The Right Question About Office 2003

Today, Microsoft officially launches Office 2003 at a New York gala hosted by Chairman Bill Gates. I’ve taken a number of press calls the last couple of days asking when companies would upgrade to the new Office version. This question made sense with earlier versions, but not for Office 2003.

That’s because in-between Office releases, Microsoft changed how it licenses software to businesses. In May 2001, the company introduced Licensing 6, with a component known as Software Assurance. The new plan nixed Version Upgrades that let companies buy new software whenever they chose to. Under Software Assurance, companies would pay Microsoft up front, annually, over two- or three-year contracts for upgrades.

From Microsoft’s perspective, the new licensing scheme would smooth out the revenue bumps. If businesses are paying on a regular basis for the software, the huge sales spikes could expected to be less following a new product release. From my perspective, the plan also is an effective way to discourage switching to competing products. After all, if a company has already paid Microsoft for an upgrade, switching becomes much less an option.

Interestingly, not all customers signed up for Software Assurance, which fully went into effect on Aug. 1, 2002. How many is a number in dispute. Based on public statements made by Microsoft CEO Steve Ballmer last year, at least 2,500 of Microsoft’s 4,000 largest customers signed up for Software Assurance or moved up to an Enterprise Agreement (That has Software Assurance-like upgrades built in). But in other markets, uptake paled by comparison. According to a Jupiter Research June survey, only about one quarter of U.S. small- and medium businesses subscribe to a Microsoft volume-licensing program.

Last summer, Microsoft had already made clear that Office 2003 would release sometime this year. So, in evaluating the new upgrade program, businesses needed to take into account Office 2003. Those interested in discounted upgrades during the next two or three years had good reason to sign up for Software Assurance or move up to an Enterprise Agreement. Those planning to skip this upgrade would be better holding onto their money and paying full price down the road.

Customers that signed up for Software Assurance have, in effect, committed to Office 2003. Microsoft has their money already. So, Microsoft has a good number of upgrades in the bag, so to speak. The issue, then, is when will those customers deploy the software they paid for? I would expect minimum 6-12 months before many of these customers even begin upgrades.

What about the customers that skipped Software Assurance upgrade protection program? The assumption is they will pass on this Office upgrade. Otherwise, why not sign up for Software Assurance when they had the chance and save paying full price for Office 2003?

The real question reporters and Microsoft customers should be asking is not how many businesses will upgrade to Office 2003 but to the next version of the productivity suite. Microsoft has said that a Longhorn version of Office would ship around the same time as the next version of Windows, codename Longhorn. Some customers that wait on moving to Office 2003 now might be ready for the upgrade 18 months to two years from now. Assuming Longhorn Office won't ship until 2006, they will either have to stretch out their upgrade cycle or buy Office 2003 around 2005.

Those that wait fall into two groups: Those with upgrade protection and those without. Both groups face the same dilemma: Wait or buy. As Microsoft saw with Windows Server 2003, repeated delays drove some customers to Windows 2000 Server upgrades; they didn’t wait for the new release. I predict a repeat of the scenario in 2005 if, as I expect, Longhorn Office slips into 2006 or 2007.

That raises a question about Software Assurance. Do companies renew their two- or three-year agreements with no guarantee of an upgrade during the contract period? The first wave of Software Assurance contracts expire at the end of this month. I would strongly encourage those customers to carefully weigh their contract renewal options.

I’m not suggesting they shouldn’t renew their contracts. The release date of Office Longhorn is only one factor in gauging Software Assurance’s value. But, it is a factor that shouldn’t be overlooked, either.

Posted by Joe Wilcox at October 21, 2003 09:04 AM