Microsoft's looming Windows 7 licensing 'disaster' for XP users

Windows 7, due to ship on Oct. 22, has gotten good reviews as the OS that Vista should have been. And the large percentage of businesses that have held onto XP rather than go to Vista - about half, according to Gartner - are no doubt planning to migrate to Windows 7. But Microsoft may be making it harder and costlier for them to do so, notes Gartner analyst Michael Silver. "It's a disaster waiting to happen," he says.

Microsoft's potential XP downgrade trapUnder Microsoft's planned enterprise licensing rules, businesses that buy PCs before April 23, 2010, with Windows 7 preinstalled can downgrade them to Windows XP, then later upgrade them to Windows 7 when they're ready to migrate their users. But PCs bought on or after April 23 can only be downgraded to Vista - which is of no help for XP-based organizations, Silver notes - and could cause major headaches and add more costs to the Windows 7 migration effort.

[ See why InfoWorld's Randall C. Kennedy says XP mode is the right idea but the wrong implementation. | Preparing for Windows 7? Get the overview you need in the Windows 7 PDF Quick Guide from InfoWorld's J. Peter Bruzzese. | And download our free Windows performance-monitoring tool. ]

Microsoft's PR firm tells InfoWorld, "It looks like Microsoft hasn't made any announcements around timing for downgrade rights from Windows 7 to Windows XP yet." But Microsoft has discussed the six-month limit with Silver multiple times and characterized it him as a "pubic" policy. The policy is also clearly visible in a Microsoft PowerPoint slide (available for viewing at InfoWorld).

Both Forrester Research and Gartner advise clients to wait 12 to 18 months after Windows 7 ships before adopting the new OS, so they can test compatibility of their hardware and software, as well as ensure their vendors' Windows 7 support meets their needs. But Microsoft's six-month downgrade restriction for XP means that the businesses that chose not to install Vista have to rush the migration process. Or they can spend extra money and enroll in Microsoft's Software Assurance program, which then lets them install any OS version at the price of the extra yearly fee (about $90) per PC. "Microsoft will probably get more money out of [this policy]," Silver says.

For businesses not willing to pay extra for the Software Assurance program, Silver sees real headaches coming, which ironically could slow the adoption of Windows 7 by XP-based businesses. Organizations could buy more PCs than needed by April 22 to essentially stock up on XP-downgradable Windows licenses, but that distorts their purchasing costs. Or they could buy PCs as needed after April 23 and either live with Vista or Windows 7 on them - perhaps allocating those systems as test units instead of regular production systems - or buy XP licenses from retailers that still have them in stock. Tracking which PCs have which downgrade rights in IT asset management systems, though, "will be difficult," Silver notes. "Microsoft has made a real mess."

"Users need to say this policy doesn't make sense," Silver advises, and try to convince Microsoft to change it. Consumer pressure has worked to sway Microsoft licensing policies before; notably, businesses' strong resistance to Vista caused Microsoft to extend the availability of Windows XP several times in various forms.

The perils of using XP modeSilver notes that Microsoft is sending mixed signals to XP-based users, given that it will include a license for XP as part of Windows 7 Ultimate in what is called XP mode. In XP mode, a virtual machine can run Windows XP in parallel to Windows 7. But this approach doubles IT's workload, as it must deploy and manage two OSes per PC: Windows 7 and Windows XP. "That's not optimal," Silver says. And because many PCs can't run the Virtual PC technology that makes XP mode work, IT will face compatibility complications as well.

Silver suggests that XP mode will end up being used only for XP applications that can't run under Windows 7 (whether or not they're formally supported in Windows 7 by their vendors). But there may be more of those than IT realizes. The reason: Web apps tuned to Internet Explorer 6, which Microsoft has essentially orphaned. Windows 7 will ship with IE8, which has a compatibility mode for IE7, but not for IE6. And if IT retains IE7 in Windows 7, Silver notes that IE7 lacks an IE6 compatibility mode. So IT must rework its IE6-dependent Web apps or use XP mode to run IE6. Both are hassles.

