Subscription Licensing Tested

Microsoft has begun to experiment with a seismic shift in its business model, from selling “perpetual” licenses to an “annuity” model in which customers make continuous payments for the Microsoft software they run, or the software utilities they use, either on their own computers or delivered over a network. Microsoft is experimenting with subscription-type licensing as a way to ensure that customers always have the latest version of a software product, eliminating disruptions caused by periodic brute-force upgrades. It also promises a steadier revenue stream and a path to new profitability by encouraging “laggards” who use old versions to upgrade more frequently.

Periodic payments for the use of software are not new-the first mainframes employed the model in the 1950s and much enterprise software still involves ongoing “maintenance” fees. But Microsoft has begun to seriously consider software subscriptions of some kind in only the last two years. Its initial explorations have spanned a diverse range of products and approaches, from its most established and most profitable lines (the volume licensing agreements that cover millions of PCs) to radically new efforts (HailStorm). As the multitude of names suggests, no clear subscription model has emerged, but there can be little doubt that Microsoft is committed to the annuity approach.