Microsoft’s CEO attended a joint press conference with New York City (NYC) mayor Michael Bloomberg to announce a new software deal for NYC. Details of the deal, including the related discount and Microsoft’s willingness to be flexible, suggests open source and cloud-based office productivity suites are becoming central to licensing discussions with Microsoft.

First of a kind deal or first of many?
According to New York Times reporter Ashlee Vance, Mayor Bloomberg began the press conference stating:

I am sorry if you are looking for a story of sex and pizzazz. That is not what this is about. This is about making the city government work better.

The deal, labeled as a “first of its kind” by Ballmer is valued at $20 million per year and will save the city $50 million over five years. To put these figures in perspective, NYC’s annual budget is about $63 billion.

NYC shifted from individual city agencies negotiating separate deals with Microsoft to a city-wide licensing deal for the city’s 100,000 employees. Additionally, Microsoft is allowing NYC to pay license fees based on the actual applications that city workers use. Vance reported that “New York will put workers into three categories based on how many applications they use.”

It could be argued that few enterprises are large enough and have not yet consolidated corporate-wide licensing to follow in NYC path. In fact, Ballmer is quoted: “corporations often negotiate more nuanced licensing deals than government bodies”. However, categorizing employees based on the applications they use, and paying for a few applications together versus selecting between an individual product license and a significantly larger product suite license could become more common in the enterprise.

Did Microsoft accept a 33 percent revenue reduction?
While “sex and pizzazz” may have been absent in the announcement, the deal, and the negotiation, could hardly be considered just another sale.

For one thing, it’s not everyday that Ballmer attends a press conference to announce a deal. Especially when the deal will, at least potentially, see Microsoft make $50 million less from the NYC over five years.

The quick math suggests NYC was able to negotiate significant concessions from Microsoft.

The deal is valued at approximately $20 million per year, suggesting approximately $100 million in revenue to Microsoft over 5 years. Next, the deal is expected to save NYC $50 million over that same period.

Using these two pieces of data, one could assume that Microsoft was on track to make $150 million over the five year period, had it been able to negotiate separate contracts with NYC agencies. Instead, Microsoft will settle for $100 million, or 33 percent less, over the five year period.  Additionally, this is a 33 percent reduction against the discounted rates that each NYC agency had already negotiated themselves as part of the potential original $150 million over five years.

It could be argued that the $50 million in savings are not entirely due to a reduction in license fees paid to Microsoft. Maybe some city agencies were using alternatives to Microsoft technology, and will now use Microsoft products and thereby save the city money. This would represent net new revenue for Microsoft while also reducing NYC’s costs.

However, to even consider a 33 percent discount on already discounted city prices, if Microsoft were displacing a competitor in any part of the NYC, Microsoft would have negotiated to make this fact public.

There was no mention of Microsoft displacing a competitor in the announcement.

In fact, quite the contrary, NYC Deputy Mayor, Stephen Goldsmith, credited competition for helping NYC negotiate the significant discount. Goldsmith is quoted: “we took advantage of the competitive moment.”

Playing the Google & open source card
IT decision makers are increasingly using Google Apps and open source office productivity suites as negotiation tactics. Vance quotes Mary-Jo Foley, a well known Microsoft reporter, stating:

So many of the customers I am talking to play the Google card even if they have no intention of going to Google. Microsoft knows people are doing it, but what can they do?

It’s logical to assume that Microsoft will be pushed to a point at which they will aggressively attempt to call a customer’s bluff. As much as companies would like to threaten “we’re going to drop Microsoft Office”, the realities of doing so are far from clear cut – at least today.

IT decision makers are encouraged to help a subset of users to build skills with alternatives to Microsoft Office today. Users that require infrequent access to office productivity tools, or that need to access files and collaborate across computing devices could be good candidates.

At the very least, this will help companies appear more credible during future negotiations with Microsoft.

It’s interesting to note that as part of the NYC deal, Microsoft was able to convince NYC to license Microsoft products for a, as NYC deputy mayor Goldsmith claimed, “a large number of individuals that don’t even have e-mail access”.

While NYC has certainly negotiated an aggressive deal with Microsoft today, one can’t help but wonder if they’ve lost future negotiation power. Not only is NYC remaining fully committed to Microsoft client technologies, they are also increasing the number of city employees skilled with Microsoft products. These two points will make it even harder for NYC to adopt a competitive solution in 5 years.

Negotiate hard, like NYC did. But don’t forget to take steps to ensure future negotiating power.

Follow me on Twitter at SavioRodrigues. I should state: The postings on this site are my own and don’t necessarily represent IBM’s positions, strategies, or opinions.