www.aspnews.com/analysis/analyst_cols/article.php/766481

Back to Article

Weekly Review: Microsoft Makes Move to Monthly Fees By Phil Wainewright May 15, 2001 Microsoft took a big step towards a subscription-based pricing model this week, courageously grasping one of the thorniest nettles in the path of software vendors as they transition to online delivery of their wares. It's been a long time coming — ASPnews first reported Microsoft's intention to launch subscription licensing as long ago as February 1999 (see Microsoft to Allow Apps Rental). But even the best-laid plans can still go awry. Speak Out Does subscription-based software mean a rosy future or painfully deferred revenues for ASPs and perpetual fees for customers? Talk it out in ASPnews Discussion Forum Moving to an annuity model for software pricing seems to have a depressing effect on software companies' stock prices, as noted in a previous review. When a company starts booking its sales revenue monthly over the life of each product rather than as a one-off, upfront payment, the short-term effect on reported revenues can be devastating. At least two-thirds of the revenue is deferred to future years, so that even if sales improve as a result of the switch away from upfront payments, reported revenues in the first year will be barely a third of what they were the year before. It takes around three years for subscription revenues to catch up to the levels previously achieved by sales of traditional upfront licenses. Software giant Computer Associates last month demonstrated how confusing all this can be. In October, it decided to pre-empt the problem by accounting for sales of its software as if all of it was already being sold on subscription. But when it published full year financials last month (for the year ended March 31), it faced allegations that it was using accounting tricks to make its figures look better than they were. To make matters worse, it was subsequently forced to admit that a "typographical error" in the original press release had overstated earnings per share by 150 percent. Even its own officials had apparently become overwhelmed by the complexity of its new accounting methods. Microsoft's announcement brings in subscription licensing as an option for enterprise customers from October this year, beginning what it hopes will be a phased transition to the new revenue model. The software will still be installed by customers, but instead of paying an upfront license fee, they will be able to pay a subscription that spreads the cost over the assumed life of the product. But there's a catch: Although Microsoft claims most customers will pay the same or less, the new scheme will be more expensive for companies that upgrade less frequently than the average. That's because they'll carry on paying a monthly fee as long as they continue using the product, rather than paying a fixed one-off purchase price. The aim of the new scheme is to kick off the transition to subscription licensing and pave the way towards online provision of software. Microsoft is also introducing online tools to help customers manage their software licensing, and a new software maintenance offering called "Software Assurance," giving guaranteed access to upgrades and other product enhancements as they become available. The flaw in the scheme is that Microsoft is attempting to make subscription licensing an all-or-nothing choice. It wants to be able to earn a royalty every year that customers use its software, whether they upgrade or not. The trouble is that this takes away the customer's option of staying with a single version for a one-off fee. Automatically paying a monthly subscription for software that never changes would be as absurd as paying Intel a royalty for every year you own a PC built with one of its processors. Customers will still want a one-off, perpetual licence option for certain fixed-function requirements. Microsoft's misleading rhetoric about "software as a service" is at fault here. Allowing customers to use software is not in itself a service for which customers should pay a subscription; software is bought, sold and licensed just like any other form of intellectual property. The service element comes in offering a variety of licensing options and delivery mechanisms, and in refreshing the product with upgrades and enhancements. While it is true that software publishing will increasingly take the form of subscription licensing and online delivery, there will always be a place for one-off perpetual licences. Microsoft is going to have to accept that it is not the software itself that is the service, so much as the process of publishing and delivering it. From A to Z and Back Again A correspondent in this site's ASP-Lists email discussion lists posed the question last week, what does the 'x' stand for in xSP? The innocent query has sparked a thriving debate. My own advice would be that it's a bit like the "A" in EBITDA — within reason, it stands for anything you can't easily fit in anywhere else. There seem to be few letters of the alphabet that have not yet turned up in front of SP to denote some new spin on "service provider." To my knowledge, BCDEFHIMNPVW have all been used (business, commerce, developer, ecommerce, full, hosting, Internet, management, network, procurement, vertical, web). Many have multiple interpretations in addition to these few examples. No surprise, then, that a new report just published by research group IDC reveals that the worldwide xSP market is already worth $140 billion and will reach at least $400 billion by 2004. No doubt there's plenty of upside on that projection once the industry finds candidates to fill the currently unoccupied KSP, JSP, QSP, YSP and ZSP slots. More adventurous participants, breaking free from the conventional confines of the three-letter acronym, have already ventured into four-letter territory with terms such as AISP, CASP and WASP. The trend is fuelled by advice from those venture capitalists who are reluctant to invest in any business that is not a recognized leader in its field, preferably one that it has pioneered with its own distinctive acronym. It cannot be long before we see the advent of the A2ZSP, a category of service provider that aims to dominate the entire multi-billion-dollar space simply by promising to be all things to all people. Rest assured that ASPnews will still be around to report on all providers — whatever they choose to call themselves — that deliver and manage business applications as an online service. To us, they'll always be ASPs at heart. This review of the week's news highlights is by ASPnews.com founder and consulting analyst Phil Wainewright. A comprehensive news digest is published every month in the ASP News Review newsletter, available exclusively to subscribers.