Microsoft Enterprise Agreements: What partners need to know

Microsoft takes EA accounts direct, puts the squeeze on its large account resellers.

The year 2011 will introduce the first serious challenger to Microsoft's most important volume licensing program, the Enterprise Agreement (EA), and the challenger comes from the only company capable of challenging Microsoft on the desktop — Microsoft itself.

For Microsoft's channel partners, notably its Large Account Resellers (LARs) that are the only channel for EA sales outside of Microsoft, it may seem like the second shoe has dropped. Already facing the loss of much of their EA revenue from the company's largest 2,000 accounts worldwide -- Microsoft will begin taking those accounts direct, starting September 2011 — partners now face a new obstacle as Microsoft introduces two online services, Windows Intune and Office 365. These services duplicate much of the functionality of the EA and could affect EA sales among midmarket and smaller companies. They’ll also be billed directly by Microsoft.

Competing with the EA

Four products form the core of the EA: a Windows OS upgrade (full OSes are not sold through Microsoft volume licensing programs); Office Professional Plus; and two suites of Client Access Licenses (CALs), the Core CAL Suite and the Enterprise CAL Suite. Customers must purchase at least one of these products for every desktop or portable computer in their organization to get an EA, which offers the lowest prices and are the easiest licenses to manage among Microsoft volume programs.

Customers who purchase one of the CAL suites, plus the Windows and Office components, are entitled to a further 15% “platform” discount.

The Core CAL Suite provides CALs for four servers: Exchange, System Center Configuration Manager, SharePoint and Windows. The Enterprise CAL Suite includes those CALs plus eight others.

Windows Intune is a subscription that duplicates three products offered in an EA: a Windows upgrade, Microsoft-hosted management services that are similar to Systems Center Configuration Manager (in the Core CAL Suite) and the Forefront Protection Suite (in the Enterprise CAL Suite).

Office 365 (the successor to the Business Productivity Online Suite) covers two more Core CAL Suite components, Exchange and SharePoint CALs, and offers a subscription to Office Professional Plus.

Combining Windows Intune with Office 365, we get almost everything that’s in the most popular EA offering, the Professional Desktop, which includes the Windows upgrade, Office and the Core CAL Suite. The only thing missing is the Windows Server CAL, but at $30 or less, it is the least expensive Client Access License offered in an EA. Most organizations will continue to use at least some Windows servers on-site, justifying the separate purchase of this CAL.

Implications for the channel

Even without Office 365 and Windows Intune, 2011 would be a challenging year for EAs. A major reason to renew an EA is to get upgrade rights to Microsoft's latest products, but most EA customers are already sitting on unused upgrades, given the explosion of new products in late 2009 and 2010. Windows desktop and server, Exchange, SharePoint, System Center Configuration Manager and Communications Server (whose CALs are part of the Enterprise CAL Suite) were all upgraded during that time.

Most organizations will take three or more years to absorb those upgrades, which makes a further three-year renewal of an EA in 2011 questionable. Customers will be paying for upgrades that won't arrive until near the end of their EA and those upgrades may languish for several more years, given that customers will have just begun to fully integrate their 2009-2010 upgrades.

Time to choose your strategy

Microsoft wants its channel partners to join it in moving EA customers to the cloud by selling Windows Intune and Office 365. That may be a good option for resellers with a substantial amount of business in the midmarket, but larger resellers that pursue this route will run into guess who? Microsoft.

A large chunk of a partner's online services revenue comes not from its share of the subscription fees, but from the actual migration. In particular, it comes from sales of Exchange mailboxes and SharePoint data and applications -- from on-premises to online services. However, Microsoft is now bidding on all Exchange migrations of more than 2,300 users. Partners are still free to compete, but Microsoft's rock-bottom pricing, one-third to one-quarter of what partners have been charging, reflects a slimmer offer (less assistance with Active Directory integration, for example). And the fact that while partners get 6% to 18% of the online services revenue, Microsoft gets 72% to 94%, makes it easier for Microsoft to charge less for the initial migration.

This services push echoes the trend for on-premises software. Prodded by Microsoft’s constant push for resellers to shift from transactional license sales to a much broader basket of sales and deployments and maintenance offerings, many resellers expanded to include more services. They value Enterprise Agreements less for the fees and rebates that they generate and more for the opportunity to be a key part of the customer's IT planning process and first in line for more lucrative services offerings. When Microsoft takes its largest global accounts direct, however, it severs a critical link between partners and these customers, who generate the largest and most profitable services engagements.

