License 6.0: The New Deal

Microsoft has once again pushed back the date for implementing License 6.0, its new set of licensing options for customers who qualify for volume purchases. The new deadline is July 31, 2002—but after examining the history of this subject, I feel safe saying that date isn’t etched in stone.

Microsoft has changed the plan since the company first announced it about a year ago. (See for up-to-date program details.) The most significant change is that under License 6.0, you won’t need to sign up for Software Assurance (SA) to buy Premier Support (you can expect to see additional new support options available to SA participants). In addition, the definition of "currently available release version"—an application requirement for program participation—no longer specifies Microsoft Office XP; Microsoft will accept Office 2000 as a current version. The company also has developed special licensing programs for educational organizations.

If you have a say in your company’s decision-making process about OS and software upgrades or if you're responsible for preparing budgets and justifications, you need to decide whether the License options are feasible for your company. License involves fewer upgrade options than Microsoft’s earlier licensing programs. You can choose from the following plans: Open License 6.0, Select License 6.0, Enterprise Agreement 6.0, and Enterprise Subscription Agreement 6.0. (See the sidebar "License 6.0 Plans" for a brief overview of the four basic plans.) Each plan is linked to a new SA upgrade-coverage maintenance plan. In addition, Microsoft has changed some of the rules for licensing reimaged installations. (For details, see the sidebar "The New Rules About Cloning.")

Microsoft calls the new licensing program simplified, but the new options aren't as straightforward as earlier ones were: The License plans involve long-term commitments and requires that you subscribe to the SA maintenance plan when you buy your licenses. Unless you accept these requirements, you’ll pay the full volume purchaser price the next time you upgrade.

Changes in Server-Product Licensing
The new scheme changes the way you license server products. Microsoft is eliminating Microsoft BackOffice Server 2000 and BackOffice per-user Client Access Licenses (CALs) and replacing them with the new Core CAL. The Core CAL provides one CAL that covers Windows Servers, Microsoft Exchange Server, Microsoft Systems Management Server (SMS), and Microsoft SharePoint Portal Server (formerly code-named Tahoe). See the sidebar "Core Client Access License" for details. You’ll need to license most other server products (e.g., Microsoft Commerce Server) on a per-processor basis. And the Core CAL, unlike the BackOffice CALs, doesn’t cover Microsoft SQL Server.

For SQL Server, you can choose between processor-based SQL Server licenses or individual SQL Server CALs. Deciding which option to choose is easy: Multiply the per-processor license cost by the number of processors in the target computer. Then, multiply the CAL cost by the number of individual CALs you’d need to cover all the users who access SQL Server. Compare the two numbers and pick the lower one. For example, if you’re running SQL Server on an 8-way machine and only a few dozen users access the product, you probably should opt to license CALs. If thousands of users access SQL Server, licensing by processor might be cheaper. (For more information about SQL Server licensing, visit

Software Assurance
SA is a software maintenance plan that gives you rights to all new versions of a licensed product that Microsoft releases during the term of your license agreement. As Microsoft describes it, "Software Assurance is a new, simpler way of obtaining upgrades to the latest and most innovative Microsoft products than making sense of the many upgrade license types previously offered."

In a nutshell, you’re committing, for the term of your SA agreement, to upgrade whenever Microsoft releases a new version of a product you've licensed. SA is included automatically in Enterprise Agreement and Enterprise Subscription Agreement; if you use another licensing plan, you can purchase an SA agreement when you purchase your licenses. If you already own the most recent version of a product, you merely need to buy the SA agreement to ensure availability of future upgrades.

SA pricing depends on the licensing plan you use and on the cost of the product license attached to the SA agreement. The annual SA cost is 29 percent of an annual desktop license price or 25 percent of an annual server license price.

Give some careful thought to the following requirement: You can’t enroll in SA unless you’re running the currently released version of a product. If you let SA lapse when your agreement expires, you must pay full license prices (with the appropriate volume pricing levels for your enterprise) for future upgrades. I’ve found a lot of confusion among IT administrators about this requirement. Many administrators asked me whether their companies need to upgrade server and application products (including server-based BackOffice applications) under their License 5.0 plan before they can sign up for License 6.0 with SA, or whether signing up will automatically give them the current license versions.

According to Microsoft, you can enroll in Upgrade Advantage (UA), which is available until July 31, 2002, to "catch up" on versions, and your UA agreement will be converted automatically to SA. Microsoft (or your Microsoft reseller) will work with you to bring your current deployment up-to-date. Of course, if you already run the current version of a product, all you need to do is add SA to that license. To make all this a bit less complicated, SA is automatically included in the Enterprise Agreement plans.

