ZDNet UK / News and Analysis / Business of IT / IT Strategy

Microsoft woos customers away from resellers

By Michael Kanellos, CNET News, 17 June, 2003 14:23

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Microsoft, Enterprise Agreement

NEWS
The US software giant has a new strategy to boost its sales and fend off rivals. During the past two years, Microsoft has increased the amount of software it sells through its Enterprise Agreement (EA) licensing program, under which the company sells applications directly to businesses. That's a big switch from previous plans, under which Microsoft relied on a worldwide network of resellers to find customers and sell its software, ideally for profit. Resellers are always pulled into EA agreements, but to service deals largely consummated by Microsoft. Microsoft then pays them a commission out of fees paid to Microsoft by the customer. Under the EA plan, Microsoft representatives also spend more time and energy at customer sites discussing the technical or economic benefits of its wares. "We now estimate that 30 (percent) to 35 percent of large customers have Microsoft Enterprise Agreements," said Alvin Park, an analyst at Gartner. That's up from 15 percent in the recent past. In March, Microsoft CEO Steve Ballmer said that 2,500 to 3,000 of Microsoft's largest 4,000 accounts, or 62 percent to 75 percent, have EA agreements. The direct push has only just begun. In 2001, Microsoft dropped the entry requirement from 500 desktops to 250, which has fueled growth and widened the customer base. Many of the company's new hires are field reps for EA, said Rebecca LaBrunerie, product manager for the worldwide licensing and pricing group at Microsoft. "They have been pushing it very, very hard," said Paul DeGroot, an analyst at Directions on Microsoft. "It is the most lucrative form of agreement for Microsoft and involves the tightest relationship." Microsoft is taking a similar approach to smaller customers as well. A program that shares many of the attributes of EA -- standardization, for instance, and a pricing plan that mimics direct pricing -- has been put together for companies with as few as five PCs. Called Open Value, the plan was launched in March. The increase in Microsoft's direct involvement with customers makes sense, given a memo sent by Ballmer to Microsoft employees earlier this month. In the memo, Ballmer spelled out the challenges the company faces from Linux, and he emphasized the need for Microsoft personnel to "spend (more) time talking to customers." The CEO has said the company needs to get a firmer grasp on what its customers want, or it risks losing them to competitors. The new licensing plan could be one way to increase sensitivity to customers. EA customers "are the least likely to try Linux," DeGroot said. The EA deals, which last three years, get customers and service providers to swirl in a tighter Microsoft orbit. EA licensees also agree to buy more software from Microsoft, such as Windows upgrades and Office XP for all desktops and notebooks, even those from Apple Computer. "With Enterprise Agreements, if you standardize across your company on these products, we will give you the deepest discounts," LaBrunerie said. "The key advantage is that customers will standardize on a set of products." For customers, Microsoft's hands-on approach could save serious money. Under EA deals, customers receive software discounts that can be up to 30 percent more than the discounts offered under other volume licensing programs, LaBrunerie said. Customers said the EA deals also lower costs for managing software and make for better Microsoft support. "The perception of all our executives was that they did not get the benefit they paid for" under previous Microsoft licensing agreements, said Douglas King, CIO of Magnatrax, a manufacturing conglomerate that consists of 11 separate companies. "Up until last year, it was more of a situation where you felt handcuffed." The potential losers in Microsoft's new plan are some of the company's network of software resellers who served as the middlemen between Redmond and business customers. But the new EA deals don't entirely cut those resellers out of the loop; many serve as liaisons to administer deals brokered by Microsoft. Partners, while not selling directly to companies, can serve an important role by eliminating some of the gear-grinding that goes along with managing software assets or getting advice from Redmond. Microsoft is also trying to ensure partners can benefit through commissions or better technical support. "We can call Microsoft on behalf of our customers now. It's a big deal," said Jeff George, vice president of alliances at Epicor Software, which develops Windows applications for small and medium size companies. "Customers have this view of Microsoft. They know the amount of support they get is very limited. Heaven forbid you are going to make calls." Raking in the cash Because Microsoft negotiates software prices on its own and sells directly, the EA deals give the company an opportunity to achieve higher margins on software sales. In Select and Open, Microsoft sells software to distributors and resellers, who then retain any markup. "We suspect that the new direct-selling model allows Microsoft to retain the same or greater margin, while helping to keep its channel partner healthy or viable," Park said. In an interview in February, Ballmer disputed that Microsoft makes more on EA deals, while affirming the program was good for resellers. "For us economically it is the same. For our partners, I think there is a chance, I actually think their profit margin per account is probably also about the same either way," he said. Resellers nonetheless generally had little good to say about EA because it deprives them of a potential sales opportunity. The conflict is ameliorated in part because Microsoft appoints a reseller, called an Enterprise Software Advisor, to administer the account. In return, the advisor obtains 7 percent to 10 percent of the contract's value. Microsoft's rules and requirements for participating in these programs, though, can be arcane and expensive, sources said. The commissions can often be low in dollar terms. Nonetheless, the obligations for servicing an EA contract can be comparatively simple. "It's a lower margin, but it comes with no risk," said Tom Barnes of Syscom Technologies. Profits from software sales have been elusive for partners. Before EA came in five years ago, Microsoft recommended that resellers sell their software at 17.7 percent above the wholesale price, Park said. Many ended up selling at cost or below cost to get the deals and qualify for a 2 percent to 4 percent sales rebate. In one extreme case, a reseller offered the software at 5 percent below cost, got the contract, and then recovered a 4 percent rebate. Ultimately, as more business goes direct, Microsoft will come to resemble its rivals, such as Oracle or Sun Microsystems. "They are saying, 'We need to be more than a software company and (we) need to be a services and solutions company,'" King said.
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