Microsoft sometimes appears to be a victim of its own success. The company has never been keen to release its highly profitable mainstream business automation package MS Office into the OEM channel, arguing it would devalue the software in the eyes of the consumer.
David Smith, Microsoft channel sales and marketing manager, says: ?Lotus and Corel are so desperate for market share that they are bombing suite prices to a fraction of their real value. But this makes it very difficult for the channel to make money. We fight off the pressure with occasional promotions, but without doing anything strategic on prices. We need to protect margins for the channel.?
His sentiment is admirable as far as the Microsoft SP channel is concerned ? these companies build service value on the back of Microsoft reselling. But the argument holds little sway with the army of UK system builders which rely on Microsoft applications to provide the value-add for their vanilla-brand PCs. This channel wants MS applications as cheap as possible ? or at least on the same terms as the bigger players.
The conflict in wishes is reflected in tensions between MS? channel and OEM strategies. The company has maintained long-standing pre-installation rights for Office with Dell and Gateway 2000, the world?s two biggest direct selling PC manufacturers, despite its antipathy to OEM Office.
Sources suggest Microsoft was bounced into signing preferential terms with the companies, after both threatened to pre-install Lotus Smartsuite on all their PCs. If the sources are correct, Microsoft?s quick fix, intended to safeguard market share, has spectacularly backfired. For the deals stick in the craw of the channel as an outstanding example of unfairness.
UK computer dealers and systems builders usually do their complaining in private, but the disparity between Dell and Gateway Office prices and those which everyone else has to pay is too great to ignore. UK trade lobby group the Personal Computer Association (PCA) accuses Microsoft of breaching competition rules by restricting OEM agreements to Dell and Gateway, and its complaint is currently trawling its way through EU regulators.
Dell and Gateway provoked further outrage in January with time-limited promotions, offering Office 97 upgrades for just #20. Martin Hellawell, general manager at Computacenter, said at the time: ?This is becoming a real problem for the whole channel ? we?re very upset and annoyed.? When a mighty reseller such as Computacenter publicly reveals its displeasure with a key supplier, you know the vendor is in trouble.
In February, Microsoft attempted a peace offering by announcing the Office 97 Var edition. This OEM product of Office for small businesses, open to all channel players regardless of size, is currently available only in the US, but is expected to make its way to Europe within the next three months.
But according to Keith Warburton, head of the PCA, the concession could be too little, too late. ?Little progress would have been made if OEM pricing differentials remained in place. If Microsoft is truly going to give fair pricing opportunities then this will represent a major victory for us. It is important that they don?t then go and give further price reductions to the likes of Gateway,? he says.
Warburton also attacks Microsoft?s tardiness in bringing OEM Office into the UK. ?Given that they?re having most trouble over this matter in Europe, why has Microsoft decided to wait so long before implementing the changes here? How did the company ever get itself into such a mess in what is, after all, a secretive backwater of the software industry??
Almost 30 per cent of MS? turnover is derived from OEM business, with operating systems accounting for the overwhelming majority of sales volumes. But it also happens to be the world?s biggest vendor of application software. It offers OEM bundling options for an array of applications including entry-level suite package MS Works, its market leading encyclopedia Encarta and a line-up of consumer titles. But never ? unless you were Dell and Gateway ? would it offer Office on OEM terms.
This is all well and good, unless you control 90 per cent of the business automation software market. And systems builders use big-name bundles to shift their computers, as Nicholas Tee, MD of Leighton Buzzard-based CD Imports, is discovering.
Tee, who established a successful business wholesaling over 300 cut-price consumer titles to independent computer and bookshop retailers, entered the OEM software fray for the first time last year, with a collection of bundles assembled from the Learning Company, the world?s biggest consumer software publisher. ?We thought there was an opportunity with small systems builders,? he says. ?The Viglens of this world were getting all the big bundles, and the small guys were losing out.?
He describes this activity as ?dabbling?, but doubts whether he will take the plunge into full-scale OEM distribution.
Five months down the line and OEM sales are slow, Tee reveals. ?Business is not as good as we would have liked. There is a certain lethargy with small systems builders. It is all very well whinging, but independents do little to help themselves. To stay in this game, you need to be a lot more aggressive.?
