Microsoft 2004 Annual Report Download - page 12

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BUSINESS DESCRIPTION (CONTINUED)
PAGE 12
Open. Designed primarily for small-to-medium organizations (5 to over 250 licenses), this program allows customers
to acquire perpetual licenses and, at the customer’s election, rights to future versions of software products over a
specified time period (generally two years). The offering that conveys rights to future versions of software product over
the contract period is called Software Assurance. Software Assurance also provides support, tools, and training to help
customers deploy and use software efficiently. Under the Open program, customers can acquire licenses only, or
licenses with Software Assurance. They can also renew Software Assurance upon the expiration of existing volume
licensing agreements.
Select. Designed primarily for medium-to-large organizations (greater than 250 licenses), this program allows
customers to acquire perpetual licenses and, at the customer’s election, Software Assurance, which consists of rights
to future versions of software products, support, tools, and training over a specified time period (generally three years).
Similar to the Open program, customers can acquire licenses only, acquire licenses with Software Assurance, or renew
Software Assurance upon the expiration of existing volume licensing agreements.
Enterprise Agreement. The Enterprise Agreement is targeted at medium and large organizations that want to
acquire perpetual licenses to software products for all or substantial parts of their enterprise, along with rights to future
versions of software products, generally over a three-year period.
Enterprise Subscription Agreement. The Enterprise Subscription Agreement (ESA) is a time-based, multi-year
licensing agreement. Under an ESA, customers acquire the right to use the current version of software products and
the future versions that are released during the three-year term of the agreement. At the end of the term, customers
may either renew their ESA or exercise a buy-out option to obtain perpetual licenses for the latest version of the
covered products. If they do not elect one of these options, then all previously covered software must be uninstalled.
Online Services. We distribute online content and services through MSN and other online services. MSN delivers
Internet access and other premium services and tools to consumers. MSN also delivers online e-mail and messaging
communication services as well as information services such as online search and premium content. Microsoft Business
Solutions operates the bCentral small-business portal, which is delivered online. The bCentral portal provides tools and
expertise for small-business owners to build, market, and manage their businesses online. Other services delivered online
include Xbox Live, Microsoft Developer Networks (MSDN) subscription content and updates, periodic product updates,
and online technical and practice readiness resources to support our partners in developing and selling our products and
solutions.
CUSTOMERS
Our customers include individual consumers, small and medium-sized organizations, enterprises, governmental
institutions, educational institutions, Internet Service Providers, application developers, and OEMs. Consumers and small
and medium-sized organizations obtain our products primarily through resellers and OEMs. Sales to Dell and its
subsidiaries in the aggregate accounted for approximately 10% of fiscal 2004 revenue. These sales were made primarily
through our OEM and volume licensing channels. No single customer accounted for more than 10% of revenue in 2002 or
2003. Our practice is to ship our products promptly upon receipt of purchase orders from customers; consequently,
backlog is not significant.
COMPETITION
The software business is intensely competitive and subject to rapid technological change, evolving customer
requirements, and changing business models in every segment. We face significant competition in all areas of our
business. The rapid pace of technological change continually creates new opportunities for existing competitors and start-
ups and can quickly render existing technologies less valuable. Customer requirements and preferences continually
change as other information technologies emerge or become less expensive, and as concerns such as security and
privacy become more important. Our direct competitors include firms adopting alternative business models to the
commercial software model. Firms adopting the non-commercial software model typically provide customers with open
source software at nominal cost and earn revenue on complementary services and products, without having to bear the
full costs of research and development for the open source software. Global software piracy – the unlawful copying and
distribution of our copyrighted software products – deprives us of significant amounts of revenue on an annual basis.
Future versions of our products compete with the existing versions licensed to our installed base of customers. This