Microsoft Unveils EA-Like Licensing, New Channel Model for SMB

On Thursday, the software giant began briefing direct market resellers, VARs and value-added providers on a new SMB licensing option called Open Value. The option allows SMBs to buy companywide licenses that can yield up to 25 percent in savings and spread their payments over a three-year term, a Microsoft executive said.

The SMB licensing program, which Microsoft has been mulling for more than a year, is similar to the Enterprise Agreement (EA) option offered to large organizations. Microsoft currently offers Open Business and Open Volume deals to SMB customers. With the new Open Value payment option, however, SMB customers with up to 750 seats can enjoy the benefits of annuity payments, software savings and upgrade rights via Software Assurance, the executive said.

Microsoft also unveiled Thursday a channel model that assigns distributors as license providers with solution providers as advisers that get a fee for influencing a technology purchasing decision.

Both the new SMB licensing option and new channel roles will take effect in March 2003, Microsoft executives said.

Rebecca LaBrunerie, program manager for the Worldwide Pricing and Licensing group at Microsoft, said the company has rolled out similar programs in Canada and Europe. The new licensing option, she said, can save SMB customers as much as 29 percent on desktop software costs and 25 percent on server software costs over a three-year period.

"It's another option to standardize on the Microsoft platform across a company, similar to the EA, and it allows [SMBs to realize lower costs," she said. "It's a more sophisticated licensing [program, so we need to equip channel partners with training and how we're changing our licensing model. "

The program gives Microsoft a way to sell more Software Assurance contracts to SMB customers, many of which frown at Licensing 6.0, analysts said. In return, companies get free financing, a way to spread out costs, and software discounts for companywide purchases. Companies with as few as five seats can participate; there is essentially no cap on the number of seats for midsize companies, LaBrunerie said.

One analyst said the new option gives those that failed to buy into Licensing 6.0 before Microsoft's imposed deadline last July another way to secure Software Assurance and future upgrade rights without paying the full price for the software.

"My take is that this is the move to assuage many of the customers whose costs went up as a result of Microsoft eliminating upgrade options and replacing them with Software Assurance. In many cases, [Software Assurance added a significant expense to customers that wanted upgrade protection but didn't qualify for Enterprise Agreement-class discounts," said Steve McHale, a channel analyst with IDC. "By allowing customers to spread out the costs of acquisition, Microsoft is trying to address the biggest problems for these customers. Microsoft looked after the big customers first and is now doubling back to the companies that were most vocal about their objections to Licensing 6.0."

Paul DeGroot, principal analyst at Directions on Microsoft, a Kirkland, Wash.-based newsletter, said the move appears aimed at building support for Software Assurance. "It says that [Software Assurance and, more generally, annuity licensing, is still a huge priority for Microsoft," he said. "Microsoft is, in effect, providing zero percent financing. With interest rates the way they are, that's not the benefit it might have been, but still, a lot of small companies are probably paying 7 [percent to 9 percent on lines of credit and other financing options, so that is a measurable benefit. "

Along with the new licensing option, Microsoft is instituting a new model for the SMB channel that converts distributors such as Ingram Micro into license providers and billing agents while VARs, value-added providers and direct market resellers become software advisers.

The model is similar in some respects to the Enterprise Software Agent model that replaced the Large Account Reseller role two years ago, but splits the responsibilities across the two-tiered SMB channel. As part of that shift, Microsoft assumed direct control of the money flow, with large resellers serving as licensing advisers and earning fees for influencing sales and serving customer accounts.

Under the new Open Value model, the distributors will handle customer accounts and electronic billing while the VARs will get a fee for influencing a deal. Microsoft would not disclose the percentage or point structure for the Open Value program.

Sources said the new structure could skim revenue from resellers in the SMB space but will also establish a tidy profit for nailing software deals with SMB customers.

"The money will be going directly to Microsoft, but it's a hybrid form of the ESA model in which authorized license providers have electronic agreements with customers and they do multiyear billing," said LaBrunerie. "Microsoft pays a fee to the software adviser, and Microsoft is selling in a pass-through model to authorized license providers."

Some analysts expect the referral fee for VARs will fall between 5 percent and 10 percent.

Analysts' initial impressions of both the licensing program and adviser model were positive for the channel. However, it will take some time before the repercussions on both tiers of the channel are fully understood as Microsoft makes a strong overture to the SMB crowd, they said.

"The average customer-facing VAR, the guy who visited the customer and convinced them to purchase software, never really was compensated by Microsoft. You had to sell extra services, or perhaps mark up the software price a bit," said DeGroot. "The referral fees make this much easier, and potentially much more profitable: Every time the customer orders from a license provider, the adviser gets a cut. I think that's a significant incentive for many folks who deal with the SMB market to get in there and pitch Microsoft solutions and platforms."