Users Rip MS License Changes - What's the cost of little or no competition?

For some Microsoft customers, it's paying as much as 107 percent more for the software they buy in volume.

As previously reported, Microsoft on Oct. 1 will dramatically change how it licenses software to its largest customers. That change will drive up what they pay for products such as Office XP or Windows 2000 between 33 percent and 107 percent, according to market researcher Gartner.

Many customers also are finding they have to buy new versions of Office even to qualify for the new licensing program. With market share of more than 90 percent in both desktop productivity applications and operating systems, Microsoft is able to charge more in a way it couldn't in a more competitive market, say analysts and the company's customers.

Some Microsoft customers--many of which are companies not even halfway through their 2001 fiscal year--are outraged with the changes, which the software giant announced in May.

Ray Bailey, information services manager at a electronic component manufacturer Bergquist Company, said he is "disappointed that Microsoft has been so aggressive in its (licensing) program. We have to pay because we have no choice. Why couldn't they give us some more time to do it gracefully?"

By eliminating certain options under the new licensing program, some technology managers contend they no longer have the choice to upgrade when they want. Instead, they feel railroaded into buying expensive maintenance contracts from Microsoft.

Bill Landefeld, Microsoft's vice president of worldwide licensing and pricing, defended the changes. "I think customers have choice. They had choice before, and they have choice going forward."

Some analysts and customers disagree."On the desktop, there really aren't alternatives," said Gartner analyst Neil MacDonald. "Microsoft knows that people don't have a choice for desktop operating systems and productivity applications."

IDC analyst Al Gillen agreed. "If there were a lot of alternative choices on the client systems, it would be much more difficult for Microsoft to implement licensing programs with such limited choices for the users," he said. "Basically, Microsoft is twisting its customers' arms, and I can't believe its customers are thrilled about this."

There are alternatives to Microsoft's Windows and Office software, including the Linux operating system and Sun Microsystems' StarOffice productivity package. But the vast majority of businesses have standardized on Microsoft's products, making migrating to a rival product difficult. "There aren't a lot of alternatives for desktop productivity," MacDonald said. "Corel (WordPerfect) is a weak competitor and so is StarOffice."

The new licensing policies, however, could lead to businesses taking a second look at alternative products. No customers contacted by CNET News.com said they planned to evaluate alternative applications.

But competition in the server software market remains healthy. For example, companies can choose Linux as an operating system, database software from IBM, or Oracle or messsaging software such as IBM's Lotus Notes as alternatives to Microsoft's products.

"Certainly, Microsoft runs the risk here at the server (level) of giving some advantage to people like Oracle and IBM," MacDonald said. "It's really too soon for Microsoft to feel secure on the server side. They have good market share, but I wouldn't say they're dominant."

Bailey said the Oct. 1 deadline to switch to the new licensing plans is "way too short for our company given the economic downturn...We were never given time to budget properly. Microsoft would not sit still if one of its vendors did that to them. Why are they doing it to us?"

Other companies subscribing to Microsoft's "Open" or "Select" volume-licensing programs also complained about the change in licensing but requested anonymity.

Several recounted similar stories about Microsoft pressuring them to upgrade Office versions more frequently.

"They kept bringing up the BSA (Business Software Alliance) and insinuating about software audits," said one technology manager. "We got the message, all right: Upgrade to Office XP or else."

BSA is a trade group backed by 18 hardware and software makers. The organization, which is strongly backed by Microsoft, helps companies combat and prevent software piracy.

Some companies, unsure whether some employees might have installed illegal software on corporate PCs, decided to take no chances.

"My bosses are mad as hell about the way the whole licensing process is going," one IT manager griped. His company just paid more than $125,000 for two years of Office licenses--or about $177 per PC.

"We would certainly want to know more about" any veiled threats, said Landefeld, who said such sales tactics would not be condoned. "If that is happening, what people need to understand is that administering software is very difficult, especially for large, multinational companies."

