Cloud Customers Demanding Better Terms From Microsoft

In Microsoft's race to add high profile cloud computing customers, and keep them away from Google, the software giant is making unprecedented concessions to get deals done. The software giant's newly forged contract with the city of New York, which will save the Big Apple $50 million over the next five years, is the latest example.

But the New York deal isn't just about cloud computing, it's also a reflection of Microsoft customers' discontent with Enterprise Agreements (EA), as well as state and local government's willingness to leverage the Google threat to coax more favorable terms out of Microsoft.

"We took advantage of the competitive moment," Stephen Goldsmith, New York City's deputy mayor for operations, told The New York Times Wednesday.

For customers, EAs offer blanket software licensing coverage and make it easy to manage desktops throughout an organization, and they also comes with significant volume discounts. However, customers rarely use all of the software that's covered under an EA, and the discounts don't always make up for the over-licensing.

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In the past, large customers have simply had to live with EAs because the cost of managing desktop software without an EA was too high, notes Paul DeGroot, an analyst with Directions On Microsoft, Kirkland, Wash. "It looks like New York didn't want to live with it, and got it their way," he said.

Next: What Microsoft Gets In Return

Tim Hegedus, senior analyst at Miro Consulting, a Fords, N.J.-based firm that specializes in licensing issues, says Microsoft EA renewals have been on the decline over the past 24 months. "The economy has definitely caused organizations to more carefully scrutinize expenses, and Microsoft EAs are frequently at the top of the list for cost reduction."

In the future, Microsoft could face even greater costs when other state and local governments start demanding similar deals, DeGroot added. That's probably why Microsoft and New York City aren't divulging specifics about the details of their newly forged agreement.

In exchange for its flexibility, Microsoft gets to add the nation's largest city to its roster of cloud computing customers, which will help take the sting out losing out to Google on the Los Angeles cloud software deal last year. Not surprisingly, Microsoft isn't wasting any time crowing about its latest cloud computing win.

"With Microsoft's latest cloud-based productivity and collaboration tools, New York City employees will benefit from having better access to information, improved collaboration and information sharing among city agencies," Microsoft CEO Steve Ballmer said in a statement.

However, it's important to note that New York City was already a Microsoft customer, as was Minnesota, which inked a deal in September to move 33,000 state workers to BPOS. Both appear to be cases where customers are re-upping, and Microsoft is adding cloud computing elements in order to cast these as cloud wins.

Next: New York City Embraces BPOS

Some industry watchers believe Microsoft is offering steep discounts on BPOS to get the deal closed, while Google is doing the same with Google Apps Enterprise.

As part of its Microsoft contract, New York will move about 30,000 employees to Microsoft's Business Productivity Online Suite (BPOS) of cloud apps, which earlier this week was re-branded as Office 365. Some of the savings is expected to come from moving some of these employees to the Deskless Worker version of BPOS, which costs between $2 and $3 per seat monthly as opposed to $10 per seat monthly for the full suite.

Given Microsoft's ferocious competition with Google for cloud mindshare, and Google's recent customer wins in the states of Colorado and Wyoming, solution providers say it makes sense to highlight the cloud in every deal. "It does seem like Google and Microsoft are going tit-for-tat," said one source, who requested anonymity. "After Google got Los Angeles, Microsoft probably thought, 'Who can we get that's even bigger?'"

But even without the cloud message, the New York deal sounds like a case of outsourcing IT to Microsoft and letting the company handle everything, which can hardly be seen as a departure from the past.

"It's definitely one way to ensure that if and when New York is ready to embrace the cloud, Microsoft will be the default position," said Tony Safoian, president and CEO of SADA Systems, a North Hollywood, Calif.-based solution provider.