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IT MANAGEMENT
Making Sense of Microsoft Licensing
What's behind the numbers?
On May 10, 2001, Microsoft fired a shot heard 'round the world -- the world of enterprise software licensing, that is. On that day, Microsoft introduced the next generation of licensing for its products, called Licensing 6.0. According to Rebecca Lab-runerie, Microsoft Licensing program manager, Licensing 6.0 is the most significant change in Microsoft licensing in the last 25 years. Although the initial date for the new rules to take effect was October 1, 2001, it was delayed until March 1, 2002, and ultimately extended to July 31, 2002.
New choices, new rules
As of August 1, 2002, there are only three ways to purchase Microsoft products:
- A retail, shrink-wrapped package.
- License only.
- License plus Software Assurance (I'll describe this in detail later).
The second and third options include four tiers of software licensing:
Open License 6.0: Designed for small businesses with five or more PCs. If you aren't purchasing at least five licenses, you should buy the shrink-wrapped box. Note, however, you can mix and match licenses (Office, operating systems, servers, etc.), so you should be able to come up with five licenses.
Select License 6.0: Designed for businesses with 250 or more PCs with mixed Microsoft license requirements and decentralized purchasing. Pricing is based on your prediction (and commitment) of how many products you will buy over the three-year term. At the end of each year, Microsoft checks to see if you're "on track" and may increase or decrease your prices depending on how close you are to meeting your commitment.
Enterprise Agreement 6.0: Designed for businesses with 250 or more PCs that want to standardize their enterprise on a suite of Microsoft products. This option is best suited for companies with centralized purchasing. Again, because pricing is based on the number of PCs, companies can "true up" at the end of each year to adjust their license fee based on actual usage. In other words, if you add more licenses, the new number of licenses is reported to Microsoft at the end of the year and you're licensing fee is adjusted accordingly.
Enterprise Subscription Agreement 6.0: Similar to Enterprise Agreement 6.0 in that it's designed for businesses with 250 or more PCs and that want to standardize their enterprise on a suite of Microsoft products. However, Enterprise Subscription Agreement 6.0 doesn't offer perpetual rights. This makes Enterprise Subscription Agreement 6.0 similar to a "software lease."
Perpetual rights refers to the ability to use software in perpetuity. In other words, if you purchased a license for Windows 95 and never needed to upgrade, you would have the right to use that software forever. Historically, all software came with perpetual rights. Under Licensing 6.0, all volume licensing options include perpetual rights except Enterprise Subscription Agreement 6.0. After the contract term expires, you no longer have the right to use the software.
There are also special programs designed for academic, government, and non-profit organizations. See http://www. microsoft.com/licensing for more details.
Software Assurance (insurance?)
For Microsoft software users, the days of one-time upgrade programs are gone. Software Assurance guarantees you the right to use any new version of a software product throughout the duration of the contract. So, if a new version of Windows or Office is released during the coverage period, you are automatically entitled to the new version without additional cost. This makes Software Assurance more like software "insurance" against obsolescence.
Software Assurance replaces programs such as Upgrade Advantage, Version Up-grade, Product Upgrade, and Competitive Upgrade. Going forward, Software Assurance is only available at the time of initial license purchase. In other words, you can purchase a license, or you can purchase a license plus Software Assurance.
Get out your calculator!
All Microsoft products are divided into three categories:
- Applications -- For example, Office, Project, Visio, Visual Studio, etc.
- Systems -- For example, Windows XP Professional, etc.
- Server products -- For example, Windows 2000 Server, SQL Server, Exchange Server, etc.
- Software Assurance -- For applications and systems products costs 29 percent per year. Software Assurance for Servers costs 25 percent per year.
Let's say, for example, your new Select License 6.0 for Windows XP Pro costs US$100,000. If you select the three-year Software Assurance plan, your cost would be 29 percent of the license cost per year ($29,000). In this example, this means the total contract would cost $187,000 ($100,000 + $29,000 + $29,000 + 29,000). However, the total purchase price is divided over the life of the contract. If you divide $187,000 by three, your annual cost is $62,333. Therefore, $62,333 is due on day one; another $62,333 is due on the year-one anniversary; and your last payment of $62,333 is due on the year-two anniversary. Note that Enterprise Agreement 6.0 and Enterprise Subscription Agreement 6.0 automatically include Software Assurance.
What does this mean for you?
If your organization is in the habit of keeping up with the most recent version of Microsoft products, Software Assurance might be right for you. On the other hand, if your company only upgrades every other version, then Software Assurance probably isn't cost-effective. Going by the numbers, a 29 percent fee means you'll break even if you upgrade every 3.5 years or less (four years for the 25 percent fee on server products). So, if your upgrade cycle for applications and systems is less then 3.5 years, you should subscribe to Software Assurance. However, if your upgrade cycle is typically more than 3.5 years, you probably don't need it. Remember, if you go with the Enterprise-level license, Software assurance is automatically included.
The only potential exception to this rule is developer tools such as Visual Studio. Programmers are notorious for their desire to always have the latest and greatest version of development software. You may wish to create a unique licensing policy for each category of software to accommodate the variety of needs in your particular organization.
