Volume Deals Drag Out

The company's field sales force no longer is being told to push new Enterprise Agreements (EAs)typically three-year volume dealsbut rather to stem the bleeding, sources said.

"The No. 1 priority for [Microsoft] sales is to protect existing EAs, not get new ones," said a longtime East Coast partner.

That is quite a departure for a historically aggressive company. But conditions from very public product delays to residual anger over volume licensing changes to overall sluggish IT spending are hurting Microsoft big time, channel sources and Microsoft insiders alike said.

It doesn't help that customers keep using Linux and OpenOffice as a stick to beat down Microsoft pricing. "We're being squeezed hard by every customer. Very few actually plan to use [Linux] but they're using the threat for price leverage," one Microsoft source said.

The main selling point of EAs was customers got a lot of heavily discounted stuff over three years, another insider said. "As release cycles go longer than three years, there's no reason to [renew]. You can see why there's so much angst about getting Longhorn and its related products out sooner rather than later."

Another consideration is that Microsoft cut discounts going from Licensing 5 to Licensing 6 "ticking customers off," the source said.

Microsoft admitted on its first-quarter earnings call that customers are taking longer to sign on the dotted line. One reason: More server software is going into EAs so evaluations take longer, said CFO John Connors.

While such delays may impact "seasonality," the company still expects renewals for the year to fall in the usual 65 percent to 75 percent range for EAs and 10 percent to 30 percent for the Software Assurance (SA) maintenance component.

One partner pegged the current EA renewals at closer to 60 percent, which he classified as "a disaster."

"People aren't buying things like Office 2003," said another longtime Microsoft channel source. There are also a lot more "one-off" deals, where companies buy only what they will actually use, sources said.

Harry Zoberman, senior vice president of marketing and operations at ASAP Software, Buffalo Grove, Ill., acknowledged the dilemma. "Decision making continues to get extended, and that is a problem," he said.

To help show the value of volume deals, big resellers like ASAP offer promotions to speed Office 2003 deployment. But many customers haven't deployed what they bought last time and see little reason to re-up now.

Renewals are absolutely critical, said Paul DeGroot, an analyst at Directions on Microsoft, Kirkland, Wash. "For the first three years, you pay for both license and SA. When you renew, you pay only for SA. If you do not renew and decide a year later to go back, you have to repay for all those licenses. If you do not renew, you will likely not [do so] for three or four years."

Microsoft does have some big deals in the offing. Last week, the U.S. Air Force announced a six-year pact covering Office 2003, Windows Server 2003 and other products for up to 525,000 seats.