Guernsey Research analyst Chris LeTocq said he found the strong-arm tactics surprising but read in them a serious implication.

"We have a quarter that's just about to end (on Sept. 30), and I wonder if it's getting tough for Microsoft," he said. "I wonder if what they're getting is not enough takers" on the new licensing program.

The licensing changes were unpopular from the start, because Microsoft essentially eliminated the most common and cheapest way of purchasing new software.

Rather than paying full price, many larger customers purchase software through one of two popular volume-licensing programs. Under terms ending Sept. 30, most companies could purchase upgrades either through a two-year maintenance contract called "Upgrade Advantage" or by buying one of four common version upgrades--the most popular option. Starting Oct. 1, both plans will be replaced with a new program called "Software Assurance."

But because version upgrades are being eliminated, customers no longer can choose how often they upgrade their software. They either must pay an annual fee as part of a two-year maintenance contract or pay full price for upgrades.

"Software is going to be delivered differently in the future, and we're getting ready for that," Landefeld said. "We are providing a more predictable way for people to get the greatest and latest from Microsoft."

Before participating in Software Assurance, Microsoft customers must be on the current version of the product to even qualify. In the case of Office, that would be XP, released the same month Microsoft announced the changes. Microsoft had wanted companies to make those upgrades by Oct. 1 but later extended the deadline to Feb. 28.

"Your main alternative is to pay the upgrade price more frequently now," LeTocq said. "Alternatively, you decide you're going to pay full whack somewhere down the road."

For customers who upgrade every two years, software costs would actually go down 19 percent, analysts concluded. But the majority of customers--particularly those buying Office--typically upgrade every four years.

"Microsoft claims that over 50 percent (of customers) will see no change in costs, which is not true," LeTocq said.

Said Landefeld: "There is a fine balance as we move toward delivering software as a service and having a balance that works for all customers. There are some customers that are going to upgrade more and some less, but there's a need for a fine balance...We think we're doing the right thing for our customers."

Gartner estimates that medium-sized businesses upgrading software every three years would pay anywhere from 33 percent to 77 percent more under the new plan than they did with the old. Four-year upgraders would pay 68 percent to 107 percent more.

In a scenario of 5,000 desktops, the typical company would see a licensing increase of $900,000 to $1.6 million, Gartner concluded.

"Microsoft has made it pretty clear that it expects its customers to step up to the plate and upgrade more often," Gillen said. "Microsoft is causing pain and resentment in their customer base. Their customers probably are going to have to upgrade--they don't really have a choice. There has to be an alternative for customers to switch to, and there really isn't."

That the company is squeezing customers isn't surprising given the weak PC sales climate and Microsoft's overwhelming market share, MacDonald said. Both situations make more voluntary upgrades difficult.

"Can Microsoft grow much past 92 percent market share on the desktop?" he asked. "There's no new room for growth for new customers on the desktop. In fact, it's a declining market...If you don't have enough more to offer, you're going to squeeze more out of the people using your products."

The larger problem is that Microsoft has revised its licensing policies almost every year for the last four of five years, analysts say.

"Microsoft has been using changes in licensing terms as a way to generate revenue for years," MacDonald said. "It allows Microsoft to come in under the radar screen with something not as blatant and obvious as raising the prices."

He warned Microsoft customers to expect more aggressive licensing changes in the future.

"People should expect more of this," MacDonald said. "Our guidelines to our clients are that at least for 2002, they can look at their budget for Microsoft software and add 40 percent per year compounded."

Unfortunately, about 95% of computer owners don't have that as an option. And I doubt that many of them will throw away their computers and buy Macs just so they can run OS/X.

Check this out:

He Who Controls the Bootloader

Important parts:

Peaceful Coexistence? Right.

It is statistically unlikely that a person purchasing a new computer is ever going to change its operating system — the OS that comes with the computer you buy at the local computer mega-store is probably going to be the OS you use for years, if not forever. And while it is technically trivial for a hardware vendor to set up hard drives to dual- or triple-boot multiple operating systems, very few people have the interest — or the huevos — to repartition their hard drives and install additional OSs after the original point of purchase. Therefore, few things could be more financially critical to an operating-system vendor than to have one's product preinstalled on consumer computers.

