Microsoft Eyes Lost Royalties

Microsoft last week told OEM distributors they will be required to pay for its software at the time of purchase and acquisition, rather than when they sell the software to system builders. The policy is scheduled to go into effect mid-2006.

Sources in the company said its antiquated “trust” system—in which OEM distributors order copies of software for roughly $5 through authorized replication houses and pay Microsoft only after selling to system builders—is being violated by some of the company&s 280 distributors worldwide.

Making distributors pay up front, as is required of OEMs today, should curb the practice. “Some are shipping 100 shipments to system builders and [telling] Microsoft they sold 70,” the source said. “They&re not paying Microsoft what they should for royalties.”

Kurt Kolb, general manager of Microsoft&s worldwide system builder business, described under-reporting as a global phenomenon. He said he expected no impact on system builders, and no “hiccups” in the channel business, because a second new policy ensures that OEM distributors get reimbursed for damaged or unwanted products. That policy goes into effect this fall.

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One channel executive said most OEM distributors won&t care as long as their returns are not rejected. “I would think it should have a neutral impact on distributors unless they are fearful of being stuck with inventory. Honest ones should have no worries,” said John McGrath, a software licensing specialist at Bell Industries, Indianapolis.

A distributor executive agreed, adding that most U.S. OEM distributors will be far more worried about inventory management, particularly for new products that have no historical run rate.

“It gives Microsoft better control over what happens with their product once it leaves authorized replicators,” said the executive, who requested anonymity. “It&s strategically a good move for them to have a better understanding of how product gets into the channel and if there are any gray-market activities. This will take that opportunity away.”