Why Microsoft's pushing Office subscriptions

Analyst: Software Assurance's failings come home to roost, so Redmond turns to perpetual payments

The launch of new and revised Office 365 software-by-subscription plans for businesses shows that Microsoft realizes its current licensing revenue is threatened by cost-cutting customers, an analyst said yesterday.

"Microsoft wants to shift people to subscriptions because you cannot stop paying for a subscription," said Paul DeGroot, principal at Pica Communications, a consulting firm that specializes in deciphering Microsoft's licensing practices. "What they're facing is a lot of Office revenue potentially dropping off the books as customers stick with their perpetual licenses but stop further payments to Software Assurance."

Firms regularly pay for "Software Assurance," an annuity-like maintenance agreement that gives customers the right to future upgrades in return for annual payments spread over three-year terms. The problem with Software Assurance (SA) is that while Microsoft upgrades Office every three years, few businesses follow suit. Instead, enterprises take years to roll out an edition, skipping one or even two of the upcoming versions before again repeating the process.

By not deploying those interim editions, companies that pay for SA are spending money on something they won't use, said DeGroot.

"If you have Software Assurance, you're now entitled to Office 2013," DeGroot noted. "But say you're in the middle of an Office 2010 migration. That means you're buying not Office 2013 with SA, but Office 2016 or even Office 2019. If you renew SA, you're not going to get anything for it, or not anything that you're going to deploy in the next five, six years."

Dropping SA from an enterprise agreement can cut between 25% and 50% from an Office bill, DeGroot said, and save big businesses millions. It's no surprise, then, that enterprises are questioning the value of Software Assurance.

"A lot of companies are saying, 'I'm not going to renew SA, but I can keep using the software that I've already paid for. And I can save a lot of money,'" said DeGroot. He usually recommends that clients ditch SA for that very reason. "It's just not efficient to pay SA because you're paying twice as much for Office as you need to."

When a company dumps SA, Microsoft loses revenue. So if an enterprise takes five years between Office deployments, that's five years of lost income for the Redmond, Wash., developer.

"Software Assurance was always a bad idea, but now it's coming home to roost for Microsoft," said DeGroot. "They have to move away from SA. In five years, I don't think there will be SA licenses for Office."

Microsoft's response to the fragility of Software Assurance's future, and the potential loss of billions as customers decline to renew Office 365, the "rent-not-own" plans that Microsoft debuted Wednesday.

With Office 365 subscriptions, Microsoft locks in customers, who must continue to pay or lose the right to run Office. There's no way to opt out, even temporarily, from the annual payments, as there is now by stopping SA, because there is no "perpetual" license, the traditional kind that is paid for once, then used as long as desired.

According to DeGroot, subscription prices for Office can be "quite competitive" with Software Assurance, assuming the customer retains the latter. "In general, subscription works about the same as Software Assurance, although subs have tended to be a little bit higher."

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