"It's fair to call it price increase because whereas in the past if you owned Microsoft software and wanted to get next version, you could buy that at discount and now you can't," said Drew Brousseau, a financial analyst who covers Microsoft for SG Cowen, noting that many customers may also opt to extend their upgrade cycles and then pay full price for software rather than sign on to the new program. "Either way, it'll cost customers more than it would have in the past. Customers won't go to alternative platforms but they will simply elongate their upgrade cycles."

Brousseau added that Microsoft's recent financial numbers suggest that customers are signing on to Software Assurance but it's not clear what the adoption rate will be over the next four months. He contends that the majority of customers will accept the new plan over time.

Seeking to placate irate customers, and following the terrorist attacks and economic downturn last fall, Microsoft delayed the deadline for Software Assurance from Feb. 28, 2002 to July 31, 2002.

But with four months to go, customers,large and small alike,will be under the gun to make some hard decisions. On the up side, it's a positive for the channel, solution providers maintain.

"In the SMB space, I don't think that the new plan will change the amount of Microsoft software SMBs use," ITSynergy's Cocanower added. "If nothing else, it does offer some advantages in that it is causing many companies to contact Certified Partners to get the skinny on what's going on, and what they need to do about it. It gives us the chance to become a trusted adviser, and look for additional opportunities."

,>