Licensing: users feel forced to pay up

As if the downturn wasn't enough, IT executives say they are feeling the squeeze from major software vendors instituting licensing changes that create unwarranted financial burdens. Worse yet, these customers often see no choice but to pay up.

During the past two weeks, Oracle has come under fire from clients and industry analysts about licensing issues that could jack up costs for database users. Microsoft and IBM have also introduced licensing changes over the past year that customers criticise, saying the plans increase costs and force upgrades, and require the purchase of support and services they don't want or need.

"Vendors are herding users in the direction they want them to go instead of letting us go at our own pace," says Barry McGrady, manager of global technical services for Imerys, a mineral processing company. "I don't like being herded."

McGrady took a stand that he knows may cost him later. Instead of spending "six figures" to convert to Microsoft's new Software Assurance licensing model, which requires users to pay for the latest software whether they use it or not, McGrady decided not to upgrade his Office 97.

"It means I'll have to pay more and buy all new licences down the road," if and when his company upgrades Office, he says.

Critics of the licensing changes characterise them as part of a general move by financially strapped vendors to create a recurring revenue stream. They also say the move is the start of efforts to figure out how to license software for forthcoming Web services. Vendors have seen current revenue models pinched as customers delay upgrades and ignore upgraded software that adds only bells and whistles.

But not every user is feeling that pressure. Carl Mercer, a research engineer for a telco, says the Oracle 9.x licensing changes have lowered his costs 41 per cent. He notes that the changes benefit customers on high-end scalable processor architecture (Sparc) implementations and hurt those on Intel, but adds: "I do not believe Oracle has attempted to hit existing customers or existing products for additional money."

Oracle says its latest issue is over conflicting interpretations of a licensing clause. Microsoft and IBM, while acknowledging that some customers will experience higher costs, say many will see lower costs, better support and services and simplified licensing contracts.

Microsoft's new licensing model, which begins at the end of July, requires users to be licensed for current versions of software or pay full price for new licences when they upgrade. Microsoft has delayed the start of the program twice because of hostile reaction.

Imery's McGrady says he thought about dumping Office altogether, but that's a decision he and others can't make because the products are so ingrained in their networks.

"What do you change to?" asked a licensing manager for a large company in the restaurant industry that relies on Oracle databases. "Once you're in, you're hooked. For us it is an infrastructure decision. It's like a mainframe."

Two years ago, the licensing manager gave in to Oracle and switched from named-user pricing to per-processor pricing, the same type of switch some users allege Oracle is again trying to push on customers.

"It was damn close to an eight-figure decision," says the licensing manager. "But the vendors have it figured out. You get something that works, and they know what it took for you to get to that platform. And they know you don't want to change."

Some say the licensing and pricing is returning to the mainframe days.

"My Microsoft SQL Server enterprise edition with Software Assurance is $US20,000 for one processor," says Pam Peschel, business support specialist for Denver Water in the US. "For a quad, that's $80,000; does that sound like mainframe pricing?"

However, that attitude may define the times.

"No one should be surprised that all these vendors are trying to create recurring revenue streams because product life cycles are increasing," says Laura DiDio, a principal with Information Technology Intelligence. DiDio says software development five years ago was revolutionary. But today, software is evolutionary in that advancements are mostly feature enhancements that lead companies to question the value of upgrades, she says.

"It will take a group effort to stand up and change these software and licensing issues," she says. "We need big banks and companies like Gartner to stand up to the vendors. The little companies can't do it, so they are forced to comply.

Commenting on customers' plans to find alternatives to Microsoft products, Gartner analyst John Enck said: "There is a lot of discontent over licensing, and users are looking to pick some places where they don't have to deploy Microsoft. He says the alternatives include standards-based Internet messaging systems that could also solve the virus issues plaguing Outlook; operating systems from Novell or Linux; and public-domain software such as Apache Web servers.

Controlling software maintenance costs is a big concern for CIOs like Ed Binney of research firm Ideas International. Binney explains: "It's much easier to save on costs than it is to generate higher revenues, and any costs you save go straight to the bottom line."

"Higher licence maintenance costs that are non-discretionary force businesses to look for savings elsewhere as they strive for continuous productivity gains."

The move forces users to consider the benefit they may get from upgrades, against the savings from waiting more than two years and buying the latest version outright, he said. Microsoft's new licensing model is moving upwards from historic software support and maintenance costs - ranging between 15 and 25 per cent of the original licence purchase price, and for some products, Microsoft's maintenance model approaching 50 per cent.

Consequently, Ideas will retain all existing licences for Microsoft products and refresh them at a time that "suits its work program", rather than pay excessive maintenance costs, Binney said. "We'll evaluate all other Microsoft products case by case. For example, the licensing rights to some products expire if you do not pay a yearly maintenance subscription," he said.

Starbucks Australia IT manager Aram Dayeian argues it is not necessary to upgrade general "keep the lights on" software for the desktop or network unless this is of real value to a business. "It's the business objective - and for us it's selling coffee to our customers - that drives the business, not IT," he says, adding: "We're still on NT4.0 and don't plan to move to Windows 2000 probably until next year because we want to [be sure] of the actual benefits of upgrading."

However, overall Dayeian feels it is easy for Microsoft to "bully" customers running Microsoft houses because their desktop and clerical software products were often mission-critical.

"You sort of have to roll with the punches," he says.

"As a Microsoft global customer we've rolled out Office to our operations worldwide, standardising on Outlook. And because our licensing arrangement is global, there could be a huge [financial] impact across the business under the vendor's licensing changes." Dayeian added there was little other choice in productivity software products to match the breadth of Microsoft's Office suite. "Microsoft really has a monopoly in that space."

IBM's program, launched late last year, combines maintenance and support into one package, which users say forces them to buy things they don't need. An IT executive for a mid-sized hospital told US Network World that the licensing change increased his yearly costs by $US50,000. He called the increase "outrageous", adding, "I don't know who came up with this, but they are only thinking of IBM's profits."

That issue of more product lifecycles is reflected in the bottom line for vendors. Oracle's revenue from its database business has been down every quarter over the past year. Microsoft, which once derived more than 50 per cent of its revenue from Office, has seen that percentage shrink into the 30s.

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