• Illustration: Calculating Step-Up Pricing

Newly-introduced "step-up" licenses could lower costs for volume license customers upgrading from Standard Editions to more full-featured Professional or Enterprise Editions of Microsoft products. Step-up licenses are very similar to product upgrade licenses that were eliminated in 2001 with the advent of the Software Assurance (SA) upgrade program. Step-ups will only be available to customers who participate in SA, and could make that program more attractive by giving customers an opportunity to upgrade products at no financial penalty.

How Step-Ups Work

A step-up is a special license that allows a customer to upgrade from the Standard Edition of a product to the more expensive Enterprise or Professional Edition. The step-up is similar to the product upgrade (PUP) licenses formerly used to make the transition between editions. For example, to upgrade from Office 2000 Standard to Office 2000 Professional, a volume licensing customer could purchase a PUP for about US$89. (Note that this differs from upgrades between versions, such as from Office 2000 to Office XP, which requires a version upgrade license, now available only in retail channels.)

PUPs were eliminated when the current volume licensing program, Licensing 6.0, was introduced, which presented customers with a problem: if they outgrew the capabilities of the Standard Edition of a product, they would have to pay full price to move to its Professional or Enterprise Edition.

Step-ups are intended to solve this problem. By paying the difference in price between the cost of the two product licenses, customers can move up to the Professional or Enterprise Edition of a product. This gives SA customers additional flexibility in scenarios where they might find that they have outgrown a Standard Edition or want to consolidate servers, for instance.

Microsoft is currently offering step-up licenses for many of its server products, including Commerce Server, Exchange, Internet Security and Acceleration Server, SQL Server, Windows Server, and BizTalk Server Accelerators for financial, health, and supply-chain solutions. Step-ups are available for server products with both server/Client Access Licenses (CALs) and per-processor licenses, but they cannot be used to move from SQL Servers licensed in server/CAL mode to per-processor editions of SQL Server. Desktop products with step-up licenses include Office 2003 and Project 2003.

Step-Up Limits

Though similar, step-up licenses are not identical to the discontinued product upgrades. Most significantly, step-ups are available only for products that customers have enrolled in SA. In addition, the price difference between editions with a step-up license includes not only the difference between the cost of the license but also the difference in the cost of SA for the two products for the remainder of the customer’s volume licensing agreement. At the end of the agreement, the customer is considered to be fully licensed for the Enterprise or Professional Edition of the software.

Step-ups are available in volume programs aimed at larger customers, such as Select and Enterprise Agreements (EAs) and also in the new Open Value program which requires the purchase of SA with all licenses. However, customers in Microsoft's entry-level volume licensing programs, Open Business and Open Volume, are not eligible for step-ups because they have already paid in advance for the full price of their license and SA and it is not possible to calculate price differences for ongoing payments. Microsoft recommends that they start a new Open Value agreement, in which they can purchase the step-up licenses.

The pricing for step-up licenses neither rewards nor penalizes customers. Customers do not pay more to upgrade to Enterprise or Professional Editions than customers who purchased those editions in the first place, nor do they pay less. (For more detailed information about step-up license pricing, see the illustration "Calculating Step-Up Pricing".)

One other wrinkle is that the step-up licenses are only available for a promotional period which ends Sept. 1, 2004. Microsoft has not indicated whether it will make the step-up licenses a permanent part of its volume licensing list.

Special Deals for Office, Project

In addition to their role in migrating customers between Standard and Enterprise or Professional Editions, step-up licenses can also be used by Microsoft to migrate customers upward when the functionality of their existing product changes significantly. Two desktop products, Project and Office Standard, illustrate this case.

Project Step-Up

In the space of two version upgrades, Microsoft has taken Project from a standalone desktop product to a full-blown server/CAL configuration. Project 2000 was a desktop product with limited collaborative ability and was not available in multiple editions; Project 2002 added a Professional Edition and a server that offered better collaboration; with Project 2003, customers using the Standard Edition will lose the ability to exchange data with Project Server, as this capability is reserved for the more expensive Professional Edition.

