A growing number of rebates and discounts for core Microsoft products signals a period of flux for the company’s pricing. The company rarely discounts products such as Windows XP or Office except during transitions to new versions, which makes current discounts exceptional. These and other pricing moves are a response to longer product cycles (in which new product launches that drive upgrades are further apart), greater interest in the price-sensitive small and midmarket business segments, and the need for pricing worldwide to be more sensitive to competition and local economic conditions.

Spring 2004 Promotions

Among the promotions or reductions offered in spring 2004 are the following:

• Rebates up to US$15,000 for U.S. small business customers who purchase upgrades to Windows XP
• Rebates of US$75 on Office Small Business Edition (SBE) 2003, and US$100 on Office Professional, for the purchase of up to five copies
• A price reduction of 80%, from approximately US$499 to approximately US$99, on an initial purchase of up to five standard user seats for Microsoft Business Solutions Customer Relationship Management (MSCRM) software, when a customer purchases or upgrades to the Windows Small Business Server 2003 (SBS 2003) Premium Edition
• Rebates on up to 200 copies of Office for academic customers when they purchase Software Assurance upgrade rights with new Office licenses
• Discounts of about 15% on both Office and Windows for customers in the United Kingdom
• Rebates on Windows Server 2003 that can be used for deployment assistance and training.

Targets: Small and Midmarket Business, Adoption

In the past, Microsoft has sometimes discounted older products near the end of their life cycle; alternatively, new products are sometimes introduced at introductory rates. But the discounts offered on many products in spring 2004 do not fit either of these patterns, suggesting that the company wants to achieve better penetration and adoption of some of its product-line stalwarts, particularly among small and mid-size organizations. In addition, the company is offering different discounts in different regions, experimenting with variations from its policy of a single worldwide price for most products.

Small and Midmarket Business Focus

The small and midmarket business focus is seen in the limited quantities for which most of these discounts are available. The Windows XP upgrade rebates are limited to customers with fewer than 1,000 employees (which covers small and mid-size customers in Microsoft’s market taxonomy). The US$75 to US$100 rebates offered to U.S. customers on Office SBE and Professional are limited to just five copies of the software. Although academic organizations aren’t businesses, the focus there is on smaller customers: the rebates offered to academic customers top out at 200 copies. While larger organizations might still take advantage of some rebates or discounts, they may find that standard volume licensing programs, which provide discounts on much larger quantities, offer a better savings.

The discount offered for MSCRM applies only to a company’s initial purchase of up to five licenses along with a purchase of or upgrade to SBS 2003 Premium Edition. The promotion is thus aimed at encouraging small businesses to try MSCRM by reducing the initial investment that these price-sensitive customers need to make.

The deployment and training rebates offered for Windows Server 2003 will be of greatest value to small companies that lack the IT resources to manage a significant migration from, for example, Windows NT to Windows Server 2003. They can use the rebates to get assistance from a skilled Microsoft partner and to train one of their own staff on basic server features and management.

Promoting Adoption

Another major rationale for promotional pricing is to encourage adoption of particular products.

The MSCRM promotion has many of the earmarks of a promotion intended to spark adoption of a new product, except one: the product has been on the market for more than a year before the promotion began. In this case, the promotion suggests that the product hasn’t met sales objectives, and its US$499 price may have been more than members of the target market—small companies just beginning to explore CRM—are willing to pay. In a somewhat similar case, Microsoft took Microsoft Operations Manager (MOM) to market with a high price (US$849) that was dropped to US$349, first during a promotion and later permanently. However, the MOM price applied to all MOM purchases, whereas the CRM promotion applies only to an organization’s first five licenses, which makes a permanent US$99 price less likely.

Promoting Office 2003, released in Oct. 2003, is also important because Office 2003 can drive demand for server products, such as Windows Server 2003 and Exchange 2003, that offer collaboration features tailored for Office 2003 users.

