Software Assurance Doesn’t Work in the Cloud

Jun 16, 2011

Many people want to believe in the notion that a company like Microsoft can come up with an effective cloud offering. But Microsoft’s own history demonstrates that being in the cloud is not in Microsoft’s DNA.

It’s not that Microsoft isn’t technically capable; they have a lot of smart, savvy folks working for them, just like all the other big corporations. But by their very nature—a large, public company with many product lines and many investors to please—Microsoft is always going to be looking at the long-term revenue strategy. How can it get customers and keep them paying for as long as possible?

Nowhere is that more evident than Microsoft’s Software Assurance (SA), the 10-year-old licensing program that hangs like an albatross around Microsoft’s neck. To keep going with the upgrade and maintenance plan only further aggravates existing customers and makes new customers leery. To change the plan might spark an open revolt among current SA participants who would wonder where their money went all those years.

BetaNews is running a stark expose series on SA as it reaches its 10-year anniversary this month. It is a real eye-opener into the cost/benefits of SA, which is all about the long-term. Software upgrades can only be obtained by SA customers who pay Microsoft an annual fee, 29 percent of the full license price per year for desktop software and 25 percent for server software. And they have to pay for those upgrade rights all the while they are in the program; regardless of when the next upgrade arrives.

For Microsoft, SA works well: a steady stream of income for software that may not be ready to ship for months or years, which can more than offset any discounts the customers might get when they actually do purchase the upgrade. For customers, not so much. The SA program actually discourages upgrades, according to the article:

“The break-even point, where a full upgrade equals the cost of Software Assurance is about three-and-a-half years. At 29 percent a year on desktop products like Windows and Office, if customers hold out for four years or more, the non-Software Assurance customer will pay only 100 percent for the upgrade license, while the SA customer will pay 116 percent.

In effect, the Software Assurance pays a 16 percent premium to get a 13 percent discount.”

This steady stream of income has created a trap for Microsoft. When they moved from traditional upgrade pricing to SA, Microsoft created a very steady, recurring revenue flow from their software products. One of the major motivations for any software company to switch to a software as a service (SaaS) model—moving from unpredictable licence revenue bursts to a steady, recurring revenue flow—simply does not exist for Microsoft. On the contrary, they would lose exactly that to SaaS.

Looking at all of the foibles of SA and the addictive trap it has created for Microsoft, it is hard to imagine how Microsoft will effectively exist in the cloud. They could not remotely try something like this, because every proficient cloud vendor and managed services provider understands something very basic about good cloud services: you have to be nimble and ready to serve customers when—and only when—they need you.

There’s no lock in. There’s no unreasonable subscription plans. Customer X needs 1,000 servers for their apps in June? That’s what they get. Customer Y needs a messaging solution at a fixed yearly cost? That’s what they get. No slight-of-hand, no assurance programs.

Cloud is about providing service well. Do that, and the customers will come.

About the author

Rafael Laguna

Rafael Laguna

Co-founder and former CEO of Open-Xchange

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