The next wave of software licensing

SAN FRANCISCO: Users are fed up with the way vendors sell them software. How upset are they? A recent survey by software management provider, Macrovision, found that only 28 per cent of enterprises were satisfied with their vendor's pricing and licensing strategy.

That means the door is open to a number of alternative, emerging models, notably subscription and per-use schemes. Meanwhile, changes in where and how software runs - including softwareas- a-service (SaaS), virtualisation, and multicore processors - are accelerating the rate of change. Take SaaS, for example. It typically has a per-seat, per-month scheme that averts the up-front costs incurred by conventional licensing. That low cost of entry - reduced even further by the lack of hardware and installation costs - is clearly a key reason why, according to a recent Aberdeen Group study, more than half of companies surveyed were either using SaaS or actively exploring its use.

Other areas, such as virtualisation, have yet to arrive at a consistent licensing model. The main purpose of virtualisation is to run multiple sessions - and/or multiple operating systems - on one machine to vastly increase server utilisation. But most of that advantage could be blown if traditional per-machine or per-processor licensing were applied, which is why both vendors and users are struggling to find a sensible answer.

Adding to the complexity is that big customers are enjoying the fruits of new licensing models favourable to them before anyone else. Many vendors are dragging their feet in introducing such schemes to the wider world for fear of disrupting predictable licensing revenue streams, which themselves have been shaken by a tough enterprise software market.

UTILITY PRICING "Software companies can't afford to change their licensing models too quickly for fear of them affecting revenues," Gartner research vice-president, Alvin Park, said. "They know they'll eventually have to go to utility pricing, but they don't want to cannibalise revenues from other models."

But change they must if they want to retain their increasingly cranky customers.

Enterprises are under the gun to improve productivity as IT budgets shrink, and that means they need to cut costs or squeeze more out of their IT dollars. These emerging models, even with some details still to be worked out, offer an opportunity to do just that. The Macrovision study gave a clear idea of the way users' licensing choices are going. About 7 per cent fewer enterprises than the previous year said the expensive perpetual license was their preferred choice, whereas the same number opted for getting more of their software through monthly, yearly, or term subscriptions.

It also showed that vendors are listening. Some 40 per cent of those surveyed said they were offering subscription models in 2005, up from 33 per cent in 2004, and fully 60 per cent expect to be doing so in 2007.

A fast-growing international supplier of video game peripherals, Mad Catz, went the SaaS route when it needed to rollout a new helpdesk system. After analysing what that would have taken to do internally, it eventually decided to go with Servicenow. com, a three-year-old on-demand provider.

BOXED UP The company has only a small IT department, CIO, Larry Herrmann said, and experience from previous service desk implementations showed it could have taken the company as long as a year to get the system where it needed to be by itself. Herrmann said Mad Catz needed something that would work right out of the box.

The Service-now.com hook-up was an education in other ways. "Licensing software this way brings out the difference when other organisations change their licenses, which they tend to do on a regular basis," Herrmann said. "We're going through that with Adobe now. It shows us there is a simpler way to license software, because this [subscription] model obviously works."

The desire to solve a business problem, as Mad Catz did, is the reason many companies are now using SaaS, Aberdeen's vice-president of enterprise research, Beth Enslow, said. Cost is generally a secondary consideration, she said, but most who use the on-demand services would find they did save once they calculated the fully loaded cost including license maintenance and other IT costs related to software and infrastructure upkeep. If a customer is diligent in tying down the details of the license from the start, then the price of the subscription should be the least concern.

LEGITIMATE CONCERN "Our customers very quickly try to understand what's involved in the typical 36-month contract," Servicenow.com CEO, Fred Luddy, said. "For example, they want to know that the price won't go from $US70 a month to something like $US1000 after the first term expires. And that's a legitimate concern, since they've built a business around our service." Service-now.com puts a guaranteed cap on any option year price rises into the initial contract, he said.

Multicore processors will certainly be as disruptive to software licensing as SaaS, although it will probably take longer to have an effect.

Dual-core processors are standard for new servers after chipmakers Intel and AMD started selling them last year. Both companies expect to introduce quad-core processors soon, Intel later this year and AMD in early 2007. Market researcher, IDC, expects enterprise hardware infrastructure could be as much as 50 per cent dual-core by 2008.

Vendor concerns are that these new processors will cut into their revenue because they can do substantially more with the software they run than single-core processors. User concerns are the

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