To help owners of Project Standard Edition who want to retain their ability to collaborate using Project Server, Microsoft is offering a step-up license that will let them move up to Project Professional Edition. The usual rules apply: they must have purchased SA for Project Standard, must pay the difference in the price between the two editions (including the difference in the price for SA on the two editions), and the step-up license promotion ends Sept. 1, 2004.

Office Standard Migrations

For nearly a decade, the difference between Office Standard and Professional Editions was the particular desktop applications bundled in each edition. The main difference was that Office Professional included the Access database, and Office Standard did not.

In Office 2003, Microsoft is introducing a second difference: Standard and Professional Editions of individual applications, such as Word and Excel. The Professional Editions of these applications have more sophisticated handling of XML and rights management capabilities (such as the ability to control whether an e-mail can be forwarded outside the company) than the Standard Editions. (For more information on Office 2003, see "Outlook Leads Office Suite Improvements".)

By default, the Office Standard Edition suite will include only the Standard Editions of these applications, but customers who have purchased SA with Office Standard Edition will have the two following upgrade options.

A "rights grant." Office Standard customers with SA will be given the right to use the Professional Editions of the four applications in Office Standard (Word, Excel, PowerPoint and Outlook)-as long as their SA does not expire before Sept. 1, 2003, or begin after Mar. 31, 2004. Customers who exercise this right get only the Professional Editions of the four applications in Office Standard. Select and EA customers will automatically get Office Professional Enterprise Edition media from which they can load the four applications; Open license customers who qualify should order Office 2003 Professional Enterprise Edition CD-ROM media rather than Office Standard media.

However, these customers are not entitled to deploy any Professional Enterprise Edition applications that are not part of Office Standard. These include Access, Publisher, Business Contact Manager, and InfoPath. Moreover, these customers are not entitled to use "successor" applications (that is, Professional Editions in the version of Office after Office 2003), even if they maintain SA on Office Standard.

A step-up license. To get permanent rights to the professional applications and their successors, Office Standard customers with SA have the option to upgrade to Office Professional Enterprise Edition using a step-up license. That will give them not only the Professional Editions of the individual applications but also access to the additional applications that are bundled in Office Professional Enterprise. As with other step-ups, these customers will have to pay the difference in both initial license prices and SA between the two editions before Sept. 1, 2004.

Impact of Step-Up Licenses

Step-up licenses could strengthen SA by rewarding SA customers for their loyalty. Without the step-up licenses, those who have purchased SA (which adds 87% to the price of desktop software and 75% to the price of server products over three years) have no advantage over those who did not—in both cases, customers were required to pay the full price of the Enterprise or Professional Edition if they wanted to move up.

The impact on Microsoft’s revenue of step-up licenses is not clear. Some customers might forego the more expensive Professional Edition on the grounds that they can purchase the less expensive Standard Edition and, if required, exercise their new option to step up at no penalty. However, the availability of step-up licenses could offset this by encouraging more customers with Standard Editions to purchase Enterprise or Professional Editions, generating more revenue for Microsoft.

For example, the Standard Edition of Exchange sells for US$699, and the Enterprise Edition for US$3,999 (all prices are Open Business estimated volume prices; customers who purchase large volumes will pay less). A company that purchases a step-up license at the start of the second year of a three-year volume agreement will pay an additional US$1,650 in each of the remaining two years for the difference in license prices, and an additional US$825—more than the entire license price of the Standard Edition—each year for the difference in SA payments between the Standard and Enterprise licenses.

Resources

Particular step-up offers for servers, Office, and Project are described in licensing briefs available at www.microsoft.com/licensing/resources/volbrief.asp. The Office and Project briefs contain the phrase "Transition Licensing" in their titles, while the server brief is titled "Enterprise Edition Server Step-up License."

For more information about the benefits of SA, see "Software Assurance Improved" on page 24 of the July 2003 Update.