Microsoft's Office 365 Add-ons muddy licensing and make customers pay twice

The new licensing arrangement may be useful for dipping toes in subscription waters, say experts, but it could end up in customers paying more for their software

Microsoft has kicked off licensing add-ons that let enterprises add Office 365 subscriptions atop existing volume license agreements, touting the new options as a more flexible, simpler way for businesses to move to a rent-not-buy model.

Flexible: Maybe. Simpler? Hardly. Independent analysts scoffed at any notion of Microsoft's licensing becoming easier to understand, with one saying that the Redmond, Wash. company's practices have become so Byzantine it's "getting ridiculous."

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"Microsoft claims it's 'simple,' but I doubt that word is abused anywhere more than in Microsoft licensing," said Paul DeGroot, a licensing consultant whose Pica Communications specializes in Microsoft licensing, in an email reply to questions.

Others were just as skeptical of pairing "simple" in the same sentences as "Microsoft licensing."

"Microsoft says that with so many licensing choices comes more complexity," said Michael Silver, an analyst at Gartner who also fields clients' questions about Microsoft's policies. "That might be true, but the complexity is getting ridiculous."

The analysts were talking about Office 365 Add-ons, an offshoot of a promotion Microsoft ended June 30 that let enterprise customers add Office 365 to their existing EA (Enterprise Agreement) at a sharp discount.

According to Microsoft marketing materials, the new licensing add-ons, which launched Aug. 1, "Give you a simple, low-cost way to add Office 365 services at any time, while maintaining your current Enterprise Agreement and Software Assurance benefits."

Enterprise Agreement is the name of Microsoft's volume licensing program for its largest customers, companies, and organizations that license Windows or Office, and the accompanying CALs -- for "client-access licenses" -- for more than 250 PCs. An Office EA requires that all users or all PCs be covered by the agreement; each user or PC is allowed to run the suite though a "perpetual" license that, once paid for, can be used as long as the company wants to stick with that edition.

Complicating matters is that EAs automatically come with Software Assurance, an annuity-like program that lets a customer upgrade to future editions during the EA's three-year lifetime.

But Microsoft is aggressively pushing the software-as-a-subscription concept, to even out revenue, replace Software Assurance and make good on its promise to become a "devices-and-services" company. Office 365 is a subscription that, for an annual fee, lets each user run Office on up to five desktop and notebook devices, and up to five mobile devices. But if a business stops paying the subscription fee, its employees cannot use Office; it never owns the license, only rents it.

Some enterprises have jumped on Office 365 wholeheartedly, but most have either stuck with their existing EAs and the perpetual licenses acquired through those agreements, or have adopted a hybrid approach, where some users rely on Office perpetual licenses and on-premise servers -- ones running Exchange for email, for instance, and Windows Server for file storage -- while others are tied to Office 365.

Office 365, while giving employees locally-installed copies of Office, offers cloud-based and off-premise email, storage and other services.

Add-ons let companies dip a toe into Office 365, said Blake Gollnick, director of Microsoft licensing at SHI, a New Jersey-based reseller.

"Add-ons are a great way for companies to get involved with Office 365," said Gollnick. "They're not ready to commit to the cloud long-term, they're not transitioning to Office 365 and dropping on-premise licenses, but they can add any number of users they want [to Office 365]. It's a much simpler sales process."

Simpler than moving licenses from perpetual to subscription, anyway.

DeGroot agreed with that. "There's one clearly positive benefit here: There's no minimum purchase requirement, so you can add additional capabilities for just some of your employees, which can be difficult to do in an EA, where by default you license the same capabilities for everyone," he said. "That means that in a regular EA, if you want every capability for some people you have to give them to everyone, even those who don't need it, unless you can negotiate some concessions from Microsoft."

But both DeGroot and Silver wondered why companies would, in effect, pay twice for Office.

"It appears that you can add products, but you don't subtract any on the other side, so you pay twice -- once for the perpetual licenses you have in your regular EA and again for the non-perpetual, subscription licenses in the Add-ons," said DeGroot.

Even Gollnick acknowledged the double payments, although he noted that Microsoft provides partial discounts for Office 365 Add-ons. "But customers are still going to pay above and beyond the on-premises [fees]," he said.

Microsoft doesn't publicly reveal the discounts, saying in its promotional materials only that, "[Office 365 Add-ons] pricing recognizes your existing investments in Office and CAL Suites." It also promised that the biggest customers would get the largest discounts.

DeGroot laid out one scenario where add-ons might prove useful. A company could sign an EA for every worker that included only the bare bones, then use the Office 365 Add-ons to acquire more advanced rights for those that really needed them.

"You can add Office 365 E3, which includes those Enterprise capabilities, to a subset of employees who need them, rather than buying them for everyone," said DeGroot. "But Microsoft isn't willing to let customers choose Office selectively, using Office 365 Add-ons."

DeGroot also speculated that Microsoft was thinking as much of its salespeople as its customers when it created the Office 365 Add-ons. "Overall, I'd say that Microsoft has removed a few bumps on the way to Office 365 for some customers," DeGroot said. "It has also made it easier for its own sales teams to add Office 365 to agreements, which they desperately need, since it's impossible for many sales reps to get a bonus at Microsoft these days unless they can show Office 365 traction."

But the addition of more options -- DeGroot said that corporate customers could already buy Office 365 services through the Microsoft Online Subscription Program  -- is most of all a signal of the overwhelming complexity of Microsoft's tangled licensing.

"It's quite difficult to understand, and we believe a lot of users may not really understand what they're getting and more importantly, what they're not," said Silver.

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+, or subscribe to Gregg's RSS feed. His e-mail address is gkeizer@computerworld.com. See more articles by Gregg Keizer.

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This story, "Microsoft's Office 365 Add-ons muddy licensing and make customers pay twice" was originally published by Computerworld .

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