Microsoft looks to customers to assure rosy finances

It has been another wildly successful year for Microsoft. Despite universal budget cutbacks at corporate IT customers, a moribund PC sector and intensified competition in the server software market, the company managed to push sales up by a robust 10% to $28.37 billion in its fiscal year ending 30 June. Net income, meanwhile, was a whopping $7.83 billion.

The question many IT decision-makers will be asking themselves, however, is this: Are they paying the price for Microsoft's sustained glory? The answer centres on Software Assurance, Microsoft's controversial new licensing scheme


Company name: Microsoft

HQ: Redwood, Washington

Main activity: Operating system, office and application software

Last full year revenues: $28.37 billion

Last full year net income: $7.83 billion

Key issue: Microsoft continues to defy the general technology industry slump, but its highly positive growth profile will depend on widespread corporate adoption of its new licence scheme.



designed to keep customers' software up to date, but which will also penalise those who fail to sign up.

Microsoft's figures show that Software Assurance (SA) has already become the engine of growth for the company. According to John Connors, the company's chief financial officer, in its final quarter of fiscal 2002, the rush to sign new contracts before the Microsoft-imposed deadline of 31 July boosted Windows desktop platforms revenue by a colossal 20%.

Based on a three-year contract, Software Assurance provides users of Windows 2000 and XP with immediate access to desktop and server software updates as soon as they become available. This comes at a price, however. On average, customers will pay an additional 29% on top of their desktop licences to cover desktop upgrades, and an additional 25% on top of their server licences to cover server upgrades, according to Gartner analyst Alvin Park.

However, those who have failed to negotiate Software Assurance contracts by the deadline – the majority of customers, according to analysts – will end up paying much more. When they next want to upgrade, they will have to buy a completely new set of Microsoft licences. For some, that means licence costs could jump by as much as half, says Park.

But Microsoft is counting on organisations falling into line. In fact, Connors says existing licensees, combined with new Software Assurance contracts, should allow Microsoft to report even better growth of between 11% and 13% in 2003, leading to overall revenues of between $31.4 billion and $32 billion.

If that does not raise the ire of some embattled corporate customers, then Microsoft's unprecedented levels of profitability certainly will. The company's net income for 2002, at $7.83 billion, amounts to a 27.6% net profit margin. To put that net income into perspective, it is higher than the revenues of any other software company in the world (with one exception, Oracle), and it looks hefty compared to the 12% to 15% margin that most software companies consider acceptable.

In the words of John Handby, the CEO of IT management organisation CIO Connect, "Microsoft is really taking advantage of its customers." Against that backdrop, some organisations are looking at Microsoft alternatives (Linux, the open source operating system, and low-cost office products such as StarOffice).

But most customers say they will stick with Microsoft. Indeed, even those critical of the Software Assurance scheme, such as CIO Connect's Handby, say that in many areas there is still no viable alternative to the Microsoft platform.

Microsoft's business is not uniformly strong, however. While the advent of the Software Assurance scheme pushed revenues from desktop dlatforms (largely the Windows operating system) up by 20% in the fourth quarter, sales of desktop applications (mostly MS Office) climbed a mere 1%. Similarly, the enterprise software and services group could only muster 4% growth.

However, Microsoft is looking to its .Net web services initiative to change that, and it has stepped up its assault on the corporate applications software market through its acquisition of enterprise resource planning and customer relationship management software vendors Great Plains of the US and Navision of Denmark. The Microsoft machine doesn't look like breaking down anytime soon.

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Ben Rossi

Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

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