Last Tuesday, Microsoft announced that it would launch a new licensing program early next year designed specifically for small and medium sized businesses (SMBs) that license multi-year contracts. The program will be called Open Value, and it permits some customers to spread out payments for specific Microsoft products.
The products that Microsoft will license through Open Value include the Windows operating system and Microsoft Office, the most popular infrastructural products in use by SMBs.
Open Value is a clear nod to SMBs who complained that Microsoft's enterprise licensing agreements put in place last July--also known as License 6.0--wouldn't work in their environments. License 6.0 required a significant up-front fee, based upon the number of users, plus the annual licensing fees over the three-year life of the license. Open Value, targeted to customers who have between 5 and 250 PCs, will ease the up-front burden and roll in the fees over the life of the three-year contract. This reduces the budgetary exposure that SMB IT managers have with their managers when the growth of the company's infrastructure is uncertain.
By adjusting its licensing agreement to meet the realistic needs of the SMB marketplace, Microsoft is joining an increasing number of software vendors that have read the writing on the wall. These vendors are recognizing that the majority of 2002-2003 sales and revenues will not come from their traditional customer base of larger organizations. Here's how the SMB strategy plays out.
IDC estimates that the overall market for IT goods and services actually shrank in the past two years by over 3 percent, with the heaviest losses in storage equipment (down 10.6 percent in 2002) and networking equipment (down 7.6 percent in 2002). And though revenues are expected to climb in 2003, real double-digit growth is not anticipated until well into 2005.
By comparison, the share of SMB activity in the marketplace is actually growing. In the United States, SMBs will spend an estimated $135 billion in 2002. This is 30 percent of the total IT spending in the US. In addition, it's estimated that spending on CRM and ERP software will continue to double on an annual basis in the SMB niche.
This means that while the IT market has shrunk, it has exposed the IT needs of a larger proportion of SMBs, turning their needs and requirements into the targets that IT vendors must address.
How realistic is this strategy? Well, consider the following. Through the latter half of the 1990s, larger organizations were rebuilding their infrastructures to take advantage of the advances in technology and the evolution toward e-business initiatives. However, while a majority of the SMBs also took advantage of the lowered costs of productivity tools such as Windows desktop products, they were not economically positioned in their industries to really drive the e-business requirements for their products. Nor were these SMBs technically positioned to create the systems mechanisms to build the e-business infrastructure. SMBs--who are the natural suppliers and customers of larger organizations--had to wait for the standards for e-business interaction were put in place by the mega-corporations.
Now that larger organizations have set the standards--and have essentially shut down IT spending on infrastructural initiatives--SMBs are feeling more comfortable to begin responding to the demands. This translates into an increase in the number of smaller interfacing projects that are necessary to keep these businesses on target in their supply chains.
As a consequence, focusing on SMBs and their unique business needs has become a priority for many software and equipment vendors. Gone are the days when multi-million-dollar contracts with the largest companies are the overriding goals of vendors. Gone are the days of unbridled IT spending. In their place will be an extended period when vendors meet their numbers through multiple contracts with the smaller organizations who have tighter budgets and limited technical resources.
For instance, Oracle, Sun Microsystems, SAP AG, PeopleSoft, and Oracle have begun rebuilding product offerings in an effort to focus specifically on SMB market segment, primarily because larger customers are not spending so much. Many of these vendors have begun building channel partners--in a mode similar to IBM's Business Partner channels--to keep their cost of sales down.
Of course, IBM had already established a substantial Business Partner and channel mechanism, and it is continuing to focus on the SMB marketplace with the recent roll-out of its WebSphere Express series of middleware software tools. These tools are designed specifically to meet the budgetary needs of the smaller customer market niche. They're technically powerful enough to fill the e-business bill, but scaled to meet the budgets and resource requirements of the SMB.
How long will this focus on SMBs continue? Probably until the IT market rights itself over the next two years and larger organizations begin spending again on their next round of infrastructural projects. Of course, no one expects the return to the days of 20 percent IT spending, but IDC estimates that 10 to 12 percent growth is within reach over the next two years.
In the meantime, it's believed that small and medium sized companies with limited budgets and specific needs will raise the cost of sales for IT vendors by requiring an increased effort at salesmanship and modifying the conditions of sales through such mechanisms as licensing arrangements. Overall, this movement should lower the costs of IT products and services in the short run, and increase the opportunities for smaller companies to better compete by using the latest IT technologies.