As Microsoft moves into its busiest volume-licensing period -- the end of the fiscal year -- the company could face some difficulties with Enterprise Agreement customers. Many organizations will be completing long-overdue Windows and Office upgrades in 2011 and 2012. These customers will probably be on Windows 7 and Office 2010 for at least three or four years, so they might not deploy Windows 8 and Office 15.
But any organization that renews an Enterprise Agreement (EA) in 2011 will pay almost the full license cost of Windows 8 and Office 15. For a company with 10,000 computers, that's about $4.5 million spent on software it won't use. Instead of renewing operating system coverage in EA, companies may want to continue coverage on Client Access Licenses (CALs) on servers. This will cut their bills for Microsoft software by up to 75% over three to five years, and it will have relatively little effect on IT environments and users.
There are, however, some drawbacks to not renewing Windows and Office, including the loss of EA discounts, more complex asset management, and less access to new versions of the software and Software Assurance (SA) benefits. It's important to consider the tradeoffs before making a decision.
About half of EA customers license desktops in their agreements, which include upgrade licenses for Windows, full licenses for Office Professional Plus, and a suite of CALs, such as the Core or Enterprise CAL suites. Under the new agreement, when an EA customer buys a platform, it earns a 15% discount off the sum of the component prices. Software packages cost about $300 to $480 per desktop, per year, depending on the customer's discount level and which CAL suite it licenses.
When an EA is renewed, annual costs often go down because the customer has already paid for the product licenses, so they only pay the SA maintenance fee. However, a new agreement may be more generous because Microsoft changes its prices -- sometimes by more than 50%. For example, that 15% discount for the whole platform? It's only a 5% discount in a renewal.
Microsoft also changes the price of SA in a renewal. SA on Windows and Office is an annual payment that is 29% of what the customer pays for the product license. So a company that purchases 10,000 desktop licenses in a new 3-year agreement might pay $58 a year for the Windows component. That includes $27 each year for SA and about $31 each year for the license. After three years, the customer has paid for the $93 OS upgrade license in full. Now, when the company renews its EA, it no longer pays for the Windows upgrade license. Instead, it only has the ongoing SA payment. This drops the price of the OS upgrade in an EA renewal to $42.
But why is the company paying $42 -- 55% more than the $27 it paid for SA in its original agreement?
There are several reasons. First, Microsoft shaves away two-thirds of the platform discount, reducing it from 15% to 5%. Then Microsoft changes its assumption about how the customer purchased the upgrade license. Instead of assuming that the customer purchased it in an EA, Microsoft assumes that it purchased the license in a Select Agreement, and Select Agreement discounts are not as good. For example, the Select price for the Windows upgrade is about $155 -- not the $93 that the customer paid in its EA. By boosting the assumed price of the license by nearly 70%, Microsoft gets a bump in SA payments.
And while the SA price increase on Office isn't as high, it's still up to 25% more than customers paid for in the first term of their EAs.
Therefore, since the customer loses most of the EA discount in a renewal -- and pays the Select Agreement price instead -- the penalty for dropping the OS and Office upgrades from the EA is relatively minor. A customer can buy SA on upgrades through Select for about the same price. Furthermore, it can purchase SA selectively in Select, rather than for every desktop it owns. This can make Select less costly than an EA over the long term.
Enterprise Agreement's most valuable asset for many customers is that it mitigates the risk of noncompliance. In EA, every computer in the organization is licensed for the latest edition of Windows and Office as well as all earlier editions; all versions of Windows and Office are legal.
But organizations that standardize on Windows 7 and Office 2010 can quickly spot interlopers, such as Windows 8 and Office 15. Until Windows 8 and Office 15 ship, they can't be noncompliant, and after that, even a modest software asset management program should be able to identify nonstandard desktops and confirm the possession of a legal license.
No one knows today what new features will be in the next versions of Windows and Office (including Microsoft), and renewing an EA means paying for those features. Is it worth taking the chance that you'll miss out?
