Value Equation

With Microsoft's Windows .Net Server 2003 in its final round of testing and due to ship in only a few months, the technical makeup of the operating system is no longer in flux. It will come in 32-bit and 64-bit versions, support clusters of up to eight nodes, and include much-improved tools for resource management. Now there's only one piece of information missing for anyone evaluating whether to deploy the foundation for Microsoft's Web-services strategy: the price.

Microsoft officials aren't ready to say what .Net Server will cost, but documents obtained by InformationWeek indicate that the company has in mind price increases of 10% or more for two of the four editions that will be available when the platform ships in April. According to the Microsoft documents, which were filed by several technology vendors to the Transaction Processing Performance Council as part of the submissions process to participate in its benchmark tests, Microsoft plans to charge $899 for the Standard Edition of .Net Server and $3,299 for the Enterprise Edition. Both prices represent increases over comparable Windows 2000 editions. The documents don't provide price information on .Net Server's Datacenter or Web editions.

The prices listed in the documents represent a "high-water mark" of what Microsoft might charge, says Bob O'Brien, group product manager for .Net Server. It's also possible that .Net Server editions could be equal to, or even cheaper than, comparable Windows 2000 packages. "We haven't closed on pricing," O'Brien says.

Any price increases, which also could come in the form of higher fees for .Net Server client-access licenses or 64-bit versions of the operating system, would contribute to the growing perception among some technology buyers that Microsoft's software, once considered the low-cost approach to business computing, is getting downright expensive, especially compared with Linux. That view became more widespread as some businesses signed on to Microsoft's controversial License 6.0 programs, which replaced other volume-licensing options on July 31, only to see their costs increase.

"That was a bitter pill," says Ken Foster, manager of software technology at American Electric Power's applications-services division. "We had a very significant increase in costs." Foster found himself in the unenviable position of having to explain to business-unit managers, who bore the brunt of the higher costs, why the IT unit needed the Microsoft products covered in the contract.

Foster's complaint is all the more serious for Microsoft because he's not a disgruntled customer taking potshots. The energy company is participating in .Net Server's early-adopter program, and Foster speaks highly of Microsoft's products and personnel. "They were wonderful," he says. "We've established a tighter bond than ever before. The change in licensing model-that was the pain, and the price that went with it."

As Microsoft gets ready to ship its first new server operating system in three years, this will be one of its challenges: getting cost-sensitive customers to sign on for all the upgrades it keeps rolling out. "It's not a good economic environment to ask the business areas to fund infrastructure changes, and that's what we're talking about," says a tech VP at a financial-services company in the Midwest that tends to be a release behind Microsoft's most recent products.

For some companies, it all ties back to License 6.0. As part of those programs, Microsoft introduced Software Assurance, which company officials compare with maintenance contracts other software companies offer. For an annual premium, companies can upgrade to products covered under their contracts. Buyers who don't enroll in Software Assurance-because they can't or don't want to keep up with Microsoft's release cycle-forfeit the discounts they used to get when they upgraded software on their own schedule. "They're dictating churn to generate revenue," says one unhappy IT exec. "They've got us locked in."

The impression that Microsoft is putting the squeeze on customers wasn't helped when the vendor reported record revenue of $7.8 billion for its most recent quarter, an increase of 26% from a year ago. During the quarter, companies either signed new three-year contacts with Microsoft or rushed to buy upgrades under older, more favorable terms before the July deadline.

HIP Health Plan of New York, the No. 1 company in this year's InformationWeek 500 ranking, has standardized on Microsoft software on 3,000 PCs and more than 100 servers. "I love Microsoft. They've been a great vendor to us," says Pedro Villalba, senior VP of IT and chief technology officer with the health-maintenance organization.

But concern over the rising cost of Microsoft products has HIP looking at alternatives. "I'm committed to doing something with a mission-critical application on Linux next year," Villalba says. "I have to look at viable options. I can't ignore it." HIP already has steered away from using Microsoft's SQL Server database for its business-intelligence applications, choosing Cognos Inc.'s products instead.

SQL Server's price-$19,999 per CPU for Enterprise Edition-can add up quickly on big multiprocessor servers. In one extreme example, SQL Server fees account for more than $4 million in a 256-CPU Compaq system with a total cost of $10.6 million. The system ranks at the top of the Transaction Processing Performance Council's transaction-processing category, a testament to the heavy workloads that Windows and SQL Server now can manage, albeit at eye-opening fees.

For many businesses, though, it's not single, multimillion-dollar Windows servers that are the issue, but the cumulative effect when they license dozens of Microsoft products for hundreds of servers and thousands of desktop PCs over three-year contracts. That's what's causing more companies to consider cheaper Linux options. American Electric's Foster says he's open to using Linux servers as a "creative alternative" if necessary. "I'm not even hiding that from Microsoft," Foster says. "They know it."

That kind of talk has Microsoft contemplating new defensive tactics. Among them: .Net Server will ship in a stripped-down edition for use on Web servers-exactly where Linux is most popular.

The vendor also commissioned research firm IDC to conduct a study on the total cost of ownership of Windows 2000 versus Linux. IDC found that Windows 2000 was ultimately cheaper in four of the five IT workloads measured. That's because the higher costs of Windows software were offset by lower management and staffing costs, according to IDC.

Microsoft officials concede that some customers have seen prices rise, but they say the opposite is also true. (CEO Steve Ballmer, in an October interview, said most customers signing new enterprise agreements saw per-desktop costs drop.) Microsoft officials point out that, in tests, performance doubled on .Net Server for some applications. And they note the list price of Windows XP Professional, $299, is $20 cheaper than a Windows 2000 client.

Mary Kay Inc. is fully engaged in Microsoft's .Net strategy-and happily so, says Barry Bloom, chief architect of E-business for the cosmetics company and author of a book on how to use .Net technology. "The benefits just keep coming in," says Bloom of the company's months-long development effort to port hundreds of Visual Basic applications to the environment. "It's unbelievable how much faster it is, how much better it deploys, how stable it is." Still, Bloom says, Mary Kay isn't using certain Microsoft products, Content Management Server among them, because of their price tags. "The value-add for some of these things just isn't there."

Microsoft's endless product refinements have created devoted fans. "Who in their right mind would move away from Microsoft's platform?" asks a business executive with a major financial company. "It's a good thing we have an industry standard. They continue to innovate."

The catch: His company is close to standardizing on Lotus Notes, despite his pro-Microsoft feelings. The reason: lower costs.