Software Assurance: How Microsoft gambles with your money

Second in a series. Microsoft makes no assurance that Software Assurance customers will get access to new products, even though they pay 29 percent of the full desktop software price, annually, over a two- or three-year period. It's 25 percent for server software. As I explained earlier today, Licensing 6.0, which Microsoft debuted 10 years ago this month, commits seven deadly sins. I present here the first of seven.

Win, Lose or Draw

Unless you know much more than Microsoft does about the release dates, feature sets and prices of future products, Software Assurance is a gamble. Based on a typical 3-year product cycle, in which the final feature set, licensing, and pricing may not be announced until three months before release, Software Assurance is a sure thing only about three months out of 36.

Software Assurance is probably best compared to a Vegas casino. The odds of a big win are about the same, and the house always wins in the long run. I have difficulty coming up with a comparable business scenario in which:

• Customers hand over money for a product they've never seen, and
• The manufacturer has not finished designing the product, and
• The manufacturer does not guarantee delivery of the product or a substitute, and
• If the manufacturer fails to deliver a satisfactory product or any product at all, it still keeps the customer's money

Sounds more like carnie game at the state fair than a commercial transaction. (My apologies to the carnies in the audience; at least their customers can have fun even when they lose.)

Some Software Assurance defenders compare it to insurance, but the insurance industry goes to great lengths to calculate the probability of an event occurring and sets the prices of insurance premiums accordingly. If Software Assurance were done that way, its price would be lower just after the release of a new product, since the release of the next version is years away, and the price would rise closer to the likely release of the next version, when the odds are more favorable that the customer would actually get something. But that's not the Microsoft way. Regardless of the risk, the bet is the same.

At times, the losses have been significant. Early adopters of new products can lose because the release of the next version is more likely to occur after their Software Assurance expires. In some cases, it doesn't make much difference when businesses buy a product: the release date is so far out that many customers will lose.

Windows Vista Craps Out

The biggest miss, in terms of both the time and the financial impact on customers, was the shipment of Windows Vista more than five years after customers began purchasing Software Assurance in Oct. 2001. The delay of more than five years meant that some customers had to renew Software Assurance on Windows XP for a second three-year period, bringing their total investment in Vista to nearly twice what the operating system cost customers who did not purchase Software Assurance on Windows XP. To make matters worse, even after paying for Vista twice over, many of those same customers found Vista unsatisfactory and continued to use XP. They might even have renewed Software Assurance on the OS for a third time to be eligible for an upgrade to Windows 7.

For these customers Microsoft offered no refunds, no extensions and no compensatory discount on Windows 7, when they finally got an operating system upgrade they wanted to deploy.

While so far, such misses are the exception -- most of the time, most customers will get at least one upgrade, and Software Assurance offers other benefits besides upgrades -- the upgrades and other benefits will rarely ever result in a really big win for customers. In future installments of this series, as I explain the choices customers need to make and the benefits they get, it will be clearer when the customer wins; however, the difference between a win and a pass on Software Assurance is rarely that great.

Keep in mind that if you don't buy Software Assurance, you're also gambling. You're gambling that Microsoft won't come out with a compelling upgrade within the next 3-4 years. Although it's a gamble, customers have a bit more control over the odds here, because those who take this side "win the bet" if they stay with the current product as long as possible. The more years they don't pay Software Assurance, the less likely that they're going to pay more than the regular license price.

However, Microsoft is forcing many businesses to take the gamble -- at least with Windows. Large businesses that want the most complete version of Windows 7, Enterprise Edition, with important security features, are obliged to buy Software Assurance. Either they place the bet on Software Assurance or they walk away and purchase a Windows 7 edition missing key enterprise features and wait out the next upgrade cycle. Either choice is a gamble, and Microsoft punishes businesses -- by withholding security and virtualization features, among others -- that bet against Software Assurance.

Paul DeGroot is one of the world's leading experts on Microsoft licensing policies, rules and volume licensing programs. Over a ten-year period, he developed and led the licensing practice at Directions on Microsoft, an independent analyst firm focused on understanding Microsoft policies and strategies. DeGroot formed Pica Communications, LLC, where he is principal consult, in 2010, to bring his licensing expertise to a broad range of customers worldwide. Please follow him on Twitter.