There is no technical reason why CompUSA customers shouldn't be able to walk out of the shop with a machine that asks "Which OS do you want to use today?" upon boot. And yet, even today, after several years of relentless news about how Linux is ready for the general desktop and business customer, one does not find dual-boot Win/Linux machines from large commercial OEMs at any consumer outlet or web shop I know of. Yes, you can get dual-boot machines at some of the smaller shops, but these are the ones that slip under Microsoft's radar, and there's no guarantee that Microsoft won't decide to take action against these vendors at some point. And yes, you can buy Linux-only machines from vendors such as IBM. But think about it: Why would IBM sell Windows machines and Linux machines, but no dual-boot Win/Linux machines? The absence is conspicuous.

A few years ago, Be's CEO Jean-Louis Gassée used the phrase "peaceful coexistence with Windows" to describe his company's intended relationship with Microsoft on the consumer's hard drive. Later, when it became clear that Microsoft had no intention of coexisting with a rival OS vendor peacefully, Gassée recanted, saying, "I once preached peaceful coexistence with Windows. You may laugh at my expense — I deserve it."

With so little profit margin in the computer retail business, and with so little to set one brand of computer apart from another, it would seem that out-of-the-box dual-boot capabilities would be a tremendous differentiating factor for hardware vendors. It would seem that there would be financial incentives for computer vendors to be asking Be for 10,000-license deals. These bundling arrangements would be good for Be, good for OEMs, and good for consumers.

In his own column, Gassée has written several times about Microsoft's Windows OEM License and the ways in which it limits the freedoms of PC OEMs. In July 2001, I spoke with Gassée to find out why no dual-boot computers with BeOS or Linux installed alongside Windows can be purchased today.

In the 1998-1999 timeframe, ready to prime the pump with its desktop offering, Be offered BeOS for free to any major computer manufacturer willing to preinstall BeOS on machines alongside Windows.</b? Although few in the Be community ever knew about the discussions, Gassée says that Be was engaged in enthusiastic discussions with Dell, Compaq, Micron, and Hitachi. Taken together, preinstallation arrangements with vendors of this magnitude could have had a major impact on the future of Be and BeOS. But of the four, only Hitachi actually shipped a machine with BeOS pre-installed. The rest apparently backed off after a closer reading of the fine print in their Microsoft Windows License agreements. Hitachi did ship a line of machines (the Flora Prius) with BeOS preinstalled, but made changes to the bootloader — rendering BeOS invisible to the consumer — before shipping. Apparently, Hitachi received a little visit from Microsoft just before shipping the Flora Prius, and were reminded of the terms of the license.

Be was forced to post detailed instructions on their web site explaining to customers how to unhide their hidden BeOS partitions. It is likely that most Flora Prius owners never even saw the BeOS installations to which they were entitled.

Bootloader as Trade Secret

So why aren't there any dual-boot computers for sale? The answer lies in the nature of the relationship Microsoft maintains with hardware vendors. More specifically, in the "Windows License" agreed to by hardware vendors who want to include Windows on the computers they sell. This is not the license you pretend to read and click "I Accept" when installing Windows. This license is not available online. This is a confidential license, seen only by Microsoft and computer vendors. You and I can't read the license because Microsoft classifies it as a "trade secret." The license specifies that any machine which includes a Microsoft operating system must not also offer a nonMicrosoft operating system as a boot option. In other words, a computer that offers to boot into Windows upon startup cannot also offer to boot into BeOS or Linux. The hardware vendor does not get to choose which OSes to install on the machines they sell — Microsoft does.