But he also readily admits that his OEM product line-up has contributed to the slow take up. ?Learning Company software is good quality, but it lacks the branding in this market,? he says.
?Everyone is so tuned into Microsoft and Lotus, and they are all chasing the same big name titles to bundle. The buyer of the PC is influenced by the strength of the bundle. Consumers are influenced by the latest Microsoft suite, the latest encyclopaedia. Daffy Duck goes to Town licensed out to 25 publishers is a much less attractive proposition.?
Martin Briggs, owner of MCB Computers, a #1 million North Wales computer retailer, agrees. His company assembles about 600 PCs a year, three-quarters of them are bundled with applications software, and overwhelmingly, Microsoft product is the bundle of choice.
?The most important way of putting perceived value is the name of the software and that means Microsoft. Almost everything else is low value and that includes Smartsuite,? he says.
?Lotus has shot itself in the foot because of its historic association with Time Computers.? Time, a division of Lancashire?s #100 million Granville Technology Group, has actively bundled Lotus Smartsuite for several years.
Kath Hill, marketing manager at Edge Publishing, a #1.8 million firm which holds republishing and bundling rights for more than 20 franchises, including sole European distribution OEM rights for Lotus software, supports the proposition that systems builders need big brand-names to add value to their PCs. But she takes issue with suggestions that Microsoft is the only brand-name in the game. ?There is a large installed base for Lotus and Corel Perfect, and people will continue to buy these products no matter what Microsoft does. Lotus has a successful channel and we are part of it.?
Her argument carries little weight with Briggs, who prefers to bundle Microsoft with his computers. Compared with other brands, Microsoft is a no-brainer, he says. ?Take the Learning Company for example. This is a meaningful name for only a small percentage of our customers ? probably less than 10 per cent. And that means you have to sell the software you are bundling when what you really want to do is sell customers the benefit of the PCs while the software you are bundling should sell itself.?
Microsoft software retains a strong perceived value, he argues. ?People reckon Works is worth #100, and Office Pro is perceived as a #500 product. It is fairly easy to sell this bundled for an extra #200.?
Tee believes that grey marketing and promiscuous licensing are clouding the OEM software business. ?I can?t believe some of the prices I have seen coming over from the States. Every day we get reams of offers for liquidation stock from the US. Today someone faxed me an offer of 100,000 bundles, with 12 sealed jewel case titles in each unit, for #5 each. I wouldn?t touch it, it was all second or third-line stuff,? he says.
?Front-line titles are new brand-name titles, while second line software has been developed by third parties and licensed to publishers all over the world. An example is Family Doctor, which has hit the mass market through licensing deals with several publishers, and then comes up in a bundle. Third-line titles are either out of date or no-namers.?
Briggs sources his OEM software, including Office, from ?anywhere within the grey market. ?We do not buy from any official DSPs [Ideal Hardware, Datrontech, Osmosis, Enta, and Actebis, Microsoft?s authorised UK distributors of OEM software], because their prices are too high,? he says.
Buying on the grey market can have its moments of excitement. Purchasing anything less than pukka software can expose innocent dealers to the wrath of Microsoft?s formidable anti-piracy team. In January, the vendor went to town on Surrey dealer Q&M Technology after it was found selling counterfeit MS Office and Office Pro. Somewhere along the line in a convoluted supply chain, US educational versions had been repackaged and passed off as full retail copies.
No one is suggesting Q&M was anything other than an unwitting pawn in the scam, but the episode still cost the company dear: it suffered public humiliation, was forced to hand over #20,000 of stock to Microsoft, as well as paying ?substantial? costs and damages.
Microsoft also obtained an emergency injunction seizing suspect software from Q&M?s supplier, Essex trader Multimicro Distribution. The wholesaler had sourced the software from Softek International, a company with offices in Canada and the Bahamas.
Softek?s supplier was, in turn, a US authorised academic reseller which had ignored terms forbidding it to sell software to non-academic organisations outside the US.
In February, Microsoft scrapped a US pilot scheme offering heavy discounts to non-educational charities because most of the software ended up in corporate accounts. This will squeeze supply of cheap OEM software from the US. From time to time, Microsoft gets a little over-enthusiastic in its effort to stamp out grey counterfeits.