Another advantage to Software Assurance is it makes your budgeting predictable. Buying new licenses every three to five years creates a "spike" in IT spending. Software Assurance lets you smooth out your software costs, adding stability to your IT budget. Also, keep in mind that when your Software Assurance contract expires, you're entitled to the latest version of the software available at the time of expiration, not the latest version actually deployed across your company.
What were they thinking?
This move represents a radical shift in thinking for Microsoft and licensing models in general. Licensing 6.0 represents Microsoft's attempt to shift the perception of software as we know it. The goal is to move away from the notion of software as an asset and toward software as a service. Fundamentally, when you purchase a software product, you aren't buying ownership of that software; you're purchasing the right to use that program. Traditionally, that right has extended into perpetuity.
Microsoft is moving away from the "big-bang" Windows 95/98/2000 life-cycle deployment models in favor of smaller upgrades with greater frequency. With the advent of Software Assurance, Microsoft will be forced to provide more upgrades, otherwise it risks angering the countless organizations that pony-up and pay the additional fees. It's kind of like going to a restaurant with unlimited refills: You want a new Coke to drink every five minutes.
Microsoft's vision is that licensing fees are a one-time expense, but Software Assurance keeps the license current -- in other words, a classic subscription model. Predictable budgeting isn't just a benefit for IT departments. Predictable and stable revenue growth is handsomely rewarded by Wall Street, especially in today's highly volatile market environment.
How will IT departments react?
At this point, nobody is quite sure how well Licensing 6.0 will be embraced. Many system administrators take the "if it isn't broken, don't fix it" approach. Therefore, many organizations used Windows 95 well beyond the launch of Windows 98 and 2000. Under the old upgrade programs like Upgrade Advantage, customers could get credit for having purchased "legacy" versions of Microsoft programs. For example, a discounted migration path existed between Windows 95 and Windows 2000. Licensing 6.0, however, doesn't offer any discounts to customers who skip generations of software applications.
The risk here for Microsoft is that it might alienate its customer base and increase the attractiveness of Microsoft alternatives. (Yes, there are alternatives.) According to Gartner research, user dissatisfaction with the new policies could let Sun Microsystems StarOffice take a 10 per cent market share away from Microsoft Office by 2004. And, in the operating system category, Lindows (see Linux + Windows = Lindows) is proving to be a compelling alternative to Windows.
The big picture
When contemplating software upgrades, don't forget to keep the big picture in mind. Total software upgrade costs reach far beyond licensing fees. The first step is to understand your environment and establish your needs. You can do this by performing a software audit. Determine which software is currently in place and conduct interviews with managers to forecast future requirements. Next, remove any emotional reactions and run the numbers. Create multiple scenarios with various licensing options spanning multiple years. Finally, don't forget about other costs, such as upgrading hardware, education and training, and consulting fees if you need outside help for your implementation.
Linux + Windows = Lindows
One of the most exciting developments in the Linux community has been the development of a package that lets you to run Windows software on a Linux machine. This package, known as "WINE" (short for "Wine Is Not an Emulator"), has been around since 1993. The project homepage, http://www.winehq.org, claims WINE has more than 1 million lines of C code, developed by more than 300 programmers around the world.
One of the major developers and supporters of the WINE project has been Lindows, a startup Windows competitor based in San Diego, California. Lindows has integrated WINE into its flagship product, Lindows OS. As a result, Lindows claims to have an alternative to Windows that can run software such as Microsoft Office.
The product itself is impressive; however, the most dramatic impact of Lindows is the way it's licensed. The current Lindows licensing model lets you purchase one copy of Lindows and use it on every PC in your family without additional cost. This "family license" lets you legally install the same copy of Lindows on all of the PCs and laptops in your home. Although the volume pricing model for businesses hasn't yet been announced, if it follows the pattern Lindows has already set, it could make Lindows an attractive Windows replacement.
In June 2002, Lindows announced the first-ever "flat-fee" licensing program for hardware manufacturers. The "Builders" plan lets computer makers bundle Lindows with every PC they sell for a flat $500 monthly fee. That's right: no per-unit software costs. If a builder ships 10 PCs or 10 million PCs, its only pays a $500-per-month licensing fee. One of the PC makers in the Builders plan is Microtel Computer Systems, which now offers $300 PCs pre-loaded with Lindows, available at Wal-Mart.
In the past few years, Linux has made enormous inroads in the back-office server market by offering stable and reliable server applications such as Web (Apache) and e-mail. However, until now, Linux hasn't made great strides in the commercial desktop market. While it's still early in the game, Lindows has the potential to have an incredible impact in this space. For more information, see http://www.lindows.com.
 Lee Barken, CPA, CISA, CISSP, CCNA, MCP is a partner at CPA Technology
Advisors, and Associate Director of the Center for
Accounting in the Public Interest at San Diego State University. Earlier he was an IT consultant and network security specialist for Ernst & Young's Information Technology Risk Management practice and KPMG's Risk and Advisors Services practice. Lee writes and speaks on IT Audit compliance, wireless LAN technology, enterprise security and computer forensics. He is the author of How Secure Is Your Wireless Network? Safeguarding your Wi-Fi LAN and Wireless Hacking: Projects for Wi-Fi Enthusiasts. http://www.cpatech.biz, http://capi.sdsu.edu lbarken@cpatech.biz
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