Other questions on moving to Windows 7IT needs to work through several other issues when figuring out its Windows 7 migration strategy, Silver points out.

SAP first quarter earnings drop 16 percent

SAP reported first quarter net income down 16 percent year on year, and revenue down 3 percent, as customers remain reluctant to spend on new software.

Net income for the first quarter fell to €204 million (US$269 million as of March 31, the last day of the period reported) from €242 million a year earlier. SAP blamed the fall on a restructuring charge related to previously announced staff lay-offs.

Revenue fell to €2.40 billion from €2.46 billion a year earlier. Within that, software support revenue rose 18 percent to €1.25 billion, a rise somewhat offset by a fall in professional services revenue, down 9 percent to €649 million.

The biggest fall was in software sales, down 33 percent to €418 million. SAP blamed the decline on a difficult operating environment worldwide due to the global economic downturn.

It is unclear when buyers will regain confidence: "Visibility for software revenues remains limited," SAP said.

However, SAP's customers are continuing to buy software, but in smaller pieces, SAP co-CEO Leo Apotheker said during a conference call with financial analysts.

"It is obvious that in the current climate customers are trying to pinch every dollar, euro and yen before they spend it," he said.

SAP is therefore focusing on growing the overall volume of deals "in every theater and every market segment," said Bill McDermott, an SAP executive board member and president of global field operations.

The company is also looking forward to the upcoming general release of its Business Suite 7 application, as well as new BI (business intelligence) software, which will help drive revenues up, Apotheker said.

But the company declined to comment further on the outlook for the rest of the year, sticking to the same forecast it provided in January. Back then it made no predictions for future revenue, citing uncertainty about the business environment.

SAP may have slightly lower software support revenue in the coming years than it had previously hoped. Following pressure from users, announced Wednesday that it has capped the price of its new Enterprise Support program at 22 percent of the software license price until at least 2015. For existing users forced to migrate to that service from a cheaper existing service, the price rise will be spread over a longer period, limiting increases to 3.1 percent a year, rather than the previous 8 percent a year, SAP said.

But Enteprise Support "will become a competitive advantage" for the company, Apotheker predicted.

Along with its earnings report, SAP on Tuesday announced that it had agreed on a set of KPIs (key performance indicators) for Enterprise Support with SUGEN (SAP User Group Executive Network), a group composed of SAP user groups around the world.

No other vendor "comes even close" to providing the level of insight into support costs that the KPIs will afford, Apotheker said.

"I have to tell you that by having [created the KPIs], the discussion with our customers has radically changed. It is not about price anymore. Now people are focused on extracting the value," he said.

Meanwhile, SAP repeated its January prediction that operating margin will remain around 25 percent - if full-year software and software-related service revenues at constant currency remain flat or decline by 1 percent from their 2008 level of €8.62 billion. While companies tend to hedge their predictions against adverse moves in exchange rates by assuming constant currency, in the first quarter foreign exchange movements acted in SAP's favor. In the first quarter, software and software-related service revenue remained flat, but excluding Business Objects support revenue that Business Objects would have recognized had it remained a stand-alone entity it fell 2 percent - and would have fallen 4 percent at constant currency, SAP said.

The company stated its results according to U.S. generally accepted accounting principles (GAAP), but said that from the end of this year, it will only use International Financial Reporting Standards (IFRS) for external communications. It will also use IFRS figures for internal reporting, forecasting and incentive-based compensation plans for staff, it said. SAP began preparing financial reports according to both GAAP and IFRS in 2007, to comply with German and European law.

The only difference in reported revenue between the two accounting standards concerns SAP's now-closed third-party software maintenance subsidiary, TomorrowNow. SAP's U.S. GAAP income statement shows TomorrowNow's revenue and income separately because it is a discontinued operation, but IFRS does not allow this separation because TomorrowNow is not a material operation, SAP said.