The Redmond giant made several changes to its Software Assurance licensing program, under which users pay a subscription fee and receive upgrades for free. Microsoft made introduce SA in 2001, and despite the relatively high costs, managed to convince a number of its enterprise customers to sign up. However, this was just as Microsoft’s once rapid upgrade cycle ground to a virtual halt. Customers already unhappy about the price of the program were still waiting on a Windows upgrade, while Office 2003 wasn’t exactly life-changing for most companies.

The program changes include mechanisms to improve the security and manageability of legacy PCs by turning them into “slim” clients, vouchers to work with Microsoft consultants, and other tweaks. Also, buyers of the Enterprise edition of the upcoming Windows Vista operating system will only be able to buy through SA.

Microsoft claims it has made these changes at the behest of customers, but reaction so far has focused on the decision to force Vista Enterprise customers to buy through SA. Really, there is little substantial pricing differentiation in the new program, and no greater guarantee of upgraded functionality, which were the real sore points.

Microsoft (and its customers) find themselves stuck between two conflicting forces. First, the company wants predictable revenue (and buyers want predictable costs) instead of spikes and lulls caused by the product cycle. However, Microsoft’s core products– Windows, Office, and various server applications– have become so complex that upgrades take years. (These programs were considered complex in the late 90s when they had a few millions of lines of code each. Now they have tens of millions.) Once criticized for shipping new versions every 1-2 years, now Microsoft is under the gun for *not* shipping new products quickly enough. Slow upgrade cycles reduce the value of subscriptions that include upgrades.

In addition, Microsoft’s licensing programs are almost as complex as their software. Check out the Software Assurance page, which is just a subsection of the Volume Licensing site.

There are plenty of things that the software giant could do to optimize pricing (perhaps the most interesting thing to watch is the release of a stripped down version of Windows that only runs 3 programs at a time and doesn’t support English, designed to compete with Linux in the developing world). However, the real issue is innovation and lack of compelling products. Microsoft made a name for itself by producing applications that did 80% as much as higher end apps at 10-20% of the price. This was a great value equation for 95+% of the market. Microsoft may just be too big to effectively innovate like that anymore. They dropped a new searchable file system from the new version of Windows– one of the most hyped features– but Google has a small download that will effectively do the same thing on current Windows machines.** Microsoft rethinks its product strategy from time to time (note the current massive reorg), but it really needs to step outside that box and rethink its “Value Strategy”. What are customers really buying? Microsoft has taken for granted that they are buying Windows and Office, but really they’re buying the means to exchange information, analyze information, communicate, etc. All things that buyers can achieve at 80% of the capability of Microsoft’s offerings at 10-20% of the price through other solutions. Revisiting the Value Strategy will drive needed changes in both product and pricing strategy.

** In Microsoft’s defense, one obstacle to innovation has been their rather impressive support for backwards compatibility. They even go so far as to “recreate” bugs that have been fixed when certain programs are running if they know those programs were written dependent on the buggy behavior. They would be much more innovative if they started from a clean slate every time, like Apple did when they switched operating system architectures, but people would be even more upset at them.

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