With millions of dollars at stake, you might want to risk waiting, especially when you consider your upgrade history. For example, companies that paid for SA on Windows XP to get upgrade rights to its successor came to two unhappy conclusions:
1. By the time Windows Vista shipped, companies had already paid SA for six years, at 29% per year, to get a discounted upgrade. But they ended up paying 174% of the normal license price.
2. When Vista arrived, some companies didn't deploy it, which meant that they had poured billions into Microsoft at no benefit to themselves.
Similarly, many passed on Office 2007 and waited until Office 2010.
So customers that have used the same desktop OS for the past 10 years -- and the same version of Office for eight -- can see themselves using Windows 7 and Office 2010 for another five years.
Software Assurance benefits
SA is one of Microsoft's most powerful weapons for earning a steady revenue stream and maintaining customer loyalty. The years between Windows XP and Vista would have been tougher for Microsoft if customers weren't paying a few billion dollars a year for SA. In addition, SA is often the ticket to desirable software or special use rights.
Depending on a company's requirements and IT roadmap, the rights associated with SA on the OS and Office may be enough reason for it to continue its EA.
Some of the benefits for Windows users include the following:
- Liberal desktop virtualization rights
- Windows 7 Enterprise
- Training vouchers
And some SA benefits for Office include:
- Home Use Program (HUP)
- Deployment planning services
- Roaming use rights
With the exception of the Windows 7 Enterprise right, all of these benefits go away if you don't include Windows or Office in your EA renewal. Note that after SA expires, customers have the right to upgrade to Windows 7 Enterprise on all computers covered by their EA at any time after the release of Windows 7 in August 2009.
Calculating the benefit
An Enterprise Agreement gives rights to every computer in an organization, regardless of whether they all need them. To determine the value of these benefits, an organization should quantify the amount they will spend on a SA renewal as well as the number of computers that will use a SA benefit. For example, a company with 10,000 computers will spend about $110 per year for SA benefits on Office, and $42 for SA benefits on Windows for each desktop. That's about $1.5 million each year, or $4.5 million over the term of the agreement. Few organizations this size would spend the same amount of money on training and deployment planning in this time period.
Companies should also be cautious of the Home Use Program. These "inexpensive" copies of Office are only temporary and may be more costly than organizations realize.
A licensee pays $110 per year on SA for each HUP entitlement, and it's unlikely that all of its users take advantage of that entitlement. If half of the users in a company with 10,000 desktops take advantage of the program, the organization is effectively paying $220 each year for the right to use Office. In addition, HUP licenses are not perpetual. Unless the organization keeps paying for SA, the HUP licenses expire, and users must stop using copies of Office purchased through the program.
Many organizations may find it more cost-effective to give users vouchers for consumer editions of the product, such as Office Home and Business. Each voucher would require a one-time expense of about $210 and get the user a permanent license, compared with $330 over three years for the HUP.
Office Roaming Use Rights may be more interesting than useful. To take advantage of such rights, users must access Office remotely from a device without an Office license that is not owned by the licensee, like an airport kiosk. This right may be beneficial for some users, but few organizations will need it for every employee.
Virtualization rights for the OS are perhaps the stickiest SA benefit.
SA on Windows may be the most cost-effective solution for an organization that wants to run its desktop OSes on virtual machines (VMs). For $42 a year, it can install the OS on as many VMs as it wants and access them anywhere.
However, the number of organizations that plan to virtualize every desktop is small. Most of the time, virtualization is used for a specific set of users for whom centrally managed desktops may be useful or for temporarily running software that has not been updated for Windows 7.
Renewing SA only for the users who need desktop virtualization may generate substantial savings. An enterprise could renew SA through a program such as Select, which does not require purchasing SA for every desktop.
By looking at the tradeoffs, an organization can determine if a less costly EA renewal would require it to forego things it wants and whether the available workarounds or alternatives would meet its needs.
ABOUT THE AUTHOR
Paul DeGroot is a writer, trainer, and principal consultant at Pica Communications, which specializes in Microsoft licensing strategies and policies.
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