Why Microsoft's pushing Office subscriptions

Microsoft's current licensing revenue is threatened by cost-cutting customers, analyst says

The launch of new and revised Office 365 software-by-subscription plans for businesses shows that Microsoft realizes its current licensing revenue is threatened by cost-cutting customers, an analyst said yesterday.

"Microsoft wants to shift people to subscriptions because you cannot stop paying for a subscription," said Paul DeGroot, principal at Pica Communications, a consulting firm that specializes in deciphering Microsoft's licensing practices. "What they're facing is a lot of Office revenue potentially dropping off the books as customers stick with their perpetual licenses but stop further payments to Software Assurance."

Firms regularly pay for "Software Assurance," an annuity-like maintenance agreement that gives customers the right to future upgrades in return for annual payments spread over three-year terms. The problem with Software Assurance (SA) is that while Microsoft upgrades Office every three years, few businesses follow suit. Instead, enterprises take years to roll out an edition, skipping one or even two of the upcoming versions before again repeating the process.

By not deploying those interim editions, companies that pay for SA are spending money on something they won't use, said DeGroot.

"If you have Software Assurance, you're now entitled to Office 2013," DeGroot noted. "But say you're in the middle of an Office 2010 migration. That means you're buying not Office 2013 with SA, but Office 2016 or even Office 2019. If you renew SA, you're not going to get anything for it, or not anything that you're going to deploy in the next five, six years."

Dropping SA from an enterprise agreement can cut between 25 percent and 50 percent from an Office bill, DeGroot said, and save big businesses millions. It's no surprise, then, that enterprises are questioning the value of Software Assurance.

"A lot of companies are saying, 'I'm not going to renew SA, but I can keep using the software that I've already paid for. And I can save a lot of money,'" said DeGroot. He usually recommends that clients ditch SA for that very reason. "It's just not efficient to pay SA because you're paying twice as much for Office as you need to."

When a company dumps SA, Microsoft loses revenue. So if an enterprise takes five years between Office deployments, that's five years of lost income for the Redmond, Washington developer.

"Software Assurance was always a bad idea, but now it's coming home to roost for Microsoft," said DeGroot. "They have to move away from SA. In five years, I don't think there will be SA licenses for Office."

Microsoft's response to the fragility of Software Assurance's future, and the potential loss of billions as customers decline to renew? Office 365, the "rent-not-own" plans that Microsoft debuted Wednesday.

With Office 365 subscriptions, Microsoft locks in customers, who must continue to pay or lose the right to run Office. There's no way to opt out, even temporarily, from the annual payments, as there is now by stopping SA, because there is no "perpetual" license, the traditional kind that is paid for once, then used as long as desired.

According to DeGroot, subscription prices for Office can be "quite competitive" with Software Assurance, assuming the customer retains the latter. "In general, subscription works about the same as Software Assurance, although subs have tended to be a little bit higher."

But by adopting the subscription model, Microsoft will be able to continually rake in revenue, year after year, from all customers, not just those who decide to pay SA's fees. That's how Microsoft can stop the revenue drain caused by desertions from Software Assurance.

Microsoft, of course, highlights what it sees as Office 365's benefits, including the right to install Office on up to five devices assigned to each worker. DeGroot agreed that in many scenarios, particularly those involving multiple devices per user, Office 365 subscriptions was the better deal than buying a perpetual license and paying SA.

What's missing from the subscriptions, of course, is a perpetual license that once paid for, can be used for years, Software Assurance be damned. Some customers may quickly wonder why they're paying and paying and paying for something they previously paid for only once.

That could be the backlash that Microsoft faces in the future.

"The risk to Microsoft is that there are alternatives to Office, especially for consumers," said DeGroot, citing LibreOffice as an example. "[Office 365] could be a boon to alternatives, and we could see more interest in the enterprise for these products. An Office 365 subscription isn't like a magazine subscription, where you're getting something new each month. Instead, it's Microsoft saying, 'To keep doing what you're doing, you have to pay us more.'"

Even so, DeGroot sees Office-by-subscription, and the demise of the perpetual license, as inevitable. "I can see a time when Microsoft says, 'The next edition of Office will be available only by subscription,'" said DeGroot.

Microsoft is already there. In an interview at a Morgan Stanley-hosted technology conference on Tuesday, Kurt DelBene, the president of the Office division, was asked if Office would at some point move to a subscription-only model.

It had crossed his mind. "I think it's the one thing that we talk about a bunch and try to figure out exactly where it's going," DelBene said. "I think we have aspirations that ultimately it might get there."

But that doesn't mean enterprises have to adopt Microsoft's model immediately.

"What I've been telling clients with Office 2010 is to just coast," said DeGroot. "You own the license. Enjoy it. In five years, when you're ready to upgrade, then buy the subscription. That's a good strategy as long as you don't keep paying Software Assurance."