In-Depth

Low Money Down: Open Value Licensing for SMBs

Microsoft's Open Value Subscription licensing plan essentially lets customers rent software rather than buy it, for substantially less money. Will small and midsize businesses take the bait?

• By Rich Freeman
• March 01, 2008

Microsoft partners in the United States and Canada will find out soon. This month, Microsoft introduces its Open Value Subscription (OVS) volume licensing plan in those countries. Already available internationally, OVS lets customers essentially "rent" Microsoft products rather than buying them outright. While technically not a lease, the new licensing scheme holds similar appeal for cash-strapped SMBs, enabling them to acquire new software for less money up-front. "We're really excited," says Eric Ligman, Microsoft's U.S. senior manager for small business community engagement. "This is going to be really positive for the SMB space."

Many SMB partners are anxious to see whether Ligman is right. Some of their customers are sure to find OVS compelling, they say. The big question, though, is how many.

Flexible Offer
OVS joins a range of volume-buying options in Microsoft's SMB-oriented Open License program. The Open Business plan, for example, lets companies with between five and 250 PCs buy Microsoft products at discounted rates. They can also purchase two years of coverage for those products under Microsoft's Software Assurance (SA) maintenance plan, which, among other benefits, provides free upgrade rights to new releases. Though Microsoft makes financing assistance available, customers normally pay immediately for every license they buy.

Open Value, OVS's parent licensing scheme, offers greater flexibility. Businesses can pay either all at once or in three annual installments. They can also buy software for all their PCs or for just a portion of them; buying companywide yields lower prices. Either way, though, they get three years of SA coverage, along with bonus goodies such as free training vouchers.OVS adds a few significant twists:

• Businesses must buy at least one product from a selected list on a companywide basis, and they can no longer pay in advance.
• Because customers are buying temporary-use rights rather than perpetual licenses, pricing is significantly lower than the cheapest Open Value rates.
• To further sweeten the deal, Microsoft offers companies with existing licenses for selected products a 50 percent discount off their initial payments.
• Businesses that buy additional licenses midyear pay nothing until their next annual installments. For example, if a company buys 50 extra Office 2007 licenses one month after inking an OVS agreement, it essentially gets to use those licenses free for the next 11 months. With Open Value, by contrast, customers pay immediately for any additional licenses they purchase after signing.
• At the start of the second and third years, Microsoft either raises customers' annual payments if they've added desktops in the preceding 12 months or lowers it if they've downsized. Under Open Value, payments can only go up, so if a company buys coverage for 100 PCs and then lays off 25 employees, it continues paying the 100-desktop rate. An OVS customer's next bill would be based on 75 PCs.
• When the agreement expires, a business has three choices: renew it for another three years; let it lapse (in which case it cedes all rights to the relevant software); or buy it out. Under the last option, customers swap their non-perpetual licenses for perpetual ones in exchange for 1.75 times the annual fee. Ligman says that roughly 90 percent of customers overseas choose to renew.

Here's one thing that doesn't change under OVS, however: Just as with Open Value, a customer can only buy OVS through a distributor. Ligman emphasizes that point because some partners initially feared that Microsoft planned to horn in on their hard-won SMB relationships by selling OVS directly. "OVS runs through distribution," Ligman told partners flatly in a Jan. 10 webcast. "You still own the relationship with the customer."

Ligman expects many of those customers to greet OVS warmly. "For anyone looking at cash flow and how to optimize that, this would be a very attractive offer," he says. Moreover, he notes, many SMBs acquire software piecemeal when purchasing new computers, resulting in a hodgepodge of different products and versions to maintain. OVS gives them a simple, affordable way to upgrade and standardize on Microsoft's latest wares. In addition, Ligman adds, it frees up money for deployment assistance and other service engagements-so partners win, too.

On the other hand, Microsoft freely acknowledges that OVS is only cheaper than Open Value over the first three years. By the fourth year, Open Value customers own their licenses outright, so unless they extend their SA coverage, they needn't pay Microsoft another dime. OVS customers must either buy out their agreements or continue making annual payments indefinitely. "It's not going to be for everyone, especially those folks looking at a window longer than three years," predicts Amy Konary, program director for software pricing, licensing and delivery at analyst firm IDC.

