Microsofts Software Assurance Mistake

The company's greatest failure has been its inability to transition from a products company into a subscriptions and services company.

What is Microsofts biggest failure? Some say its the security crisis that has surrounded the company for the past few years, while others cite Microsofts slow adoption of Internet technology. Some believe its the gelding of Longhorn into Shorthorn; a few still remember good ol Microsoft Bob.

While all of these made news and some are ongoing issues, my choice for Microsofts biggest failure is something that isnt on most peoples radar. Its something customers have generally been opposing, but its an issue where Microsoft must prevail—at least, if the company is to be a decade from now the dominant force it is today.

The failure I am talking about is Microsofts inability to transition from a products company into a subscriptions and services company.

For Microsoft to succeed over the next two decades as it has since its founding nearly 30 years ago, the company must move from selling boxes of software to selling subscriptions to software and software as a service.

Microsoft is losing its ability to sell boxes of software. Customers are finding each upgrade less compelling than the one before. And upgrades customers might actually want, such as Longhorn, are being pushed further into the future and, in any case, represent such a wholesale change that transitioning to them will be a lengthy process.

This isnt Microsofts problem alone; its something the entire enterprise software industry seems to be facing. Software as a packaged product isnt going away completely, especially if were talking about small business and consumer software, but delivering value to enterprise customers is shifting from a product business to a services business driven by Web services, software-as-a-service, and utility (or "functionality on demand") computing.

These technologies promise customers more bang for their buck and vendors the opportunity to create new value that customers are willing to pay for. Using these models, computing promises to do more, and do it more efficiently and effectively. If the industry cant manage to accomplish this, it wont just be Microsoft finding itself in a world of hurt.

Its not just me saying this. Microsoft has been talking about subscriptions and software-as-a-service since about 2000. Financial analysts are already questioning the companys inability to make the transition, even as it demonstrates to key customers a world in which traditional applications give way to a desktop built atop Web-based services.

Microsoft has made some progress in changing its revenue stream. Software Assurance is a subscription model that has, after a rocky start, begun to achieve some success with customers. Analysts who were initially skeptical, such as the Yankee Groups Laura DiDio, have come to SAs side as Microsoft has added value to the program.

/zimages/5/28571.gifClick here to read about the pushback Microsoft is getting from users whose Software Assurance plans are about to expire.

In fact, Microsoft has added so much to SA, including rebates and other incentives, that it has significantly lowered its cost of ownership for many enterprise customers. In this way, Microsoft has eased some customers concerns that SA asks them to subscribe to upgrades the company may not deliver during the term of the agreement.

In a previous column about Software Assurance, I cited Yankee Group research that showed that the widely held fear that Software Assurance would dramatically raise the cost of owning Microsoft servers and apps was unfounded. My impression is these fears werent unfounded when Software Assurance was unveiled in 2001, but they have been resolved by changes Microsoft has made to the program as a result of customer opposition and complaint.

It would be interesting to see whether Microsofts own internal analysis shows SA to be a revenue enhancer or whether its a necessary evil or even a loss-leader to introduce customers to the concept of buying Microsoft applications and services on a subscription basis.

Software Assurance has the effect of softening the blow of big upgrades by spreading the payments out (sometimes in advance) and packaging other benefits in as well. This encourages customers to buy upgrades theyd turn down if confronted by, for example, the significant one-time cost of moving from Office XP to Office 2003 all at once.

In this regard, Ive heard SA likened to adding cherry flavor to nasty-tasting cough syrup: It makes something you ought to take (upgrades) but find icky-tasking (the expense) easier to swallow.

Redmond appears to have underestimated customers antipathy toward subscribing to upgrades they didnt really want or intend to purchase. This is what caused customer revolt when SA was introduced and why Microsoft has had to sweeten SA to make it more palatable—now to the point of even being attractive.

But customers anti-upgrade attitude brings us to Microsofts second biggest mistake, which I will discuss in my next column.

/zimages/5/28571.gifCheck out eWEEK.coms Windows Center at for Microsoft and Windows news, views and analysis.


Be sure to add our Windows news feed to your RSS newsreader or My Yahoo page