MICROSOFT LICENSING POLICY ADAPTS TO NEW ECONOMY

The fix is in for Microsoft's application hosting customers. The software giant has reduced pricing on its full line of server software products by more than 20% — and fixed those prices until 2003 — as it attempts to gain market share in the ASP market.

The most welcome change in license agreements offered by Microsoft will be the price cuts. But more subtle changes also will more closely align license agreements for shared and dedicated hosting providers with traditional enterprise agreements, which are less complicated.

Under its previous multi-tiered program, Microsoft could raise prices at any time with 30 days notice. Now the company can only raise prices once annually — in January — which lets service providers write price guarantees into their end-user contracts that typically last a year.

“Raising prices that way never actually happened, but it was a risk that was a bit too much for service providers to bear,” said Reed Overfelt, director of hosting and application services for Microsoft.

It also more closely reflects the basic principles of hosting applications, which require pricing predictability to attract subscribers, said Dwight Davis, vice president and practice director for Summit Strategies. “If it is open season on pricing in the middle of a contract, it defeats the purpose,” he said.

Fixing prices until 2003 may also help the industry find the proper pricing model — a task that has proved difficult for ASPs, Davis said.

“Pricing models are simply all over the map in this sector,” he said. “It is new enough that people are throwing pricing schedules up on the wall to see what sticks.”

While pricing remains a problem, the ASP market has matured in terms of business models, allowing Microsoft to eliminate special usage terms for different types of ASPs. The company has made use rights version-specific, which protects users from price changes driven by product upgrades if the user has not upgraded.

“What we think of as a software product will be part software, part Web site, part service by the time the next decade is done,” said Microsoft CEO Steve Ballmer at the recent Comdex show. By making the terms of its licensing agreements more favorable to service providers, Microsoft hopes to increase its reported 22.7% market share. In competition against rivals such as Oracle and Sun Microsystems, Microsoft realized a 2% gain in market share last year.

While the pricing program should be well received by cost-conscious service providers, others such as USinternetworking, an Internet managed application provider, avoid license agreements by having the end user license the product and manage it for them.

This strategy is particularly useful for large enterprise customers that may be able to strike favorable licensing agreements with Microsoft that are not available to service providers.

“[We] are not going to have as much leverage as a multinational corporation in getting licensing deals,” said a USinternetworking spokesman. “So the leverage oftentimes lies with the client.”