Microsoft's License Price Hike is a Downer for Enterprises

Analysts say that Microsoft’s recent move to increase prices for its client-access licenses (CALs) may create a losing situation for enterprise customers, but is likely to provide a significant boost to Microsoft’s revenue.

At the beginning of December, Microsoft completely overhauled their price charts of enterprise licensing. The most noted change among them was the increased cost of “user” CALs by 15 percent.

CALs are required by corporations in order that workers can legally access the company’s application servers. The majority of the Microsoft’s server revenue is actually generated from transitory CALs that they sell to enterprises by the millions.

Until recently, Microsoft charged the same amount for both “device” and “user” categories. The “device” category is a license tied to a specific device, such as a laptop or desktop computer. The second label, “user,” is linked to the individual who is then able to access the server through the CAL with multiple devices, including tablets and smartphones as well.

Emerset Consulting Group’s co-founder and managing director, Daryl Ullman, says that Microsoft is “looking for new revenue” as their previous prices “were very customer oriented, but now they are under revenue risk.” He continues by saying that “changing licensing is always a way vendors deal with a revenue problem.”

In this particular case, Microsoft has only raised the price for the user CALs, while the device CALs cost remains the same. Experts say that this change may be Microsoft’s bid to cash in on the BYOD (Bring Your Own Device) trend in order to cater to workers using three or four devices. Thus, it is not surprising that the increase of revenue will be the result of the dramatic shift toward the mobile realm.

The idea is that if Microsoft fails to make money with Windows – given that they have such a small presence in mobile currently – they will certainly come out profitable by using the others’ operating systems on their own mobile devices.

According to Ullman, “this has been brewing for quite a long time.” He says that “for years, they were selling user CALs knowing that companies would use them to their benefit. They knew they were leaving money on the table. But now they've realized that they can charge more for user CALs.”

Before Microsoft upped the prices, enterprises realized they could cut their CAL expenses by two-thirds with user CALs. This was because they were able to buy just one CAL per user, rather than per device. As many workers were using a notebook, mobile device, and desktop computer, this rapidly became a good deal.

But Microsoft noticed that revenue began to slip away as more and more companies opted for user CALs to deal with BYOD and cut expenses.

Jeff Muscarella, a partner with NPI, an Atlanta-based firm that assists companies in navigating the technology purchasing and company licensing, agrees that this is a good move for Microsoft. “This will increase Microsoft’s revenue,” he says. He did not provide speculation on just how much it would bring to the company, but in a recent report, NPI stated that it “could mean billions.”

This view is seconded by others as well, including Paul DeGroot, a former analyst with Directions at Microsoft and now a principal with Pica Communications. In his words, “I think this will raise more revenue for Microsoft. But while customers may not want to pay more, a 15 percent increase could be the lesser of two evils.”

According to DeGroot, many companies are not aware that they are required to purchase CALs to support their non-PC devices. However, if Microsoft chooses to audit the customer’s licenses and they are found to be without, the company will be in trouble.

In DeGroot’s words, “if or when Microsoft comes in and starts asking how many devices in total are accessing Exchange email or using [Remote Desktop Services] sessions, it could get nasty.” He continues by saying that “all those sent emails with the helpful signature ‘sent from my iPad,’ for example, are tip-offs to under-licensing.”

Despite the 15 percent price increase, DeGroot and other experts tell clients that getting user CALs is still a better deal in light of the recent proliferation of devices.

Microsoft’s new offering of increased support for a variety of devices gives them the justification of increasing the prices. However, not everyone agrees on this point.

In a blog post past October, Forrester Research analyst Mark Batrick confronted this issue with these words: “When I only have one version of Windows and Office but wish to access that version remotely or virtually via multiple devices, why should I have to pay more for the privilege?" He continued his viewpoint with the claim that he is “still only accessing my one version of Office, albeit it from different devices at different times, but I have to pay more?!”

Others view this recent emphasis on user CALs as a piece of a bigger strategy to completely move customers into licensing that is more subscription-based.

According to Ullman, “they’ve thought this out” and “they're aggressively pushing the cloud, and changing their licensing to cloud terms and conditions. They’re using the licensing push to get customers to join their cloud wagon, and once you're hooked, they'll want to move you to subscription-based licensing.”

An example of this strategy can be found with Microsoft’s Office 365, in fact. Based on the user licensing, a subscription with Office 365 allows the user to run Office 2013 on as many as five different devices.

Muscarella refers to this as a “multi-fold strategy.” In his words, “they want to show the Street that they can compete on the cloud. They see where technology is going, and that their existing business model may die. So they're moving the oil tanker a few degrees each year.”

Even though the price officially went up on December 1, enterprises that have already negotiated their fees will continue paying that amount until their contract expires. When they renew the licensing agreements, however, they will be required to pay the higher user CAL price.

Regarding their 15 percent price increase, Muscarella points out that “Microsoft can’t do a 180 and increase the price by some dramatic amount,” but rather that it’s a “game of inches” for Microsoft. “But [their licensing] is not less complicated,” he continues. “Whenever licensing is complicated, it benefits the vendor. A CFO once told me, and I've always remembered this, that ‘Mystery equals margin.’ That's true with Microsoft.”

For enterprises, Muscarella calls these price and licensing changes as “lose-lose.”

It could always be worse, however.

DeGroot warns that “Microsoft could, if they insisted, demand that a customer immediately purchase device CALs for all the devices that need them.” While that would “generate more money,” he says, “it would also generate a great deal of ill will, and possibly less revenue in the long run.”

Microsoft may risk pushing businesses towards cheaper alternatives if they push too hard. And during this time when they are threatened from all sides, Microsoft cannot afford to lose more customers.

This seemingly-small increase of price is a “very, very smart move for Microsoft,” Ullman states. “There are a lot of customers out there with user CALs, so the impact is going to be substantial. It's not going to be just a couple of dollars.”

While this was a smart move for their finances, it may not have been the best way to treat customers – many of whom have been hit with sizeable price increases on various licenses this year.

Yet the move was not unexpected.

In Ullman’s words, “Microsoft is a licensing company” and “not a software company.” Thus, “it’s driven by licensing.” (RP) Link