29 January 2004 Microsoft has conceded that companies are resisting its drive to shift them from one-off licences to its Software Assurance subscription scheme, controversially introduced in 2002.

Microsoft chief financial officer John Connors told analysts this week that it is not clear how many customers will move onto the multi-year contracts as their old contracts expire, but the figure could be as little as 10%.

Tens of thousands of businesses rushed to sign up to the old Upgrade Advantage scheme before it was ended in July 2002. Those contracts will expire at the end of June this year, leaving Microsoft with a $1.1 billion hole to fill, according to Connors.

Analysts suggest it will be difficult to persuade many customers to buy into the subscription model, which guarantees access to upgrades as soon as they become available, because new versions of Office and Windows are still several years away.

The software maker originally introduced Software Assurance in mid-2002, but for many organisations the new scheme was too costly and they instead rushed to sign up for the older Upgrade Advantage before it was discontinued.

Connors is not confident that many of them will switch to Software Assurance. “If 10% [of customers] were to renew, we would be disappointed”, he said. “If it were higher than 30%, we would be very surprised.”

Microsoft’s deferred revenue balance — which reflects the unexpired portions of such contracts — has declined in the last two quarters to $7.85 billion by the end of December. Analysts blame the unpopularity of Software Assurance. Connors expects Microsoft to end the fiscal year in June at a similar figure, down from $9 billion a year ago.

Despite this, Microsoft recently announced overall record revenue of $10.15 billion for the quarter ending December 31, 2003, a 19% increase over $8.54 billion in 2002.