Windows XP, now in its third year, is part of some promotions as well. That's because, although XP has been very successful in the OEM and consumer channels, corporate adoption has been slower. According to a Dec. 2003 AssetMetrix survey of about 370,000 desktops in businesses of various sizes, Windows XP trails even Windows 95 and Windows NT 4.0 Professional on the corporate desktop. That survey found that more than half of corporate desktops use Windows 2000.

Finally, the promotion for Windows Server 2003 comes as Windows NT is reaching its end of life and customers need to update their servers. The deployment and training rebates will reduce customer concerns about post-NT server technologies, such as Active Directory, IIS 6.0, and Group Policy, that might be causing anxiety for some customers.

Revenue, Competition Issues

Other issues are also driving Microsoft’s interest in promotional pricing and rebates:

Competitive issues. The transition from Windows NT to new server OSs has created an opening for Linux vendors, many of which have announced NT-to-Linux migration assistance and programs. Reports of customer dissatisfaction with Microsoft’s desktop licensing programs and the relatively high price of Office for business customers have prompted open-source groups, major Linux vendors, and Sun Microsystems to announce (once again) that they plan to focus on desktop alternatives to Microsoft. Such goals have been announced before, with little impact on Microsoft, but given Linux’s growth in the server market and the fact that any tangible competition on the desktop will lead to declines in Microsoft’s overwhelming desktop market share, the company cannot be complacent.

Revenue. Microsoft has not been able to permanently convert its customers to annuity licensing models that generate cash flow on a regular basis: unearned revenue, which partly reflects revenue from annuity licensing agreements, has declined steadily since peaking in 2002 at the height of a licensing transition. Among other changes during that transition, the company eliminated most of Microsoft’s ad hoc product upgrade offerings, effectively raising the price of upgrades for customers who aren’t on an annuity plan. This means that the company remains dependent on new product launches that generate marketplace buzz—except that there won’t be any major new product launches in major business categories, such as the client OS and Information Worker applications, for at least 18 months. In this environment, lower prices and rebates that prompt upgrades are preferable to higher prices that leave buyers sitting on their wallets.

Worldwide pricing variations. As the U.K. discounts on Office and Windows and various U.S.-only promotions demonstrate, the company is taking a market-by-market approach rather than being doctrinaire about worldwide pricing. (OEM and retail prices can vary from country to country, but volume prices, most often paid by business, are the same worldwide.) In Asia, where piracy rates are very high and governments are actively supporting Linux desktop projects, the company has bent the furthest, offering versions of Windows and desktop productivity software for less than US$50 each through special government-sponsored programs in Thailand and Malaysia.

So far, these moves do not suggest that the policy of worldwide business pricing is in danger; the company is responding on an ad hoc basis to significant opportunities and threats, and experimenting with various features and licensing options in the retail and OEM channels in an effort to find the optimum offering that will meet objectives such as reduced piracy, small business market penetration, and mitigation of competitive threats.

Permanent or Temporary?

The unusual number of discounts and promotions could presage further promotions and broader price reductions in the future.

However, the promotions thus far are relatively modest and limited, often focusing on a specific market segment or region. Any significant uptick in IT spending could bring revenue and adoption rates for new software back into line, making further promotions unnecessary.

Microsoft is likely to wait for the final results of its 2004 fiscal year (which ends June 30), including annuity renewals and other trends, before deciding on future promotions or permanent pricing changes. Signs of revenue weakness or that the competition is finally gnawing away at the company’s desktop dominance could prompt Microsoft to institute broader, permanent competitive responses.

Resources

The Office Small Business Edition and Office Professional rebates are described at www.microsoft.com/smallbusiness/gtm/officeLTG/default.mspx.

The MSCRM promotion is outlined at www.microsoft.com/presspass/features/2004/mar04/03-02crm-sbs.asp.

For a list of the most recent Directions on Microsoft coverage of licensing topics, see the Recent Changes to Microsoft Licensing page.