Microsoft Corporation (NASDAQ:MSFT) is ending support for Windows Server 2003 in July 2015, so will that drive a major server upgrade? Bernstein analysts don’t think so, but they do think it will drive an increase in recurring revenue, which is exactly what Microsoft wants anyway.

In a report dated Oct. 3, 2014, analysts Mark Moerdler and Zhe Shen said they think IT departments have already been replacing their Windows Server 2003 units for the last three or four years. They say this is why there will probably be limited revenue upside from Microsoft Corporation’s server segment.

Microsoft Corporation: Server Upgrade Cycle May Spur Subscriptions

Microsoft Corporation -Possibilities for IT departments

The Bernstein team sees four possible options for IT departments regarding possible upgrades as support for Windows Server 2003 winds down. They could switch to UNIX, but they think this option is very unlikely because of historical data.

Of course they could also just upgrade to Microsoft’s newer Windows server. That generates one-time license revenue and, in their view, possibly incremental Software Assurance revenue.

They could also move over to infrastructure as a service, which again could create one-time license revenue for Microsoft or possible regular subscription revenue, depending on how Microsoft structures the agreements.

Fourth, IT departments could platform as a service, which is Microsoft Corporation (NASDAQ:MSFT)’s Azure product. Of course this option brings the greatest upside for the company because it generates regular subscription revenue.

Why subscriptions are best for Microsoft Corporation

The Bernstein analysts estimate that subscriptions get Microsoft about 70% to 85% revenue than all of the other possibilities. They believe it’s about $2,592 per server over five years if customers move to Azure. If IT departments buy the Windows R2 Server and half of them buy maintenance plans, they estimate that the number shrinks to $1,404 in revenue per server over five years.

If they move to infrastructure as a service buy have a Windows Server license, they estimate about $1,945 revenue per server over five years. This assumes they are moving to Microsoft’s product from other vendors. If customers move to infrastructure as a service and rent the Windows Server license, then they estimate about $2,333 revenue per server over five years. This assumes a 10% bulk purchase discount purchase for infrastructure as a service vendor and the vendor then renting the license to customers.

Moerdler and Zhe Shen have an Outperform rating and $56 per share price target on Microsoft Corporation (NASDAQ:MSFT).