"Must not?" What, does Microsoft hold a gun to the vendor's head? Not quite, but that wouldn't be a hyperbolic metaphor. Instead, Microsoft threatens to revoke the vendor's license to include Windows on the machine if the bootloader license is violated. Because the world runs on Windows, no hardware vendor can afford to ship machines that don't include Windows alongside whatever alternative they might want to offer.

The essence of the government's antitrust beef with Microsoft is that the company limits competition by leveraging its dominant position in the marketplace (it's important to remember that monopolies are not illegal — abusing them is). To prove its case, the government focused on the browser wars and the harm done to Netscape by Microsoft's inclusion of a free web browser in the operating system.

In my opinion, the browser issue pales in comparison to the egregiousness of the bootloader situation. The browser is arguably an essential component of modern computing — a commodity product as worthy of inclusion in the OS as a text editor or calculator. Be, too, bundles a web browser with its OS, and I'm glad they do. Questions of how the browser is integrated are much more interesting, since they connect to the point of whether Microsoft's browser bundling intent was anticompetitive or not. In BeOS, for example, it's always been possible to remove the browser from the OS simply by dragging it to the Trash, which is very different from the situation under Windows.

DOJ Misses the Point

On request of the DOJ, Gassée had several pre-trial conversations with prosecuting attorney David Boies* and Assistant Attorney General Joel Klein. Gassée explained the bootloader situation to them. They listened and heard. But they did not ask Gassée to testify on the bootloader issue. Instead, they asked Gassée to testify on the matter of browser integration. Gassée warned them that he would be a "dangerous witness," since his feelings on browser integration were actually sympathetic with Microsoft's. Gassée wanted to testify on the bootloader issue, where he felt the core of the case really rested. Klein and Boies told Gassée he could testify with focus on the "malicious intent" aspect of the browser integration question, but not on the bootloader matter.

Needless to say, Gassée declined to participate in the rest of the case. The bootloader issue was raised during the trial, however. Raised, but not actually addressed, because Microsoft claimed (in a court session closed to the public and the media) that the Windows License was a "trade secret." However, Microsoft never denied that the license exists, and never denied that it works as I've described here.

The burning question, of course, is why Boies and Klein didn't want Gassée to testify on the bootloader issue, especially when it could have substantially helped their case? The answer provided to Gassée was that the case was by then already too well established. Including the bootloader issue would have meant rewriting many of the arguments and calling in a new collection of witnesses. In other words, it wasn't convenient for the U.S. government to get to the meat of the matter. It would have been too much of a hassle to address Microsoft's anticompetitive behavior in its purest form. In addition, no PC OEM was willing to testify on bootloader issues. And why would they? The threat of losing favor with Microsoft easily would have outweighed any potential benefit from being able to preload the unproven Be operating system alongside Windows on their machines. Finally, Be didn't have the brand recognition that Netscape did; Netscape made for a much better poster child.

*Boies, by the way, did not even have e-mail as of August 2000 — the highest technology case in the land was prosecuted by a man who could fairly be described as technologically illiterate.

........So here we are in 2001, and guess what? It's still not possible to purchase a dual-boot Win/Linux machine. Doesn't that seem kind of odd? With all of the hype Linux has gotten, and with the technical simplicity of shipping dual-boot machines, not a single PC OEM is shipping such a beast. The technology marketplace is glutted with options. Vendors use even the smallest opportunities to trumpet their differentiating factors. Linux is free. And yet there are no commercially available dual-boot machines on the market. Not one. The silence of the marketplace speaks volumes. There is no other way to explain this phenomenon other than as a repercussion of the confidential Windows License under which every hardware vendor must do business.

.....They're getting away with it. They slipped through the DOJ trial without the bootloader issue becoming the thorn it should have. As far as I know, the terms of the Windows OEM License have not changed. The recommended legal remedies against Microsoft have largely been stricken, and Microsoft is currently deflecting attention from the real issues by agreeing to remove some icons from the XP desktop (as if that mattered in contrast to the larger issues at stake). Klein and Boies helped to prevent the bootloader issue from becoming a central component of the DOJ's case. And we were never the wiser.

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