Microsoft Adds Annual Fee for New Office XP Software

Microsoft Corp. is trying to boost profit from the newest version of its popular Office programs being released today by changing the terms of its licensing deals to force business customers into more expensive contracts.

The Redmond, Wash.-based software giant is prodding its best corporate customers to fork over new annual fees on top of one-time payments for the latest suite of programs, called Office XP.

“They’ve been getting some resistance from their corporate customers, but moving over to this model makes an enormous amount of sense” for Microsoft, said Zona Research analyst Charles King.

Office is one of Microsoft’s cash cows and accounts for more than 30% of its revenue.

The Office XP package of applications includes Microsoft Word, Excel spreadsheets and PowerPoint presentations, but it has only modest benefits over previous versions, analysts and reviewers say.

Two years ago, the release of Office 2000 increased that division’s revenue by 34% in its first quarter. But with older Office suites already on about 85% of corporate desktop computers, Microsoft would otherwise have a tough time guaranteeing the success of the XP product line. “Microsoft heard that people weren’t going to upgrade and came out with changes to their licensing terms,” said analyst Chris Le Tocq of Guernsey Research.

As before, Microsoft generally will charge two levels of fees for Office XP: $450 at retail for purchasers who don’t own any version of the program and $200 for a user upgrading from an older version.

But corporate buyers who want to upgrade Office XP for multiple employees must also agree to pay the upgrade fee, plus 29% of the full price during each of the next three years. In return, they get guaranteed Office upgrades during that time. (Typically, Office upgrades are released every two years.)

Microsoft business customers who don’t take the deal before Oct. 1 and decide to upgrade to Office XP later must pay the larger new-customer price, analysts said. Companywide licenses make up an estimated 50% to 70% of Microsoft’s Office revenue.

Microsoft hopes to sign more long-term Office agreements to provide a steady stream of money even if individual sales are slow.

But for customers who don’t upgrade Office products often, the effect is to increase the yearly cost of ownership by 40% to 70% per person, “the largest price increase in Microsoft history,” Le Tocq said.

Companies are grumbling.

“We’ve gotten a lot of calls from people trying to decide if they should do something before Oct. 31,” said research director Michael Silver of the Gartner Group.

Microsoft Chief Operating Officer Rick Belluzzo said some customer chafing was expected. “Any time you make a change, there are those that have some questions and concerns,” Belluzzo said. But he predicted that most will take the new licensing deals.

Microsoft’s goal is to smooth out the cash stream from its software. Analysts said it probably will succeed, because competing office programs from Sun Microsystems, Corel Corp. and IBM’s Lotus lack sufficient market share to mount a serious challenge. If so, the company will have made a significant step toward becoming more of a service-rental company than a software sales company. That movement will gather even more speed as Microsoft rolls out more Web-based offerings in the next few years.