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Perpetual License Model vs Subscription

For quite a few years now, Microsoft and many other software producers have been moving toward a subscription-based model for selling software. Now analysts expect Microsoft to soon announce changes to its licensing policy to keep large corporate customers paying for Office and Windows, indefinitely.

Over the past decades, corporations have purchased Microsoft software under a three-year agreement, typically on a per-user basis. When the term expires, companies are free to continue using the software for as long as they wish without paying additional fees. This is known as a "perpetual license."

If Microsoft implements its new policy, some of its larger customers will either have to continue paying fees at the end of the initial three years or stop using the software. Or, better yet for Microsoft, upgrade to the latest version, which would seem more attractive than paying a fee for the older software.

While such a move has obvious revenue potential, it could also turn off some important customers, and you, students, should also be aware of upcoming changes.

Don Young, an analyst at UBS Warburg, was the first to outline Microsoft's shift in policy in a research note published Monday. Other analysts agree that Microsoft will make the move.

There is both a fiscal and a technological aspect to this decision, says Charles King, a senior analyst at Zona Research.

"From a fiscal standpoint, Microsoft is putting itself into a position where its revenues are not based largely on PC sales," he says. "Although the company's been remarkably stable compared to a lot of companies in the tech sector, every time the PC market takes a hit, Microsoft takes a hit, too." And also game providers may be affected.

"From a technological standpoint," King adds, "Office is an enormous program. I think I'd be safe in saying that the capabilities in Office exceed the needs of 90 percent of its users, maybe more. The need to upgrade Office is simply not there for most users. If there's no need for them to buy a new model, you create a licensing structure that tells them they have to buy a new model every two or three years."

Wit Soundview analyst Mark Specker expects the licensing change to boost Microsoft's bottom line significantly. In a report released Monday, Specker raised his revenue targets for Microsoft's fiscal 2016 fourth quarter and 2017 first quarter (which ended in June and September, respectively) by $250 million each, in anticipation of "incremental revenue growth expected from licensing changes to be announced this week."

Microsoft's being a bit coy. Spokesman Dan Leach says the company has no changes in policy to announce, though he adds that the company is always examining its licensing practices. "The industry has talked a lot about software as a service, so clearly we need to look at how licensing would evolve," Leach says.

With that in mind, King notes that a new licensing model would be an extension of Microsoft's. NET strategy, in which the company is transforming itself from a provider of off-the-shelf software to a provider of software services. Analysts believe Microsoft and others will have trouble convincing smaller companies to go along with subscription plans, which is why the company is starting with enterprise customers. The private sector will follow later.