MS products you use will now cost more

Scott Hillis

SEATTLE: Microsoft confirmed that its licensing practices could change amid

its plans to start selling software as a subscription service. But the software

giant would not fully confirm the details of agreements described by USB Warburg

analyst Don Young in an earlier conference call on Monday.

Young told the conference call that Microsoft has recently struck new

contracts with several large enterprises, mainly in Europe, doing away with

"perpetual use" clauses that let customers continue using whatever

current version of their software is available at the time the contract expires.

Instead, Microsoft is requiring customers to continue paying for software

like the Windows operating system and Office suite of business applications even

after original contracts end, Young said. "We're seeing a fundamental shift

in license strategy," Young said.

"Now it's shifting to a model (of) limited license terms. It's shifting

to a recurring license model," Young said. "It's clearly a big

positive for Microsoft. It also importantly decouples Microsoft from PC shipment

rates." Customers who actively upgrade or buy new software will likely see

little change in their costs, but those who tend to buy software and use it for

many years will likely see a rise in costs, Young said.

Two other analysts confirmed that the Redmond, Washington-based company was

planning to announce licensing changes but said nondisclosure agreements

prevented them from discussing the details. "They do have stuff in the

works in overhauling their licensing arrangements," said one analyst who

requested anonymity. When briefed on Young's comments, another analyst said,

"You're looking in the right places."

Microsoft spokesman Dan Leach said, "We certainly are looking at the

model of software as service, and to do that licensing would have to change as

well. Leach added, "We're constantly looking at all of our business

practices ... to make sure that we adjust them as needed to make sure customers

can remain flexible and agile."

Shares in Microsoft rose 63 cents to $71.38 on the Nasdaq. Previously, when a

company wanted to outfit a large number of PCs, it entered a multiyear deal with

Microsoft under which it paid Microsoft an annual fee - usually several hundred

dollars per machine - for use of its software.

At the end of the contract, customers could upgrade to the newest version of

the software and were allowed to use the new software for as long as they

wanted, without further payments.

Good for investors



Now, in many cases, Microsoft has offered to buy out those "perpetual
use" rights from customers in order to strike new contracts without such

terms, Young said. A source familiar with the situation at Microsoft said a

traditional license with perpetual use rights would also be offered as an

option.

But Young said customers would pay extra for those rights. Microsoft appeared

to be using the strategy mainly with large corporate customers, but would likely

extend it to medium and small businesses soon, Young said. It would probably not

try to impose such terms on average consumers, since such deals would be hard to

enforce and could trigger a backlash from those consumers, Young said.

Microsoft is adopting the new tactic amid slowing sales of PCs. If the

company implements the new contracts with all business customers, it will

collect revenue simply for continued use of its software, not just on the

initial PC sale or upgrades, Young said.

"This is good for investors. Now just using the software, even old

software, ensures revenues. It's an ongoing revenue stream. It's really a

perpetual revenue stream when perpetual licensing becomes non-perpetual,"

Young said. Microsoft is also negotiating from a position of strength.

"I don't think there are any customers today who have the option to walk

away from Windows and Office. It's as entrenched on the desktop as it ever has

been," Young said.

(C) Reuters Limited 2001.