For Office customers who are running Office 2000 when they sign up for License 6.0, that version will be considered current and Microsoft won’t insist that you upgrade to Office XP. If you’re running legacy Office versions, you can use UA to move to either Office 2000 or Office XP, then roll the UA agreement into an SA agreement. I believe this is a compromise position to encourage upgrades because of disappointing sales of Office XP and Office 2000. I found several reliable sources that reported that almost half of Microsoft’s enterprise customers still run Office 97. (A surprising number of companies still use Office 95.) Apparently, only 30 to 40 percent (depending on the report) of enterprise customers have upgraded to Office 2000, and Office XP is too new for anyone to judge the rate at which companies might migrate to it. I queried more than a dozen IT administrators of large enterprises about their current Office versions and got the same results. I asked those administrators who were still using Office 97 why they were doing so; in every case, they told me they felt their company had no need of the new features and therefore couldn’t justify the expense of deployment and training.

Make a Decision
The new licensing structure and SA have several significant repercussions. The most important is that you essentially must decide now about upgrading Microsoft OSs and applications in the future. In a way, you must make this decision in a vacuum because you lack the answer to an important question: Which features will future versions include?

If your company usually deploys new versions (even if it doesn’t do so immediately upon release), signing up for License and SA will result in lowered costs and easier administration of licenses. But historically, many companies have practiced selective upgrading: deciding whether to upgrade depending on the importance of the new feature set to the company's productivity. If the features are attractive, the company deploys the new version and pays for an upgrade. Under License 6.0, though, selective upgrading means the loss of upgrade discounts. Customers who want to upgrade selectively will pay the full volume-discount–level license price.

I spoke to Alexa Bona, research director of software asset management at Gartner, who offered a warning: "The impact on customers who had planned on not renewing their current agreement and using select version upgrade licenses to meet their future upgrade needs is significant. ‘Taking a vacation' \[i.e., skipping an upgrade and waiting for the next one\] will no longer be an option, and if you don't sign up for the new licensing program, you will have to repurchase every license when you do choose to upgrade." Bona pointed out that the majority of enterprise customers take frequent vacations, and the new paradigm provides a way for Microsoft to "stem the tide of enterprises electing not to renew their Enterprise Agreements."

Bona also encouraged companies to consider the new plan’s percentage-based pricing structure. A license renewal price is a percentage of the price of a new license under a new agreement, not a percentage of what you initially paid under your original agreement. Because you have no way to determine products’ future prices, Bona stated that Gartner recommends you negotiate this item and insist that renewal percentages apply to the price you pay when you enroll. This arrangement will at least give you some solid numbers to put into your budget.

I asked a Microsoft representative about the possibility of negotiating the terms of the new licensing packages, especially the terms of SA. He didn't respond with a direct answer that invited all comers to a negotiating session, but he surprised me by not rejecting the notion out of hand. He stated that the primary motivation for developing SA was to make it easier for customers to stay current with the state of the art—a statement that I view as a hopeful sign that large companies and Microsoft can arrive at a mutually beneficial financial arrangement.

Do the Math
Determining the cost of enrollment in a new license program and SA involves an enormous amount of work. The basic question seems easy: How will the cost of enrolling in a license agreement and SA compare with the cost if I don’t join and must buy new licenses to upgrade later? But as soon as you think you have a handle on the specifics, they could change; I think it’s a safe bet that Microsoft will continue to alter the basic licensing terms for the next few years. More important is the dilemma you face when trying to figure out what costs you need to consider—this task involves more computations than are obvious at first glance.

For one thing, you must guess the future price of a Microsoft product. If you enroll in SA, you don’t know what you’ll eventually pay per desktop after your current SA agreement expires—you know only that it will be less than the full retail price that Microsoft decides to set for the product. Examine your company’s history under your current license discounts (your historical costs depend on the discount plan you use), and look for a pattern in upgrade prices. Then, cross your fingers and hope future percentage increases follow a similar path so that you can budget effectively.

Additionally—and perhaps more important—you don’t know whether you might need to upgrade equipment to run future upgraded OSs and applications. In your calculations, you must consider total cost of ownership (TCO), which involves the cost of hardware components and how much time you’ll need to establish a computer’s suitability for upgrading.

Support is another budget component to add to your formulas. When you upgrade an OS, you’ll likely need support as you deal with new paradigms, new features, and other components for which you lack experience.

I'm comfortable with accounting and experienced with Microsoft Excel, but developing a "what-if" spreadsheet for my puny 12-node network was an exercise in frustration; each step forward revealed missing items, necessitating a step backward. One lesson I learned was that you can’t have a too-detailed tracking database for your hardware components; such information has a real effect on your calculations for budgeting software upgrades under the new plans. For example, one of my Windows NT Workstation boxes would need more RAM to run Windows 2000 Professional, but I hadn’t noted the RAM type in my records. If it’s Enhanced Data Output (EDO) I’d want to replace the computer rather than add RAM, but I had to open the machine to find out. Imagine the time and effort to open every machine in a large enterprise because you didn’t record component information.

