Microsoft is making major changes to volume licensing as its steers away from Enterprise Agreements (EAs) and toward newer, more flexible models.

From 1 July 2016, the software giant will increase the minimum threshold for EAs from 250 seats or devices up to 500.

Resellers will still need to engage Licensing Solutions Partners (LSPs), such as Data#3, Datacom, HP or Insight to obtain MPSA licences for sub-500 seat customers. (Note: a previous version of this story incorrectly stated that the coming change meant resellers could buy MPSA licences without engaging LSP partners.)

Instead of EAs, customers will be steered toward one of two alternative licensing constructs – a Microsoft Products & Services Agreement (MPSA) or the new Cloud Solutions Provider (CSP) program.

Customers currently on an EA will be given the option of a one-time, 36-month extension when their current agreement expires. The only exception is government clients, which will be able to stay on EAs from 250 seats and above.

According to a Microsoft 'field FAQ' document obtained by CRN, "Partners have asked us to simplify the purchasing experience, in particular reducing the high cost of sales and deal complexity. Also, customer data confirms that MPSA and/or CSP can be a better fit for sub-500 customers."

Microsoft said that 67 percent of new EAs were for customers with fewer than 500 users, but that renewal rates in this sector were "weak", with a significant portion choosing not to renew at the end of the three-year EA term.

"This leads us to believe that the EA is no longer the ideal licensing vehicle for these customers," Microsoft advised customers.

MPSA will be the recommended alternative. Unlike the three-year term of an EA, the MPSA licence comes in one-, two-, or three-year durations, and "will soon offer short-term durations of between one to 11 months".

"MPSA is the fastest and most flexible way for customers to buy all the software and cloud services they need through one simplified agreement. With MPSA, customers can create a purchasing structure that meets their organisational needs and at the same optimise pricing through point consolidation," according to the Microsoft document.

CSP is another option; this licensing construct covers cloud services such as Office 365 and Intune and can be bought through Microsoft distributors Ingram Micro and Rhipe.

However, Microsoft stressed that EAs are not being retired and remain "our flagship volume licensing solution for enterprise cusomters with 500 or more users/devices".

Why the change?

Dr Joseph Sweeney, advisor at IBRS and Microsoft watcher, told iTnews part of the reason for Microsoft's change in policy was the midmarket's tendency to sweat assets for as long as possible.

"It's an issue that's been haunting Microsoft for some years now. People realised they didn't need to upgrade, they could sweat assets because Microsoft kit is pretty solid in the long run," Sweeney said.

"Under a traditional EA, when organisations realised they weren't going to be upgrading in any serious way for three years, a lot of them moved to an on-premise version only and sweated that asset."

Microsoft's volume licensing partners will remain responsible for MPSA licensing for 250 to 500-seats customers.

As part of the change, Microsoft is introducing a new rebate for these companies – which used be known as LARs and include Data#3, HP, Datacom, Dimension Data, Insight, SoftwareOne, Rhipe, Staples and Dell – of $5,000 for "every qualified order per customer who purchases 250 or more licenses for enterprise products or enterprise online services on MPSA".

Brad Colledge, executive general manager at Data#3, told CRN that the shift from the EA to MPSA model was "nothing new to those that are close to Microsoft volume licensing".

He said most customers will continue to buy MPSA licences through Data#3, adding that the Brisbane-based company is also a CSP partner.

"MPSA was indeed introduced as the next-generation volume licensing program to reduce complexity and make it easier for customers to consume Microsoft technology either on premise or in the cloud.

"It makes sense that Microsoft will gradually implement MPSA into the traditional volume licensing markets reducing the dependency on EAs," said Colledge.

Karl Sice, head of Staples Technology Solutions in Australia, said he was "not at all surprised at changes to the traditional LAR-LSP model".

"The fact they launched CSP last year was an early warning bell that this part of the market was changing," said Sice.

Volume licensing can be big-dollar deals – for example, Data#3 received a $49 million payment from the Department of Finance for software licensing and maintenance for Microsoft products – but pure licence sales are widely viewed as low-margin.

"No one can make margin in that business," Sice added.

Channel reaction

Nathan Belling, general manager of Brisbane-based Insync Technology, said the problem with Enterprise Agreements for the midmarket was they didn’t align to Microsoft's mobile and cloud focus. "Businesses are transforming so rapidly. Say you have 250 staff and sign an EA for three years then lose some staff – you are stuck paying that 250 for years after."

Chris Greatrex, chief executive of Sydney-based Artis Group, said there was still reticence over buying licensing through an LSP.

"With the EA, you are dealing with an LSP. We work mainly in the enterprise space, in government, where there are a lot of EAs. We will often have to stop the design discussion to engage the LSP to look at the licensing consideration. Say Dimension Data or Data#3 are the licensing partner. Because they have the specific pricing for that customer, we have to expose our architectural designs to our competitors to keep those discussions going and lock down the most cost-effective design."

Stephen Parker, former head of cloud strategy at Microsoft distributor Rhipe, said the EA construct was "long in the tooth" and would be "replaced by a more flexible program" in MPSA.

"EAs were originally designed for big companies rolling out Microsoft products. But an 1000-employee organisation only had 250 seats in a day when only top power workers had a PC. Now a 50-person organisation can have 200 devices," said Parker, who now heads up his own consultancy, 1 Vision OT.

Consumption economics

When expensive licences go unused – "shelfware" – it makes the customer less likely to renew or pushes them toward free or cheaper alternatives. Microsoft has increasingly been focused on the metric of consumption because it shows customers are using what they paid for.

The problem, said Insync's Belling, is when the "customer gets 12 months into the EA and they haven't deployed anything. Why would I renew?"

However, if the customer has deployed the software and "they are using it, they are happy to renew", added Belling.

Microsoft has ways to promote usage and hence renewals, such as its T-36 program which seeks to demonstrate business value in Enterprise Agreements.

The software vendor is increasingly compensating resellers based on customers' active usage of products – something much easier to track with cloud services like Office 365.

Updated with comments from Data#3 and clarification of the role of LSPs in MPSA licences.