Dusseldorf IT managers will have to budget significantly more for Microsoft products in the future: The US group has announced significant price increases for corporate customers for several cloud services, for the second time in two years. Microsoft plans to adopt “uniform pricing” starting April 1, reflecting the exchange rate of each country’s currency to the US dollar, the announcement says.
As a result, the prices for products such as Office 365 will rise by eleven percent in the euro area. In addition, the group wants to adjust prices twice a year to exchange rate fluctuations. “We are conducting price harmonization that also affects Europe,” Microsoft said in a statement. Customers were informed in January.
The justification should cause the affected customers to frown. Although the dollar has appreciated significantly against the euro over the past twelve months, the exchange rate is currently only a good three percent higher than a year ago. Microsoft, on the other hand, calculated the difference between the average rate for 2022 and the year-end rate and used that as a basis.
Experts see the price increase as evidence of market power. “For the last two to three years, Microsoft has been able to act like it did ten to 15 years ago,” says Axel Oppermann, founder of the analysis company Avispador. At that time, the group dominated the market for office software without any real competition. This development is likely to increase with the integration of the artificial intelligence ChatGPT into numerous products.
“In the last two years, we have noticed that Microsoft is stepping on the gas pedal,” agrees Rene Schumann, head of the Negotiation Advisory Group. “The price increases cause some trouble for our customers, which goes right up to the CEO.” Companies should prepare themselves for tough negotiations – there is definitely leeway.
“Sheer horror” from a number of customers
The portfolio of online services is affected by the price increase, as explained by Deutsche Telekom, which sells Microsoft solutions as a partner. This includes the office software Office 365 as well as the product packages under the Microsoft 365 brand and the business software Dynamics 365. Hardware, classic software licenses and private customer offers are excluded.
The new conditions do not have a direct impact on companies, contracts lasting several years are common. But: “When the contract with Microsoft expires, customers face price increases of 30 to 40 percent,” says negotiation consultant Schumann. After all, the group had already increased prices significantly in the previous year. In some conversations, he senses “blatant horror” among customers, he says.
Schumann calculates the financial consequences using a fictitious example, a medium-sized company with a turnover of one billion and an operating margin of ten percent. Such a company spends 20 million euros per year on Microsoft products. If a three-year contract with the Windows group expires, an increase of six million euros can be expected.
That’s a lot of money even for an upper medium-sized company, especially since IT spending is increasing overall. The additional payments to Microsoft alone reduce the assumed margin noticeably: only 94 million euros remain of the 100 million annually.
Hidden price increase through premium products
Now the picture is particularly dramatic for adviser Schumann, since he often has to deal with cases in which the negotiations are particularly difficult. However, his company is definitely a pointer to the anger at Microsoft: a good fifth of the 50 employees are currently taking care of software license agreements such as those from Microsoft, from medium-sized companies to large corporations, and the trend is rising. And everyone has the same problems, says the managing director.
When the contract with Microsoft expires, customers face price increases of 30 to 40 percent. Rene Schumann, negotiation advisor
Especially since there is a hidden price increase in addition to the obvious one. Microsoft is pursuing the same pricing policy as the “top five software providers”, observes the IT user association Voice – companies such as SAP and Oracle have also raised prices sharply in recent months, often with reference to inflation.
What weighs more heavily, however, is that Microsoft is shifting functions from standard product packages to more expensive offers, explained Stephanie Riesebeck, who heads the association’s center for analyzing the price and license conditions of large IT providers.
This recently happened with the communication software Teams. “The premium suites contain even more functionalities that are only economical for companies if the degree of utilization is high,” says Riesebeck.
Investments pay off
The group can afford this pricing. Avispador analyst Axel Oppermann observes that he has reached a “critical mass” with cloud products, and 30 to 40 percent of Office customers have switched to the online version. At the same time, the dependency of the companies is high, so a change can only be managed with great effort. So the market power is great.
The dominance of the group increases again.
(Photo: Microsoft)
A long-term strategy pays off. Microsoft, under CEO Satya Nadella, found the strength “not to see new projects from a purely financial point of view, but also to go through with an investment,” says Oppermann – for example to increase customer loyalty or improve the market position.
Microsoft has invested billions in IT security over the years, to protect its own infrastructure and to improve its products. This technology is now being marketed at an additional cost. “If customers keep up with the technical advances, they have to pay significantly more,” says Oppermann.
What companies need to consider when negotiating
For the Microsoft management, it is the stated goal to sell customers larger and larger product packages. CFO Amy Wood recently pointed out to analysts that the average revenue per user is increasing because the Microsoft 365 E5 product package is in demand – with several security features, by the way.
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This pricing may offer a glimpse of how Microsoft will market the new generation of artificial intelligence (AI). The software manufacturer has announced that it will expand its office programs with an assistant that summarizes telephone conferences or creates slides for presentations. It is quite possible that there will be new product packages for this.
The manager’s strategy is bearing fruit.
(Photo: Bloomberg)
Companies can only resist this development to a limited extent, as Microsoft’s market power is too great. Advisor Schumann gives some advice on how to use the negotiating leeway.
Under no circumstances should you send the head of technology or a board member into negotiations with Microsoft. The negotiating team should keep a distance from the IT department, which not infrequently “emotionally went over to Microsoft”, as Schumann puts it – for example, if the US company previously helped with a cyber attack on the company.
It is also important to see the negotiations as a process and to obtain comparable prices from other companies. “In our experience, larger companies have worse conditions than smaller ones,” says the negotiation consultant. “Microsoft negotiates harder with corporations. Once you’re in a worse price bracket, it’s very difficult to get out of there.”
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