I needed to determine whether I could update the OS on my legacy Windows computers without increasing hard disk space and upgrading RAM and BIOS versions. I also needed to consider aging computers that I’d need to retire during the term of the agreement. What if I wanted to buy OEM-preloaded systems as replacements? (You can add SA to a new full license for the Windows desktop OS within 90 days of purchasing the license from an OEM or through a retail channel. You don’t need to pay Microsoft for the license; because you already paid the OEM or the retailer, you just need to pay Microsoft for an SA agreement.)

In my frustration, I decided to search for a rule of thumb. Bona told me that Gartner has determined that if you plan to upgrade within 3.5 years (4 years for server products), enrolling in SA makes sense. Otherwise, wait and buy new licenses when you want to upgrade a product. (Microsoft uses 3.45 years as the standard.)

However, this rule of thumb is generic and doesn’t take into consideration TCO, feature-set concerns, user training, Help desk training, deployment costs, and other variables. If your company’s environment complicates any of those issues (e.g., deployment and training tasks are more complicated for companies that maintain many small remote offices), you need to make additional calculations.

Subscription Licenses
Another option you might want to consider is whether to subscribe to, rather than purchase, a license. Enterprise Subscription Agreement, which will be available to corporate customers that have 250 or more desktops, will let you rent, rather than own, your software licenses. Like Enterprise Agreement, Enterprise Subscription Agreement covers Microsoft Office Professional, Microsoft Windows Professional versions, and Core CALs. Subscriptions are for a 3-year term, and SA is built in to the package.

This program has possibilities, but under its current structure it might not pass your financial standards. The annual subscription cost per PC isn’t fixed; it’s set at 85 percent of the cost of a regular Enterprise Agreement license at the time of renewal. (You’d be prudent to assume that your next subscription period will cost more than the current one.) I suggest you try to negotiate a set subscription price with Microsoft if you’re interested in this plan.

At the end of the subscription term, you must renew your subscription (for either 1 or 3 years), buy out your subscription, or uninstall the software. A subscription buyout will cost one-and-a-half times the third-year’s subscription fee and will give you a perpetual license. (However, you’ll pay the full Enterprise Agreement price for the next upgrade.) Bona told me that Gartner is warning its clients that Microsoft could eliminate the buyout several years hence. Based on my experience with various subscription models, I don’t think that’s a significant problem. Most companies that make a financial decision to rent instead of own don’t take advantage of buyouts.

Based on my consulting experience, I have some reservations about the cost of the Enterprise Subscription Agreement. I spent many years working with clients who needed vertical software, such as specialized accounting packages (for hospitals and educational organizations) or specialized database software (for specific manufacturing industries).

Many vertical-software manufacturers offered subscriptions as an alternative to the standard perpetual licenses. Those subscription rates never cost anywhere near 85 percent of the standard volume licenses; usually, the rates were about 40 to 50 percent of volume discount licenses. A Gartner study says that mainframe venders, who have been offering these programs for the longest time, typically price subscription offerings at 35 percent of the regular volume license price. (Granted, these vertical and mainframe applications are very expensive, so the smaller percentage still represents a great deal of money.) Also, those software manufacturers let customers renew subscriptions indefinitely without requiring that they upgrade the software when new versions are produced. If customers choose to upgrade because they want the new features, the subscription rate increases.

Consult your company’s chief financial officer (CFO) or accounting firm: If subscriptions change the way you post costs for software upgrades, your company could realize some tax benefits. If the current scheme at your company is to post software to an asset account and then amortize the asset over its expected life, your accounting department might welcome the chance to post subscription licenses directly to expenses. That option has the potential to not only reduce taxable profits but also relieve your company of the time and expense of calculating and entering amortization figures. (The popularity of leasing company cars instead of buying them is an example of the attractiveness of this model.)

The current financial structure of the subscription model could be overly burdensome for many companies, though, partially because of the inability to plan expenses over a long term. This flaw is unfortunate, because a more attractive subscription program could provide a win-win situation for both Microsoft and its customers: for Microsoft, a steady, dependable, stream of income; for customers, an efficient, reliable way to budget software expenses and reap tax and other bottom-line advantages.

Good or Bad?
License is a complicated balancing act, with pros and cons of equal weight. On the positive side, the ability to deal with OS, application, and server licensing under one agreement is much simpler than Microsoft’s previously separate and complicated licensing agreements. Microsoft will also offer a Web site database for enterprise customers; you’ll be able to use the site to view, add, or remove licenses. Such an arrangement is a great way to ensure that you and Microsoft agree on the numbers, which almost never happened in the past (ask any IT administrator who had to work with a Microsoft audit request).

On the negative side, if your company doesn’t consistently deploy upgrades when they’re released, the new plan is a financial commitment to purchase software you might not need or want (albeit at a better price). And if you decide not to enroll in SA, then Microsoft releases a new version with lots of features you need, you’ll have to pay the full volume-discount price for every seat in your enterprise.

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