Last November, the software giant infuriated MCB?s Briggs after an employee informed his client that MCB had supplied him with illegal software. A Microsoft employee told the customer that software he had bought from MCB was illegal because it lacked a certificate of authenticity. But Briggs had legitimately purchased the software, part of an Acer Aspire OEM pack, from Computer Component Marketing, a #30 million distributor based in Altrincham, Cheshire.
?The action Microsoft took was totally unfounded,? he says. ?It undermined customer confidence in us, by telling our client that the product we supplied was illegal. And Microsoft didn?t even have the courtesy to tell us first.?
All Acer Aspire packs supplied by CCM included bona fide Microsoft OEM licences, CCM managing director Brent Cutler confirmed at the time. ?This is a matter entirely for Microsoft and Acer,? he said. ?Microsoft is unhappy, as it doesn?t like any OEM dumping, but that does not mean that the product is illegal. All OEMs over-manufacture product from time to time, and they all sell it through the back door. When companies offer you prices that are #15 to #20 below the official distributor prices, what do you do??
CCM had been ?marvellous?, throughout the dispute, according to Briggs. ?It offered to take back all the copies, and it never behaved in any way less than honourably.? But he is still irritated with his treatment at Microsoft?s hands and the experience has taught him to be cautious.
Today, Briggs refuses to buy any software lacking certificates of authenticity, even if it is supplied with valid end-user licences. ?To the best of our belief, we do not buy counterfeit software. We do as much checking of the certificate of authenticity as possible, and the new Microsoft certificate is very difficult to forge,? he says.
Briggs also avoids the pitfalls of dealing with ?bottom of the ladder brokers?, restricting his grey market custom to reputable second-tier distributors, such as Micro Peripherals, CCM, Concept Services and Fortune Distribution. Microsoft is perfectly entitled to exercise its right to stamp on counterfeit grey market software ? and I can think of no reason why crooks should profit at the expense of Microsoft shareholders. But the company is muddying the waters by trying to control the legitimate grey market as well.
Smith says the company has no intention of trying to stamp on unauthorised trade in its products. After all, this is barred by EU competition law. But there is, he says, a ?fine line between what is grey and what is illegal. If an OEM chooses to debundle, it is breaking the conditions of its Microsoft contract. This is feeding the official grey market.?
But piracy is an entirely different matter, as his colleague, distribution manager Geoff Wright, points out. ?For every reseller who sells counterfeit software, another reseller has just lost business.?
Smith is confident that Microsoft will take the grey market back to manageable levels. ?Five or six years ago, the grey market flourished because of differentials between US and European pricing. We adjusted the prices and it went away. The same thing will happen again.?
This time around, MS will tackle the grey market through education and by being a lot more open, he says. The company is to publish guidelines on its channel Web site which will enable traders to distinguish between what is grey and what is illegal. It also plans to publish all prices for its vast array of licensing options.
The firm is also working hand in hand with its distributors to help resellers ?understand what is different? between grey and licensed software. Chris Lewis, Microsoft manager, says: ?Only 50 per cent of all Microsoft users have licences and the rest we will not support. In the end, the customer is losing out, as margins are squeezed on software. Most of the channel is very poor at separating services from product reselling. But services is where they get the majority of their profits from.?
Resellers are missing out on service revenue boosters by failing to sell support contracts on the back of officially licensed product,? he argues. This is a telling point. But one suspects Microsoft is only scratching at the surface. UK grey sales of Microsoft OEM product flourish because of inconsistencies in the vendor?s own pricing policies. As Hill says: ?The small guy wants to sell Microsoft but he doesn?t have the option ? he can?t afford it. He doesn?t have #20 million to splash out on marketing ? he can only tell you his computer is better than another firm?s. He has only got his machine to sell.?
Microsoft carries enormous weight in the industry, but with power comes responsibility. The vendor must ensure it does not handicap smaller players, simply because they are small.
No one argues with the software giant?s right to offer better terms to volume players, but the current margin spread on Office is simply too great for the channel to swallow. It is time for Microsoft to think again.
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