Microsoft service contracts questioned

A new study says past delays in Microsoft Corp.'s products are causing some businesses to think twice about renewing the long-term service agreements that include rights to upgrade to future versions of its programs.

Twenty-six percent of the 61 information technology professionals surveyed by Forrester Research said they had decided not to renew their Microsoft Software Assurance agreements when they expire, opting instead to buy the software as needed.

Microsoft questioned Forrester's findings. The report "only looks at a subset of our customers and is not consistent with the feedback we have received," said Stacie Sloane, marketing and communications director for Microsoft's Worldwide Licensing and Pricing group, in a statement released by the company.

Software Assurance is important to Microsoft in part because it provides a predictable revenue stream for the contract term, generally three years.

Sloane said Microsoft's renewal rates "are on target and in line with our expectations."

But Julie Giera, the Forrester Research vice president who wrote the report, said she speaks with hundreds of Microsoft Software Assurance customers each year, and the findings from the formal study are consistent with what she has been hearing from many of them.

Starting last fall, Giera said, she began to hear "many more companies" express frustration about Software Assurance and ask about the consequences of dropping out of the program.

The report, issued Monday, cited factors including gaps of more than five years between the last two releases of Windows and SQL Server. Windows Vista, released for businesses in November, was delayed as Microsoft diverted development teams to deal with security problems in Windows XP, its predecessor.

The Forrester report says the annual cost of Microsoft's Software Assurance is 25 percent to 29 percent of what customers would pay in licensing fees for a new version of the software.

In some cases, the product delays meant that companies paid more in annual Software Assurance fees than if they had purchased the programs.

In addition, the report cited uncertainty about release schedules for future Microsoft products, including the next versions of Windows and Office.

Microsoft points out that Software Assurance goes beyond upgrade rights to include training, support and other services.

But many Microsoft customers don't see it that way, Forrester's Giera said. "Most customers see Software Assurance as upgrade protection," she said.

Microsoft recognizes revenue from long-term software contracts over time, as it delivers the related services or products. In the meantime, payments by customers accumulate as "unearned revenue" on Microsoft's balance sheet. As of March 31, the company's balance of unearned revenue from its volume-licensing agreements was slightly less than $7 billion.

"It's fair to say that a large portion of their customer base does subscribe to Software Assurance packages," said Sid Parakh, an analyst at McAdams Wright Ragen in Seattle.

At the same time, Parakh said the relatively small sample size of the Forrester study makes it difficult to know if the findings would hold true when applied to the rest of Microsoft's Software Assurance customer base.

The question of renewals is significant now because of a large number of Software Assurance contracts set to expire this year. About 86 percent of the companies surveyed by Forrester said their licensing agreements are scheduled to expire in 2007.

"The bottom line is many more customers are questioning whether buying Software Assurance makes sense, especially if they believe they'd pay more in SA fees than if they just held onto their money and bought new releases when they were ready to install them," the report said.

In the statement, Microsoft's Sloane countered Forrester's findings by pointing out that about 75 percent of the company's Enterprise Agreement customers are renewing those pacts. Those service agreements for large companies include Software Assurance benefits.