The unmistakable trend here was foreseeable. Ubiquitous, reliable broadband and sophisticated hosted and Web services cleared a wide path for a more direct relationship between Microsoft and end customers, and there’s no reason Microsoft would ignore the opportunity. Furthermore, Microsoft is not the only company to recognize new opportunities for dealing with customers directly.

However, some perspective is necessary. Online services for commercial customers still represent a tiny portion of Microsoft's revenue. Most of its profits come from on-premises software. For example, one reseller, who asked not to be named, estimates that in the several years that Microsoft has hosted Exchange, it has still not sold as many seats as the on-premises version of Exchange gains in a single year.

VARs add services to build cred

Resellers looking ahead might want to focus on some specific opportunities. For example, the Windows 7 Enterprise and Office 2010 Professional Plus licenses to which Windows Intune and Office 365 customers may be entitled will not install the software on their own. Deployment may still require substantial planning and configuration. Administrators will need assistance in understanding how to use the Windows Intune management console effectively. Thus, promoting Windows 7 and Office 365 as part of a larger deployment, training and advanced maintenance offering can help partners leverage Microsoft's promotion of its new products. Since such skills will be equally valuable for the even larger group of customers doing upgrades without purchasing the online services, investing in these skills will be time well spent.

Interest in Windows 7 migrations and upgrades may accelerate after SP1 is released. That might be an opportunity to sell new EAs.

VARs could counsel customers with relatively little Windows 7 but who want to upgrade in order to get an EA subscription. In this scenario, a customer doesn't buy licenses and pays only the cost of Software Assurance over a three-year term. The drawback to subscriptions in most cases is that the customer doesn't own the licenses at the end of the subscription and needs to buy them out or renew the subscription for another three years.

However desktop Windows is different. It's the one product for which customers get a license every time they buy a new computer.

Over the subscription agreement's term, the customer can replace its XP-era computers with new Windows 7 Professional machines. When the subscription ends, there's no need to buy a bunch of replacement licenses: The OEM licenses purchased through their hardware-replacement program fill that need.

The net effect is that the customer can implement a company-wide Windows 7 upgrade for all of its computers today without facing a buy-out at the end. In one customer scenarios developed for a business with 10,000 computers, this approach saved about $700,000 a year, leaving plenty of room to pay the partner who designs the licensing strategy and deploys OS upgrades.

Resellers, many of whom purchased software integrators to bump up their services credibility, should also explore high-value customizations or extensions for online services. The fact that they may be difficult means a big paycheck for those with the skills to navigate through their technical pitfalls.

The future of the channel relationship

Like the paperless office, the “disintermediated” channel, in which vendors shove the channel aside and keep all the revenue from the sales pipeline, is likely an illusion.

Many LARs have a global presence and a multivendor product line, and the best will continue to be a critical advisory resource to customers. The ability to deliver consistent service levels to global customers and to help them navigate through many new choices may be more valuable than ever. Indeed, many resellers that have hitherto survived on commissions from vendors may find that customers are equally willing to pay them for their experience and expertise in dealing with vendors.

Finally, those in the business long enough know that the relationship between Microsoft and its partners is a pendulum that swings between “how do we do more together?” and “We're paying you way too much.”

No major IT vendor is more dependent on partners than Microsoft, and while it may be putting distance between partners and itself currently, its cloud strategy has no clear payoff. A regular Enterprise Agreement might generate $378 a year compared to a Windows Intune/Office 365 subscription that generates $372 a year, minus the costs of power, cooling and other operational expenses that Microsoft doesn't bear when customers run on-premises software. That difference is not likely to make much of a net contribution to the customer’s financial success.

At some point, Microsoft could begin to squeeze its partners too hard, forcing them to consider competitive software companies that need skilled and experienced partners. Then the pendulum will begin to return.

Paul DeGroot is a writer, trainer, and principal consultant at Pica Communications, www.picacommunications.com, which specializes in Microsoft licensing strategies and policies.

Let us know what you think about the story; email Barbara Darrow, Senior News Director at bdarrow@techtarget.com, or follow us on twitter.

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