Software giant Microsoft is poised to change its global OEM product billing model on April 1st 2006 in the wake of a distributor audit that revealed discrepancies in the amount of product purchased from replicators and the amount of royalties paid to the vendor. The move has once again raised concerns about Microsoft’s Middle East channel engagement strategy in recent years.
Distributors will now be required to pay the royalty to Microsoft at the point when they purchase from the replicator, not from the point when the sell-out occurs to a reseller or system builder. Middle East distributors that were subject to the audit have also been asked to pay a fee to cover any discrepancies that were revealed. Microsoft’s move to change its model has not been universally welcomed by distributors in the region.
Nicholas Argyrides, assistant general manager at distributor Logicom, explained the situation: “When you sign a distribution contract with Microsoft, if they audit you and they find a specific amount of discrepancy between the stocks that you have and the sales that you have registered, there is a fee that you have to pay. I believe Logicom had one of the smallest discrepancies compared to other distributors. The amount is worked out using a formula.”
“In OEM deals, the distributor buys the CDs from the replicator — a company that Microsoft has authorised to produce the CDs at a manufacturing plant. We buy the CDs for a few dollars each and then sell them on. When the CD was sold on it was reported to Microsoft and the royalty was paid. From next year, when you buy the CD from the replicator you will pay the royalty to Microsoft at the same time,” he added.
Zaid Abununwar, SMS&P group director at Microsoft Gulf, confirmed the changes in the billing model: “From April 1st 2006 it will change on a worldwide basis so that when distributors order CDs from replicators they are invoiced straight away — although there will still be a credit period in place for them from that point.”
“What we found for Microsoft worldwide, based on the audits, was that distributors do not necessarily report all the royalties they owe to Microsoft,” he added. “This can leave the distributors that do report accurately at a disadvantage in the market. The audit found that some distributors had been under-reporting and under-paying Microsoft royalties. This may have been an innocent mistake due to the complexities of the system.”
“Where there is a discrepancy, these things are looked at in great detail. Sometimes the distributor will agree and pay up there and then. At other times we have to go into deeper discussions to understand how the discrepancies occurred. If it is a simple case of under-reporting, the distributor must pay the balance,” Abunuwar added.
In the Middle East, some distributors have been quick to condemn Microsoft’s heavy-handed tactics with its distribution partners, claiming that any discrepancies that the audit revealed were simply the result of channel policies condoned and encouraged by Microsoft’s regional channel team at the time.
“Microsoft is now saying its own local staff did not have the authorisation to do some of the programmes they were doing,” fumed Adnan Al-Falah, managing director at Tech Data Middle East. “Their own staff. We have e-mails and documentary evidence from Microsoft about these programmes. They were saying you can go out and do these offers and programmes that have created the discrepancies.”
“Microsoft has no intimacy with its channel in this region and no real understanding. There is no real desire to help channel profitability. The distribution channel is bleeding and Microsoft is making us pay a bill for things that happened years ago. Microsoft is coming back and accusing the channel even though they acknowledge that they have got rid of the bad apples within Microsoft that were driving this sort of channel practice,” Al-Falah added.
“I genuinely believe that Microsoft is abdicating its own moral responsibilities here. You can’t go out to distributors and say to them that they should not have taken the local staff’s word on programmes and instead should have referred to the contract,” he continued.
Abunuwar contends that distributors should always refer to the written contract, claiming that Microsoft is constantly looking to evolve its channel strategy and is being encouraged by partners to introduce tight policies.
“If Microsoft deals with a distributor, that relationship needs to be based on the contracts that are signed and not any other agreements on the side,” he said. “Distributors need to make sure they are following the terms set down in the contract. As SMS&P director I need to ensure that distributors are happy, profitable and enjoy doing business with Microsoft and I need to ensure that resellers have access to local stock.”
“I encourage any distributor or reseller that has an issue with Microsoft channel policies to call me. My mobile number is (+971) 50 455 8038. They should call me — during working hours of course,” concluded Abunuwar.
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