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Microsoft and New York mayor Mike Bloomberg held a press conference this morning to announce a big new contract for 100,000 city workers to use Microsoft software and services. The deal is expected to save New York about $50 million over the next five years, as a bunch of formerly separate contracts were consolidated into one.
But the deal is also a good example of how Microsoft can use its existing contracts to win business for its cloud based services, like the Office 365 service announced yesterday.
As with any Microsoft software deal, the details are far too complicated to cover in a blog post, but one main point is that a lot of workers were previously licensed for software they didn’t really use.
Part of the new contract moves some of these workers to Microsoft’s cloud-based services for “deskless workers.” This is basically a very cheap tier of service–it usually costs $2 or $3 per user per month–that puts e-mail and some other data into Microsoft’s data centres, then lets workers access that data through a Web browser (rather than the full version of Outlook and other Office applications).
New York is also saving money by taking data from servers that were owned and operated by various departments and consolidating them all into Microsoft’s data centres.
This is how Microsoft is going to pitch its cloud services to its largest customers over the next two to three years.
Most large organisations, government and private-sector alike, use a lot of Microsoft software, particularly Office. To save money, they tend to sign contracts that, along with discounts, give them the right to upgrade to the latest versions. These deals come up for renewal every three years (five for some government agencies), and account for about one-third of Microsoft’s revenue stream.
But as a big IT customer told me at yesterday’s Office 365 event, it’s getting hard to justify signing them because software upgrades are expensive to undertake. No company wants to upgrade every three years. So why sign the latest contract?
Moving to the cloud changes this. Customers get the latest updates delivered automatically. IT managers (and Microsoft) can go to the accounting department and show exactly where they’re getting value from the deal. And for Microsoft, it almost assures lock-in–if the customer cancels the contract, they no longer have e-mail.
So now, when these contracts come up for renewal, Microsoft will pitch cloud-based services as a partial replacement. If Microsoft needs to sweeten the deal by offering price cuts or other special incentives on traditional Microsoft software, as the company appears to have done with this New York City deal, that’s OK. The promise of steady, ongoing subscription revenue is worth sacrificing a bit of revenue in the short-term.
Google and other cloud competitors have no such existing software contracts to build on.
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