Microsoft Chases the Discount Bandwagon

In this economy, we're relying on quick, easy gimmicks to keep the money moving. Aggressive discounts are what's working for Microsoft.

Promotions, rebates and related sales gimmicks are as widely used at Microsoft as they are among most software vendors, but discounts we've seen this spring are different. One reseller told me he's never seen anything like it: aggressive discounts for licenses through virtually every kind of volume agreement, including the premier Enterprise Agreement (EA).

It's one of several signs that big companies are balking at continuing these agreements, which provide generous discounts on basic desktop software at the price of covering every PC in your organization with the software -- whether you use it or not -- and paying annually for the privilege.

In better times, this was a good deal. Most importantly, it significantly reduces the onerous task of keeping track of desktop computer software. Less important these days, but still valuable, is the right to upgrade to the latest version of the software. Today, however, many firms are concluding that they can probably live for several years with the software they already own, especially if it's a question of paying Microsoft or laying off employees.

As a result, they're playing tough on new or renewal EAs, and we see Microsoft playing a card it has preferred in the past to keep hidden.

Some years back, the company promoted what it called its "abilities": terms like flexibility, scalability, reliability, manageability and, with poetic license, agility. I suggested that the company was missing the most important one: affordability.

But Microsoft recoiled from that -- saying it didn't want to position itself as "cheap."

Well, cheap is the new black, and Microsoft, which takes after bandwagons like the farmyard dog, isn't going to miss this one.

Microsoft is actually spectacularly good at cheap. Its favorite "cheap" tactics fall into two major categories: hardware replacement and marketing leverage.

The first is any market where special-purpose hardware dominates the business, and Microsoft can replace it with software running on commodity computers. Take VoIP and related communications technology. Special-purpose hardware has played a significant role in the initial wave of adoption, but Microsoft's aim is to replace all of that technology with software running over conventional data networks on commodity servers and devices running a Microsoft OS of some kind. Microsoft's initial efforts aren't getting a huge amount of traction, but there's little doubt that as its technology evolves it will offer most or all -- or even more than -- the current technology at a much lower price.

The second cheap tactic is to identify promising technology with low market share and turn Microsoft's global sales organization loose on it. The old maxim that "we cut the price, but make it up in volume" has probably been nowhere truer than at Microsoft.

What's happening now is of a different caliber, of course: The discounting of volume licensing is not so much exploiting a new opportunity as responding to a crisis, and it poses significant dangers to Microsoft. If it doesn't work, the company will not make its numbers. If it does work, customers are likely to resist efforts to bring prices back to previous levels.

There's a bright spot for partners here, however. If licensing costs come down, partners can keep a bigger part of a smaller pie -- they make most of their money from add-on services and can use promotions to reduce the cost of a project by taking it out of Microsoft's pocket rather than their own. Partners should keep checking to make sure they know what Microsoft is offering. Also, ask your reseller about "off-list" discounts that the company doesn't advertise.

And hey, maybe Microsoft will finally add "affordability" to its list of achievements. It belongs there.

About the Author

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