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Microsoft’s Strategy of Many Little Kicks - by Peter Marwan (Editor)

Under CEO Satya Nadella Microsoft is going from one record result to the next – thanks to Cloud Services, the boom in gaming and the increased demand for PCs for home offices and home schooling during the pandemic. Windows operating systems sales are also booming. But as they say, "every little bit helps" or "he who does not take care with pennies is not worthy of the dollar”. The company has been scrupulously careful not to forego any source of income. The market for second-hand software is obviously a particular thorn in its side.

David Hubbard and Jonathan Horley from the British second-hand software specialist firm ValueLicensing are claiming damages of over €300 million from Microsoft in a lawsuit, for years of Microsoft abusing its dominant position and influencing the market for used software.

While Microsoft sometimes turns a blind eye to licensing in some Asian and economically weaker countries, in solvent Europe it apparently cannot let go of the fact that its views on the "principle of exhaustion" and the options for transferring licences, which are influenced by US law, have not prevailed. This is repeatedly evidenced by new nasty moves directed at the second-hand software market and its players. In the latest chapter: The "retention obligation" introduced in May last year for on-premise licences when switching to cloud offerings from a contract with Software Assurance.

Twelve months later, the change, which was justified at the time as being what customers wanted, has now been withdrawn. "The restriction in question supported some customers in their transition to the cloud by allowing them to apply the value of their old licences to a new cloud subscription," Microsoft told ChannelPartner. "We are now removing the restriction but continuing to offer the discount on cloud subscriptions, which we believe will benefit our customers as they adopt cloud technologies."

"Microsoft is trying to dry up the market"

From Jonathan Horley’s standpoint, founder of the British used software company ValueLicensing, which filed a hotly debated lawsuit against Microsoft earlier this year, the changes are just one of many measures in a long, strategic campaign. "Microsoft has been trying to dry up the used licensing market since at least 2016. There is a long history of abuse of their dominant position. Microsoft has no use for licences that are no longer needed by its customers and therefore has a vested interest in removing them from the market."

Horley cites support periods for Office products as another example, in addition to the now-revoked changes to Microsoft's product terms. "Office 2016 was supported for 10 years. Office 2019 will only come with seven years of support. By incentivising customers through discounts and the complex licensing terms over the past 12 months to keep licences they don't need when migrating to Microsoft 365, Microsoft has reduced the value of those licences."

Ernesto Schmutter, CEO of MRM Distribution, confirms these statements in principle, but takes a more relaxed view of the effects. "Cheap transition to cloud while holding the licences was certainly cumbersome for our business. We don't know what the intention behind this was and it doesn't matter. In any case, it has restricted the flow of goods and made purchasing much more complicated."

"We had to go two or three rounds more in the argumentation last year. I think we all welcome the fact that Microsoft has now rowed back," says Ernesto Schmutter, CEO of MRM Distribution, looking back on Microsoft's recent actions against the market for second-hand software.

However, during the twelve months in which Microsoft made it attractive for customers with Software Assurance ("from SA") to switch to its cloud offerings by offering discounts, Schmutter says that successful business was possible with good advice. "A discount naturally tempts people to take the formula offered. But it was often cheaper to give away the licences we no longer needed and choose the more expensive option. However, you had to do the maths a bit more carefully." It should also be mentioned that MRM buys licences from companies without Software Assurance. The problem did not exist there at all.

Acceptance following numerous public sector tenders

Schmutter is confident about the market for used software and the trade in licences in general, despite some hurdles: "The market is mature and sophisticated. We have been competing against some rogue players since we launched in 2017, but you can always distinguish yourself from them - for example, through certified processes in compliance with current law and successful audits."

He says partners are also important for the credibility of the business. "Our partners have an important advisory function for customers. Many have their own SAM department - so they know software asset management inside out and sell based on providing good advice on all aspects of licensing," Schmutter reports.

The market for second-hand licences can no longer be dismissed. "We have become accepted in the last few years due to numerous public sector tenders. As a matter of principle, the public sector is required to buy economically. For this reason, tenders increasingly require the inclusion of second-hand software. It is by no means always just a question of licences for software that is no longer available. A large part of the business is also licences for current software. Whether used software is also taken into account in procurement is increasingly a question of IT strategy. And good consultants also have an influence on what this strategy looks like for their clients.”

Damages claim in the UK will be a waiting game

The UK court proceedings between Value Licensing and Microsoft will be interesting. The claim is for more than €300 million in damages. According to ValueLicensing, the amount, which seems surprising at first glance, is far from arbitrary. Horley and his team monitored the market for many years, kept track of publicly announced contracts - especially those involving public authorities - as well as other publicly accessible sources and put that data together with their own findings from discussions with potential customers.

Overall, Horley estimates that Microsoft has removed licences with a cumulative value of between £23 billion and £41 billion (GBP) from the market since 2016. The claim filed by ValueLicensing focuses on Microsoft's policy for licences for Windows and Office products for desktops. However, the company has reserved the right to include other products in the claim. In the course of the lawsuit, an extension to, for example, licences for Microsoft Azure, Azure SQL or Microsoft Remote Desktop Services would therefore be possible.

"The anti-competitive strategies are most evident to us in the desktop environment," Horley explains. In his experience, Microsoft partners in many cases facilitate the software giant's efforts to take licences off the market because they are too focused on Microsoft's business and thus miss the opportunity to tell their customers about alternatives - thereby foregoing good opportunities to optimise their margins as well.

Microsoft only recently acknowledged receipt of the lawsuit from ValueLicensing. Microsoft Corporation, Microsoft Limited and Microsoft Ireland Operations Limited have all confirmed that they will defend the action in all aspects - but have also indicated that Microsoft Corporation and Microsoft Ireland Operations Limited may contest the jurisdiction of the court involved. So it looks as though another long and arduous court case is ahead – providing another opportunity for software vendors to fuel uncertainty among their customers about used software.