Microsoft’s direct approach saves businesses money

Businesses could reap savings of 30 per cent from Microsoft's tactical switch of selling more software direct through its Enterprise Agreement (EA) licensing programme.

During the past two years Microsoft has increased direct sales to customers through its EA package, a major change from the worldwide network of resellers it has previously relied on to sell its products. In March, Microsoft CEO Steve Ballmer said 2,500 to 3,000 of Microsoft's largest 4,000 accounts have EA agreements and Alvin Park, analyst at Gartner, said EA agreements have risen by 15 per cent over recent years.

"We now estimate that 30 to 35 per cent of large customers have Microsoft Enterprise Agreements."

The increase is partly down to Microsoft dropping the entry requirement for EA licensing packages from 500 desktops to 250 in 2001, and the hiring of new field sales reps to push EA to businesses.

Paul DeGroot, analyst at Directions on Microsoft, said: "They have been pushing it very, very hard. It is the most lucrative form of agreement for Microsoft and involves the tightest relationship."

Microsoft is taking a similar approach to smaller customers as well with its Open Value plan launched in March. The package shares many of the attributes of EA - standardisation and a pricing plan that mimics direct pricing – and has been put together for companies with as few as five PCs. Ballmer himself spelled out the challenges the company faces from Linux, and emphasised the need for Microsoft staff to "spend (more) time talking to customers" in an internal memo earlier this month.

For customers, Microsoft's hands-on approach could also save them serious money. Under EA deals, customers receive software discounts that can be up to 30 per cent deeper than the discounts offered under other volume licensing programs, according to Microsoft.

Customers said the EA deals also lower costs for managing software and make for better Microsoft support.

Douglas King, CIO of manufacturing conglomerate Magnatrax, said: "The perception of all our executives was that they did not get the benefit they paid for under previous Microsoft licensing agreements. Up until last year, it was more of a situation where you felt handcuffed." The potential losers in Microsoft's new plan are some of the company's network of software resellers who served as the middlemen between Redmond and business customers. But the new EA deals don't entirely cut those resellers out of the loop; many serve as liaisons to administer deals brokered by Microsoft. Partners, while not selling directly to companies, can serve an important role by eliminating some of the gear-grinding that goes along with managing software assets or getting advice from Redmond. Microsoft is also trying to ensure partners can benefit through commissions or better technical support. With EA, Microsoft sells the software directly to the customer, negotiating the price and other terms on its own, and the customer agrees to put Windows and Office on everything. The impact of these changes ultimately lowers the price for customers, and it raises the profits for Microsoft in a variety of ways. For customers with 250 to 2,399 desktops, An EA license will cost $289 per year per employee, said Park. The fee includes any Windows XP Professional upgrades that come out during the term, a copy of Office XP Professional, all upgrades to Office XP Professional, four client-access licenses (CALs) for accessing Exchange and three other commonly purchased Microsoft servers, and upgrades for all four CALs. Like all Microsoft licensing agreements, customers can get Windows upgrades but not Windows through the contract. Microsoft demands that customers get Windows through hardware manufacturers. EA contracts last three years.

Upgrade costs under Select and Open Agreements rose with Software Assurance, the controversial licensing policy launched in 2001, which eliminated upgrade discounts. Ballmer and other Microsoft executives have admitted that the Software Assurance introduction wasn't handled well and the company has since spent $20m trying to better explain the program. Gartner's Park said: "If you think you need upgrade protection, it is cheaper to go with an Enterprise Agreement. There is a big uptake in enterprise agreements for a couple of reasons, and one is the fact that they got rid of version upgrades." EAs are also far easier to manage. Licensees count how many computers they have worldwide and buy a license for each. Unauthorised use is also eliminated because customers obtain the right to use any version of Windows, Office or a CAL that comes out during the three-year period.

In turn, blanket standardization makes it easier to manage information technology assets, said King at Magnatrax. The key selling point for the company's board was the fact that, by making desktops uniform, it would ensure that all employees could access enterprise-wide applications deployed later on.

DeGroot said the deals can reduce interest in experimentation with alternatives because all desktops have Windows and so fewer customers will be inclined to try Linux.

In an interview in February, Ballmer disputed that Microsoft makes more on EA deals, while affirming the program was good for resellers. "For us economically it is the same. For our partners, I think there is a chance, I actually think their profit margin per account is probably also about the same either way," he said.

Michael Kanellos writes for CNET News.com