Impact of Microsoft taking over Enterprise Account renewals starts to 'bite'

Cutting out middle man dents coffers of larger service providers, helps Redmond offset AI investments

The sweeping changes Microsoft is making to its licensing incentives for large service providers is taking hold.

Shares in London Stock Exchange listed Bytes Technology Group (BTG) sank more than 25 percent Wednesday morning after the Microsoft reseller confirmed profits are being dented by customers delaying buying decisions in a "challenging economy" and lower financial kickbacks from Enterprise Agreement renewals.

The statement came ahead of the Annual General Meeting scheduled for later today: "Trading across the first months of the year has been impacted by a challenging macroeconomic environment, leading to some deferral of customer buying decisions, particularly in the corporate sector."

In response to Microsoft taking away an estimated one-third of Enterprise Agreements renewals from Large Service Providers (LSP), for which BTG is accredited, and transacting the business directly, resellers are starting to restructure their sales teams.

BTG said today it is shifting from a "generalist model to specialized, customer-segment-focused teams," a move it expects will help it "deliver more relevant solutions and drive sustainable services annuity income growth."

Around 50 percent of Bytes' gross profit is believed to come from Microsoft sales and it told investors today it expects gross profit for the half-year of its fiscal 2026 to be flat with the prior year and operating profits to be lower. It reported gross invoiced income of £2.1 billion ($2.88 billion) in the year ended February 28, 2025 [PDF].

"The impact of changes to Microsoft enterprise incentives is weighted more to the first half due to high levels of renewals in March and April around the public sector year end and June around Microsoft's year end," the reseller and services provider stated.

This indicates life will get tougher in the second half of the year and perhaps beyond, at least with respect to its business with Microsoft.

The LSP commission revenue - the amount Microsoft pays out for renewals of three-year Enterprise Agreement licenses - is shrinking fast. It paid out an estimated $2.5 billion to LSPs globally in 2023; $1.67 billion in 2024; is tipped to pay out $583 million this year, and nothing next.

Microsoft's estimated direct sales revenue in these corporate accounts was $833 million in 2024, is expected to be $1.92 billion in 2025 and $2.5 billion next year, according to Microsoft support biz US Cloud.

All this means the banked-on commisions that LSPs ­- including BTG - are counting on are evaporating and they'll need to make their money by diversifying beyond the traditional trade they relied on for decades as Microsoft cuts them out and deals directly with customers.

Indraneel Arampatta, analyst at Megabuyte, said of BTG that he suspects the "Microsoft partner change elements are starting to bite."

"With even more Microsoft partner model changes incoming (we have heard it's around the structure of the Solutions Designations programme) and Bytes looking just as exposed to Microsoft as it was a year ago, we suspect investors have concerns."

According to a post from Mike Jones at US Cloud, LSPs have already experienced a "seismic shift" after Microsoft "reclaimed roughly one-third of large Enterprise Agreement renewals from their LSP partners" from 2023 to 2024.

He estimates that LSPs this year and next will "lose an additional 65 percent of their EA commission revenue. By January 2026, all large Microsoft Enterprise Agreement accounts will have transitioned to Microsoft Sales Direct."

The global EA market is worth around $200 billion for three-year contract terms. With LSPs making an estimated $2.5 billion in commissions, based on a 1.25 percent commission rate. "For Microsoft, reclaiming these commissions means a 0.39 percent annual EBITDA increase — a nice boost for a company worth $3 trillion," according to Jones at US Cloud.

This comes at a time when Microsoft has lavished eye-watering sums on its generative AI, banking on customer adoption picking up sooner rather than later. Microsoft has still not split out the amount it makes on AI or adoption rates. It charges $30 extra per seat for Copilot.

Reg readers might not have much sympathy for LSPs that made margin from EA renewals, but a school of thought is that these organizations bring some expertise to the table.

"While direct relationships with Microsoft might lead to faster response times and streamlined processes, they'll lose the advisory role that LSPs traditionally played," said Jones.

"It's like losing your trusted financial advisor and being told to work directly with Wall Street — sure, you're cutting out the middleman, but you're also losing valuable guidance."

As for Bytes, CEO Sam Rudd put on a brave face this morning:

"In recent weeks, we've navigated a more challenging macro environment, compounded by the near-term effect of transforming our corporate sales team. While this has affected trading, our value proposition remains strong. We're seeing continued engagement, a healthy pipeline and remain confident that as these sales team changes bed in, we will be a stronger business, better aligned to meeting our customer needs and drive sustainable growth." ®