Big Cheese in Small Markets

When big customers cut back, where does Microsoft go for growth? Hint: think small.

Microsoft has a big problem. Sales in the enterprise space appear to be faltering as big customers collapse, go bankrupt or simply cut back. So where does Microsoft go for growth?

The core and upper midmarket, from about 100 to 750 computers, is the current sweet spot. One reason: Penetration of the big, expensive and profitable Enterprise Agreements (EAs) among big customers has hit the saturation point at about 70 percent of the worldwide enterprise market, but only about 12 percent of those midmarket customers have such agreements.

The approach Microsoft is taking could profoundly change the partner channel in the midmarket. For smaller partners, it could be a boon; for larger partners, such as LARs, not so much. Two developments signal this change.

First, Microsoft has moved the LARs' cheese. They collect fees for helping Microsoft sell and manage EAs. One of the biggest pots of money is for Software Assurance (SA) benefits activation: getting customers to actually use those benefits, big or small, that come with SA. Microsoft has found that customers who use at least three of these benefits are more likely to renew their EAs. Another major pot for LARs is selling additional products and new agreements.

Starting May 1, Microsoft has changed the fees. In particular, the SA benefits fees are cut 70 percent to 85 percent. The fees for selling additional products go up 2 percent, and the fees for new EAs go up 2 percent as well -- except for new agreements for customers with more than 6,000 seats, which don't change.

This is bad news for LARs who deal with the largest customers. A major source of revenue -- the SA benefits activation fee -- will all but disappear, and the compensating increases for additional products and new EAs have never been more difficult to earn.

Second, Microsoft is siccing a whole new set of partners on that very same midmarket space. A new licensing initiative, officially called Open Value Level C, creates a new discount tier in the Open Value program, which is much like an EA for small companies. Like an EA, you pay an annual fee for each computer in your company, and you license common Microsoft software and CALs for each computer.

Open Value has been in the market for more than five years, but it never appealed to companies with more than 250 PCs, because at that point they could get much better discounts by purchasing through the Select or EA programs -- both of which are only accessible through a LAR. With Open Value, a smaller VAR who had done all the licensing sales for a small customer might be deserted for a LAR once the customer hit the magic 250-PC mark.

That's about to change, because Microsoft has made prices in the new discount tier, Level C, virtually identical to pricing for an EA.

This is a big deal. It opens upper-midmarket licensing sales to thousands of VARs, who can offer their customers EA-like pricing without having to call on a LAR. That means smaller partners can hold on to their customers -- and the services, deployment and maintenance business that they generate -- much longer. LARs, on the other hand, will be squeezed.

While that may prove advantageous to VARs, it poses some potential problems.

VARs, who make their money from IT services rather than software sales, may find that the complexities of licensing for their customers magnify quickly as their customers' solutions and business models get more complex. That's where a good LAR really helps.

So while VARs can start salivating about the significant opportunity they'll get with Level C in the midmarket, it will be good to keep a LAR as a friend, for the days when they need a little help from one.

About the Author

Paul DeGroot is principle consultant with Pica Communications, which provides consulting services for customers with complex Microsoft licensing issues.