Your loss, their gain

A little advice for any company looking to sell off part of its operations during these troubled times — you might want to check with Microsoft first to see how much it’s going to cost you.

The longest and most complex research project I’ve ever done for The Gripe Line has uncovered some interesting revelations about Microsoft’s 6.0 volume licensing program and Software Assurance. Acceleration clauses and other convoluted language in the 6.0 contracts regarding Microsoft’s license transfer policies can obligate divesting customers to pay early for services they — and the acquiring company — will never receive.

This issue first came to light last fall when sketchy news reports surfaced about Microsoft filing an objection in the Kmart bankruptcy proceedings. As Kmart was divesting its Bluelight.com ISP, the reports said Microsoft had claimed Kmart could not transfer licenses of Microsoft software to the acquiring company without its permission. Kmart apparently resolved that situation to Microsoft’s satisfaction shortly thereafter, but the story rang alarm bells for many readers. In just what circumstances would Microsoft claim any customer needs its permsission to transfer software to another corporate entity?

That seemed like a fair question, so I asked Microsoft for clarification. While they would make no comment on the specifics of the Kmart case, Microsoft officials pointed me to a page on its Web site (www.microsoft.com/licensing/downloads/license_transfer.doc) that outlines the company’s transfer policies for mergers, consolidations, and divestitures. Frankly, I was relieved when I first read it because it seemed relatively benign. Licenses acquired under a Select or EA (Enterprise Agreement) could be transferred as long as they were perpetual, it said. There were some notification requirements, but they didn’t strike me as outrageous.

But one thing that did stand out on that page, partly because it was in bold type, was a statement that SA (Software Assurance) could not be transferred. (SA is included as part of an EA and can be purchased in conjunction with a Select agreement.) That was a bit unsettling. Remember, Software Assurance is that very expensive maintenance program Microsoft pushed on volume-license customers last year by eliminating separate upgrade pricing. While most maintenance programs in the software industry provide product upgrades and some support for an annual fee of 15 percent to 20 percent of the license cost, SA costs 25 percent to 29 percent per year for upgrades alone. Did this mean SA customers would lose their investment on licenses that were part of a transfer?

Microsoft seemed oddly reluctant to provide further clarification on that point, and most of the analysts I asked about it were unsure of what Microsoft’s actual policies regarding transfers in a divestiture would be. Corporate customers familiar with Microsoft’s ways suspected it would be much worse than the document let on. “It will always come down to ‘Let’s work something out,’ ” said one. “Translated, that means, ‘You have to give Microsoft a lot more money.’ “

Confirmation of that assumption is actually found in the Select and EA 6.0 license agreements themselves, as one expert I finally found pointed out. Patrick Bohnenkamp, co-owner of Corporate Contracts, an IT consultancy in Urbandale, Iowa (www.corporatecontracts.com), explains that it’s not just a matter of Software Assurance not being transferable. “The contract says that if you’re divesting more than 10 percent of your covered workstations, Microsoft ‘will work with that enrolled affiliate in good faith to arrange for acceleration of any remaining payments for those copies run pursuant to Software Assurance,’ ” he says. “In other words, you become obligated to pay for the years that remain on the SA agreement covering those computers, but that agreement is terminated and Microsoft provides no further upgrades under it. The acquiring party just gets the rights to the current versions you already had on those computers.”

Under the 6.0 licensing plan, Bohnenkamp explains, all license rights are temporary. “The licenses only become perpetual at the end of the three-year period, after all payments have been made,” he says. “That’s how they justify the accelerated payments. Within the logic of their contract, it makes sense.”

But the consequences of this logic will no doubt come as a big surprise to most of Microsoft’s volume-license customers. For example, if a company that signed up for SA before last summer’s July 31 deadline wants to sell a division now, in theory it must pay for the second and third year of its agreement on those licenses it wishes to transfer. That will make the transferred licenses perpetual in Microsoft’s eyes, but the SA coverage itself will then disappear — with neither the divesting nor the receiving company receiving future upgrades for those licenses. Microsoft will have received at least an additional 50 percent of the original license costs without providing a thing.

It shouldn’t come as a surprise that Microsoft has no shame about something like this. “When we’ve asked Microsoft officials about it, we’ve been told that those costs are just something companies should take into account when considering a divestiture or acquisition,” Bohnenkamp says. But he doesn’t recommend companies trying to negotiate out the acceleration clause of a new SA agreement. “Microsoft would be very unlikely to negotiate on the issue of temporary rights, which makes arguing about the accelerated payments kind of moot. It probably isn’t something you should spend whatever negotiating capital or leverage you have on.”

And leverage is what this is all about. I’m not sure about the good-faith part, but Microsoft probably will work with most customers to cut a deal on these accelerated payments. Bohnenkamp agrees. “Often it might be a matter of Microsoft wanting both the divesting and acquiring company to agree to take out a new three-year EA,” he says. “What Microsoft is really doing is saying, ‘Hey, just recognize you are truly at our mercy.’ “

If you didn’t already know that, you just haven’t been paying attention.