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Tuesday, 2 October, 2001, 17:47 GMT 18:47 UK
Microsoft slammed for software costs
Microsoft Windows 2000 professional software boxes
Microsoft's scheme has raised some firm's costs 100%
David Schepp

When Microsoft announced a new pricing structure for licensing its software in May, it said the scheme would be less complicated and result in lower costs for most of its corporate users.

The new prices took effect on 1 October, and some firms are already lining up to complain that they are now paying substantially more, are forced to buy products they do not need or want.

Microsoft Chairman Bill Gates
Microsoft's fortunes have made Chairman Bill Gates the world's richest man
Some smaller companies are now looking for alternatives to Microsoft products, in the hope of containing the higher costs of doing business with the software giant.

Large customers benefited

Under the new scheme, large customers who update often benefit most. Those that update at least every two years have the option to spread payments over months for licenses to use the company's software.

But users also relinquish ownership rights to the products, such as Microsoft's Office suite of business applications.

They take out a subscription charge for using the software, instead of paying the hefty upfront charge for owning the product outright.

Microsoft says the new scheme signals a shift away from software as a product to software as a service.

British firms, however, are generally furious over the new licensing proposals, says the Infrastructure Forum, a technology consortium that represent 98 UK companies.

Hefty increases

"Investigations during August and September now show we are facing an average 94% increase in licensing costs across the membership," says David Roberts, chief executive at Infrastructure Forum.

"This will affect all organisations", he says.

It is that sort of increase that has US firms angered over the increases. With Microsoft's dominance in the business-software realm, many feel they have few options to avoid or reduce the costs.

Microsoft's Windows holds over 90% of the market for operating-system software, and its Office software suite has nearly the same market share.

Mature market

Microsoft used to count on the burgeoning personal-computer (PC) market to drive revenues upward. Now, with PC sales slowing down, the maker of the ubiquitous Windows operating system must look to existing customers in the hope of generating fresh profits.

"Near-term it will have a slightly negative impact on [Microsoft's] revenue - but only on a small portion of revenue," says Merrill Lynch technology analyst Henry Blodgett, adding that enterprise agreements make up only 13% to 14% of revenue and only a small piece of that would be affected.

But other analysts remain sceptical whether the new scheme will work, given that fewer than a third of Microsoft's corporate clients upgrade frequently enough to get the biggest discounts.

Small businesses hit hardest

In addition, customers who upgrade their Microsoft software every three years, typically smaller businesses, are getting squeezed the hardest, seeing their costs rise in excess of 100%.

When making its announcement in May, Microsoft said the plan was designed to be "financially neutral".

The changes do not affect the consumer market, which comprises 60% of Microsoft's sales, nor those companies who chose to buy their software from retail stores.

But it means additional homework for those firms that previously went with enterprise agreements.

"It requires corporate customers to look pretty closely at these options," says Summit Strategies analyst Dwight Davis.

See also:

24 Sep 01 | Business
Calls for Microsoft investigation
21 Sep 01 | Business
Microsoft delays Xbox launch
07 Sep 01 | Microsoft
Timeline of the legal battle
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