Ramifications of Brexit may be wide-spread and plentiful, yet difficult to predict accurately.
What has been clear is the confidence / uncertainty impact on the value of sterling – having just returned a family trip to Australia – whose currency has appreciated against the USD whilst sterling depreciates I can attest to the extent of the impact!
Whilst on leave I read some reactions regarding the difference in Microsoft’s price increases applied on-premises vs the cloud. By now, I would hope that Microsoft increasing sterling prices is not news to any reader, the following however is a view on the reasoning and scenarios of yours truly.
Existing Status Quo
Earlier this year I authored a research note How Adopting Office 365 Will Impact Your Global Microsoft Licensing Strategy, to articulate how multinational organizations Microsoft licensing strategies can be impacted by choosing to adopt Office 365. Readers of that research purchasing for UK operations will likely have expected Microsoft’s price increase as sterling plunged last summer.
Two of the key elements drawn out in that research are the extent to which Microsoft:
- Operates currency price deltas for online services which differ to on-premises
- Has chosen to alter prices as exchange rates have seen it’s receipts in USD reduced
The first point reflects Microsoft use of pricing levers to incentivise cloud adoption in Europe. Moreover, Microsoft may be seeing more progress in European cloud services uptake than previously, and choose to establish USD price deltas more in keeping with on-premises pricing. Thus cloud subscription price increases outweigh on-premises. Consider also, flow through from USD price oriented hardware Microsoft acquires to run its datacenters and other imported costs that impacting Microsoft cloud services P&L.
Reference the second point, in recent years Euro, Norwegian Krone, Japanese Yen, Australian and Canadian Dollars Office 365 prices have all increased as exchange rates shifted, whilst sterling has not been subject to a currency based increase since July 2012. Actually, that last UK increase was somewhat offset in Office 365 terms by the price cut of 20% globally in March 2012.
The Asymmetric Act of Re-balancing
It goes without saying that Microsoft report results in USD, so I won’t dwell on the basic justification following devaluation. What is perhaps less widely understood is the European currency context.
Following Brexit, sterling devaluation creates a much more significant delta to prices in Euro than that which our March research note identified. A 13% increase on premises now puts sterling prices within a single percent of on par with Euro pricing, although at a notable premium to USD prices.
During a session at our ITAM summits in September I referenced currency price impacts as one of a number of influences on future price increases for SaaS clients – on that note clients already committed to and dependent on Office 365 with upcoming renewals are likely the most exposed.
The 22% cloud increase shifts Sterling prices from a significant advantage to Euro pricing to circa 5% above Euro parity. Notably pre the Brexit devaluation Sterling prices were some 5% below Euro prices – one might conclude that Microsoft are comfortable with a plus/minus 5% European market scenario.
Microsoft’s timing of the announcement and calculation is intriguing. Exchange rates can be highly volatile, and may now be particularly so given the announcement the High Court ruling that UK parliamentary approval of brexit terms (and subsequent appeal) plus the imminent US election. Any point in time calculation may be subject to change. My calculations were based on rates prevailing today – November 7th.
UK DCs offset price increase negativity?
Having put in place a number of additional European datacenters, including UK facilities, a key data sovereignty and potential performance objection has been addressed, which may lead to greater cloud adoption locally and success for Microsoft in meeting cloud revenue objectives. It is of course unfortunate for organizations looking to commit to the new UK datacentre, which only recently went online, that price increases are now being introduced. Some Azure clients may be subject to additional price increases as Microsoft alters its volume discounting / pricing approach for Azure services.
The key question for clients is – What ought we do now?
Ahead of the July 2012 price increase a wave of business was brought forward and prices locked in. It may be tempting to do the same now in advance of December 31st.
Clients should consider the value of purchasing in sterling currently, particularly given cloud prices are lower than even USD equivalents. However be wary of bringing forward requirements too aggressively, as shelfware and unused subscriptions particularly may offset or outweigh any gain achieved (Gartner clients should see Cost Optimization — Save Money on Office Licensing If Benefits of Office 365 Can Wait).
Other considerations include continuing to acquire / renew as scheduled but in alternative currencies which may offer better value (subject to appropriate due diligence), and investigating plan B / exit scenarios should the cost increase be beyond budget tolerance.
Overall, organizations licensed perpetually on-premises with options to not renew maintenance thus avoiding a 13% increase are dramatically less exposed than organizations committed to subscriptions and a 22% increase, and highlight risks of using short term subscription pricing models with limited price protection.