Microsoft under pressure

Microsoft continues to face resistance to its multiyear licensing program but will act to hold onto its dominant market share, according to company CFO John Connors.

The software giant faces a US$1.1 billion 'hole' going into fiscal-year 2005 due to declining deferred revenue, Connors said.

Observers say slowing upgrade cycles and uncertainty regarding demand for its Software Assurance (SA) annuity licenses when the bulk of Upgrade Advantage (UA) contracts expire mid-year is causing Microsoft concern and giving customers more leverage.

'The thing they're having problems with is getting renewals on enterprise agreements,' said one financial analyst, noting that customers are holding back on SA licenses and playing the Linux card to get discounts. 'June is the big test. Everyone is lined up [for renewals] in June.'

During the company's recent earnings call, Connors indicated that the company might budge on pricing to preserve its market power. 'The real wild card is what happens with pricing of software generally,' Connors told financial analysts. 'Do you hold your own or do you see pricing pressure in those high-margin businesses? We'll have to do a great job with our value proposition, but we also will do what is necessary to keep share.'

Microsoft is confident that end-of-life policies and a strong product cycle will spur a 10 percent to 30 percent adoption of SAs.

Meanwhile, its licensing predicament is giving partners and customers greater leverage to negotiate discounts. 'Software Assurance is fundamentally broken,' said one East Coast partner who requested anonymity. 'Microsoft claims that three years of SA non-perpetual upgrade rights is less pricey than negotiating a product upgrade in year four. Given what's happening with [its] deferred revenues, it's hard for me to believe Microsoft will stick it to me on the license upgrade if I choose to defer purchase.'

Added another source: 'Since Microsoft started negotiating price directly with customers, there's much more discounting going on. When there was a channel player in the middle of negotiations, there was a floor on the price. That's not true now.'

Another weapon, say integrators and IBM, is the threat of switching to IBM's WebSphere portal with applications-on-demand portlets as leverage for discounts.

IBM Software Group Vice President Larry Bowden said a large European bank recently did just that. Microsoft had expected an US$11 million renewal on products including Office. When the customer went back with IBM's portal-threat in hand, 'US$3 [million] to US$4 million magically came off that bill, which paid for the portal,' he said.