Microsoft customers face licensing hurdle to online apps

Analysts say the company's licensing still favors client-side software, making the move to hosted services a challenge

Microsoft promoted more of its Web-based software offerings at its Worldwide Partner Conference in New Orleans this week, but some analysts say the company's enterprise licensing terms provide little incentive for large customers to move away from its on-premise products.

Microsoft used the partner event to demonstrate Office Web apps, a hosted version of its Office suite, and to promote the use of a hybrid "software plus services" environment -- something it's been pushing for some time -- for customers who want to transition from its on-premise software towards some of its online services.

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Microsoft Business Division President Stephen Elop told partners at the show that nine out of 10 of their customers want to use the hosted services in Microsoft's Business Productivity Online Suite (BPOS), but that customers should have the choice between buying software or services, or using a combination of both.

BPOS includes hosted versions of Exchange, SharePoint, LiveMeeting and Office Communications sold on a per-user, subscription basis. Office Web apps is expected to be available in the first half of next year, though it's unclear if it will become a part of this suite.

While a combination of software and services from Microsoft is available to customers now, sensible licensing terms that allow them to combine them cost-effectively is not, analysts said.

Most large Microsoft customers have enterprise contracts that require them to purchase a client access license (CALs) for employees using Microsoft's OS and server products, such as Windows, SQL Server database, Exchange messaging server and the like.

The complexity arises when people want to add users to an existing enterprise contract or if they want to form a new enterprise contract that includes both software and hosted services, said Paul DeGroot, an analyst with Directions on Microsoft.

If a customer purchases a BPOS subscription for employees who will access only those services, the customer must still purchase CALs for those users, DeGroot said, even though they are not accessing the on-premise software as well.

Microsoft gives customers a discount on other parts of their license in such scenarios -- on the Software Assurance (SA) maintenance program required for enterprise agreements, for example -- but they still end up paying for something they are not using, DeGroot said. "The architecture may be hybrid but the licensing is not," he said.

Forrester analyst Chris Voce said one reason for the muddled licensing situation is that Microsoft still makes a lot of its money from on-premise software, and is hesitant to move away from that business model. "At the end of the day, Microsoft loves their recurring software relationships with their customers," he said.

Through its public relations firm, Microsoft confirmed that the number of users on contract for subscription services cannot exceed the number of CALs with SA that the customer already has.

A remedy for the current licensing situation would be to offer some kind of flexible license, but that may end up benefitting Microsoft more than the customer, DeGroot said. “There is a chance though that when they solve this problem, customers will find that they pay extra for this flexibility," he said.