Mixed Marks
Microsoft is hardly the first software company to offer subscription pricing, Konary notes. Numerous makers of open source products offer pay-as-you-go packages, and subscription offerings from Software as a Service vendors such as Salesforce.com Inc. and NetSuite Inc. have been gaining popularity for years. That has more-traditional software firms scrambling to add leasing options of their own. Just the same, Konary notes, customers seriously interested in subscription licensing are still squarely in the minority. "Maybe it's 10 percent, maybe it's 30 percent," she says. "I don't think it's half and half." Konary anticipates similarly selective enthusiasm for OVS: "I don't expect a huge tidal wave of customers to come banging down reseller doors all of the sudden."

That's certainly consistent with what some partners have experienced internationally.

According to Ligman, most foreign resellers and integrators have seen robust demand for OVS. Several United Kingdom partners, however, give the new licensing scheme decidedly mixed marks. For example, Susanne Dansey, Microsoft channel development manager at Reading, England-based distributor Westcoast Ltd., a Registered Member, calls OVS a "growing success." But most customers don't understand software leasing well enough to trust it yet, she says. Ian Watkins, director of Oxbridge Technology Ltd., an SMB solutions provider and Certified Partner in Peterborough, England, paints an even gloomier picture. Clients like OVS's cut rates, he says, but most companies ultimately opt for the longer-term savings that Open Value provides. "Nowadays, I give the two options to the client, and, to be quite honest with you, it's a bit of a no brainer," Watkins says.

Just the same, many Microsoft partners in the United States and Canada have high hopes for OVS. "It's a pretty big deal, because in small and medium businesses, cash is king," says Michael Cocanower, president of itSynergy, a Phoenix, Ariz.-based SMB technology consulting firm and Gold Certified Partner. Stuart Crawford, director of business development at IT Matters Inc., a Gold Certified computer service and network solutions provider in Calgary, Alberta, Canada, is similarly upbeat. "I'm very excited," says Crawford, who predicts that OVS will lure a lot of penny-pinching SMBs into volume licensing for the first time. It may also boost SA's penetration among SMBs, Crawford adds.

Curtis Hicks, president and CEO of Gold Certified Partner Center for Computer Resources, an Oak Park, Mich.-based integrator and Dynamics CRM reseller, agrees. Microsoft usually waits too long between product releases to make investing in SA's upgrade rights attractive, he says, but OVS customers get SA at no extra cost. Today, perhaps a quarter of Hicks's clients have SA. "That number will definitely go up based on this offering," he predicts.

Uncertain Impact
Most partners are more circumspect about OVS, however. "With some [clients] it's going to be very exciting. For others it probably won't make very much difference at all," says Ed Lohman, vice president of Affordable Computing Enterprises LLP, a small business VAR and Registered Member in Havre, Mont. Lohman expects OVS's low prices to help him make inroads with an especially tightfisted segment of his client base that stubbornly resists software upgrades. However, he notes, that segment encompasses perhaps 25 percent of his accounts.

Other partners are downright skeptical of OVS. "For me personally and my couple dozen clients, I expect almost no impact whatsoever," says David Schrag, president of Schrag Inc., a Brighton, Mass.-based SMB IT consultancy and Registered Member, OVS makes financial sense only for businesses upgrading all of their PCs at once, he argues, and its first-year discount for existing licenses isn't sizeable enough to inspire such wholesale migrations. "Microsoft has chosen not to give any meaningful credit for past investments," complains Schrag, who believes that OVS simply further complicates an already bewildering array of Microsoft licensing plans. "Give Microsoft credit for coming up with flexible solutions to fit different companies," he says, "but, honestly, we'd be better off if they just converted to one or two different schemes."

For his part, IT Matters' Crawford views OVS as evidence that Microsoft is finally beginning to grasp the SMB market. "They started off not really understanding the cash-flow problems small businesses have," he says. More recently, though, the company has been listening closely to SMB partners at conferences and advisory group meetings-and taking their input to heart. "They've really started to understand what makes the small business community tick," Crawford says. Subscription-based pricing may not be a licensing revolution, he continues, but for SMBs, at least it's definitely a step in the right direction.