Analysis The Israeli government's decision to suspend Microsoft purchases will be old news to Register readers - we broke the story back in October.

But it's the subsequent developments of sweet Thai deals, first reported by YNet, that have implications far beyond the Middle East. Procurement departments in EMEA and the Americas will be watching developments with keen interest.

Two factors contributed to the Israeli moves. The Finance Ministry plays a key strategic role, and was responsible for signing a general license agreement with Microsoft. That agreement expires today. Faced with an economic depression, Israeli government departments are looking to implement IT budget cuts of 25 per cent: OpenOffice 1.1 now looks a viable alternative.

(It's more of a de facto, rather than an explicit shut-out. Departments can still negotiate their own arrangements, and US aid ensures that some licensees are Microsoft-keen, particularly in the military.)

Microsoft scorned the Treasury's decision back in November, comparing OpenOffice functionality to Word 97. But feature saturation appears to have done little to persuade the ministry that OpenOffice is a bad deal. In short, it's lower prices, not more features, that the users need.

Israel, we understand, has become the first EMEA country to ask Microsoft for Thai-style discounts. Faced with low-cost illicit versions of its software, Microsoft dropped the $600 list price to just $37 in the Royal Kingdom. Will Microsoft bend? And will other countries follow suit?

Microsoft can certainly afford to. Redmond's $6 billion a year Office team coasts along on profit margins of 69 per cent. (A fitter, leaner Microsoft that could shake off the paralysis of its 'meetings culture' could boast an even higher margin). Israeli departments has secured a discount over list price ranging from $130 a desk for basic Windows/Office to $186, but are refusing to pay more than the Thai price. Microsoft insists that the Thai deal was strictly a one-off.

There's no doubt that Microsoft, amongst others, finds itself under margin pressure. Sun Microsystems has revamped its software pricing, vowing to turn the $20 billion global software market into a $3 billion market. Sun prices its confusingly-named Java Desktop System, a Linux PC client, at $100 per seat, or $150 in a combined package with the Java Enterprise System which includes the server software (messaging, clustering, grid, etc) too.

But not all public sector procurement departments seem to have realized what power they have. Despite Whitehall's decision to trial Linux/OpenOffice with as many as 500,000 desktops as the prize, the UK education sector recently signed a 'Memorandum of Understanding' that boasted of "spending between 20 and 37 per cent less than might have been expected". Which doesn't sound like such a great deal.

With OpenOffice and Linux bringing serious competition back to the desktop for the first time in almost a decade, Microsoft's prices have only one way to go: down. Redmond's decision to pursue other revenue sources - patents - is as the Free Software Foundation's counsel Eben Moglen said here simply the start of Plan B: "Microsoft executives are aware they have crossed a maturity threshold - they can't grow as quickly as they have before; and even blockbluster products won't change this dramatically," he observed.

So how far, and how fast? ®

Microsoft in Israel

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