icrosoft's plan to impose a new pricing program has been prompting a chorus of complaints from corporate and government customers for several months. But early results, analysts say, indicate that the move was shrewd financially — at least in the short run.
The new plan, according to Microsoft, is intended to simplify a pricing system for corporate and government customers that had grown complicated and confusing over the years. It moves customers to a subscription model of paying yearly fees for updated software, instead of deciding each time whether to buy a new version of Windows, Office or other Microsoft programs.
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Some institutional customers pay more than before, and others less. Yet beyond the pricing details, many customers seem to resent being led on a forced march by the most powerful company in computing — particularly in the midst of a weak economy, when most of them are cutting back on technology spending.
"Any change like this means disruption, requiring you to rethink your spending plans," observed Anthony E. Scott, chief technology officer for information services at General Motors. "Microsoft had this in mind for some time, but it's unfortunate that it does come amid this downturn."
But early results indicate that most customers have gone along. Some considered alternative software from rivals like Sun Microsystems, Corel and Novell, and there have been scattered defections, but not many. Any losses were far outweighed by a rush by customers to sign up for the plan before a July 31 deadline set by Microsoft.
Industry analysts estimate that those signings will add $600 million to more than $1 billion in revenue to Microsoft's results for the quarter ended in September, which the company reports on today. That extra spending is one reason Wall Street expects Microsoft to report strong quarterly results despite the technology sector's slump.
A survey of corporate chief information officers conducted in September by Merrill Lynch found that half of them had accelerated their spending on Microsoft licenses before the July deadline because prices went up afterward. "Customers are committed to Microsoft technology for the long term," said Christopher Shilakes, a Merrill Lynch analyst in San Francisco.
For Microsoft, the new pricing system should provide a steady, predictable stream of revenue from its dominant desktop software, Windows and Office, even though the desktop PC business is maturing and growth is slowing.
"Microsoft has turned a lower growth and potentially volatile business into a consistent, steadily growing business," said Don Young, an analyst at UBS Warburg. "It's a brilliant move."
The new pricing system is also part of Microsoft's drive to move increasingly beyond its desktop franchise into the lucrative market of supplying corporate data centers. It offers the best terms to customers that buy not only the desktop products but also its Windows data-serving software, an area in which Microsoft competes with International Business Machines, Oracle, Sun Microsystems, Novell and others.
Microsoft is already making solid gains in the market for server software, with sales rising more than 10 percent for the last several quarters despite the overall fall in corporate software spending. Analysts say the new pricing system may magnify that trend.
Yet many Microsoft customers have signed up grudgingly for the new pricing system. Gary Beach, publisher of CIO magazine, regularly conducts panel discussions with chief information officers and said, "There is a lot of dissatisfaction with this, and it could hurt Microsoft in the future as companies look more and more at alternatives."
Microsoft's chief executive, Steve Ballmer, said earlier this month, "With 20-20 hindsight, I probably wouldn't have made any of these changes when the economy was going to go south."
Microsoft estimates that under its new pricing system, half of its institutional customers will pay about the same as before, roughly 30 percent will pay less, and 20 percent will pay more.
The customers applauding the new pricing system tend to be companies that use mainly Microsoft software and upgrade regularly, like the Creative Artists Agency, whose agents represent actors and writers. "We pretty much use the latest and greatest stuff," said Michael Keathley, the agency's chief information officer. The firm uses 600 desktop PC's, 200 notebook computers and 100 servers, all mostly running the latest versions of Microsoft software.
Mr. Keathley said he had often complained about Microsoft's byzantine licensing systems. He expects Creative Artists to save 20 percent under the new system.
The customers that suffer from the new pricing policy are the ones that tend to run older versions of Microsoft software and upgrade only as needed. The city of Nanaimo in British Columbia, west of Vancouver, has 350 desktop PC's. Under Microsoft's new system, the cost for upgrading to the current versions of Office and buying a "software assurance" plan for updates over the next three years would have been about $170,000, according to city officials.
"It's just so Microsoft to throw something new like this at you and wring more out of the sponge," observed Cameron Scott, a member of the town's technical staff.
So Nanaimo has decided to convert about half of its desktop PC's to Sun Microsystems' StarOffice software, whose total cost over three years will be about 15 percent of Microsoft Office's.
Microsoft sales executives called officials to try to hold onto the city's business. But so far, Star Office is working well, though it lacks some features of Microsoft Office. "Ninety percent of our office workers use 10 percent of the features in Microsoft Office," Mr. Scott said. "If Microsoft's price came down so the gap wasn't so great, then we might rethink."