Users resent software pricing complexity

Software pricing is too complex and too costly and has created a growing tide of resentment among end users who favour a flat annual fee over per-processor pricing models.

User groups and analysts agree pricing needs to be simplified to create more predictable cost streams.

Bruce McCabe, managing director of research firm S2 Intelligence, said any steps vendors take towards a predictable annuity model has value.

"If you're buying a major software installation and you go to tender for it, it becomes extremely difficult to negotiate anything if pricing schemes are complicated. This is also causing lot of resentment among customers," he said.

McCabe sees growing interest by Australian enterprises in the utility or grid computing model in which applications are shifted around a network to where computing resources are available.

But in order for that model to gain traction in the enterprise, vendors must make software licensing cheaper and simpler, because it is an upfront cost which companies want to incur only once a year and be done with, McCabe said.

He believes vendors have been "too greedy" about the initial price of [annuity-based] licensing, saying Microsoft's 6.0 scheme is a case in point.

"Frankly, the larger vendors have found it too hard to cope with that sort of [competition] in the market, so their initial price for software licensing has been too high," he said.

IDC analyst Albert Pang suggests CPU-based licensing is likely to hold sway for another three years, because it has limitations and also because vendors are reluctant to switch to a model that may require them to monitor more closely the way customers are using their software.

"There's clearly a resistance from vendors like PeopleSoft and SAP, but it's just a matter of time for subscription pricing or a system less reliant on CPU-based pricing to take hold," Pang said.

Other analysts have also predicted the demise of per-processor pricing. Chip makers like Sun Microsystems and IBM are developing chips with multiple processor cores, making it harder to define what constitutes one processor. The grid computing model adds to the complexity.

IBM's Interaction Australiasia User Group president Michael Sumner believes a change in software licensing is long overdue.

"Some customers prefer to be on CPU-based licensing, but I want to move away from it," he said.

"I'm a cynical old git but processor-based licensing is a tremendous headache for users. And vendors aren't overly interested in the customer. They [introduce] a licensing scheme then force customers into unfortunate arrangements," Sumner said adding that Oracle and Microsoft are in that camp.

Sumner also complained of having performance and cost problems with a HP system running Oracle software, explaining: "I wanted the ability to attach as many users onto it without incurring a huge cost. That became my biggest concern. I was hobbled. I had no flexibility to move from this model without it costing me. It wasn't worth it."

Meanwhile, he said, software houses are only going to be "as responsive as they can be" to what customers want. "Vendors are not going to be in business if it doesn't make commercial sense to them."

Andrew Hennell, System Administrators Guild of Australia's (SAGE-AU) president, argued the per-processor licensing model is "counter-productive" for mid-sized enterprises.

"Often a smaller company may purchase a multiprocessor machine based on application speed and 'future proofing' rather than on true organisational size requirements. The hardware is within its budget and is the best solution for a [business] need, but the software fees negate the hardware performance," he said.

"I know of 70-seat sites using single processor machines and 20 seats using quads. The smaller site pays a higher software fee on a per-processor model."

A flat, annual fee model was also a catch-22 for smaller-sized companies, Hennell said. "This model can skew against smaller players in favour of larger companies. If a software fee of say $10,000 was applied to a 100-person organisation, the smaller site would again be penalised in comparison to the larger."

The fairest licensing model for all sizes of business is an "affordable per-seat" model, he believes. But by adopting this model, companies were stuck with the difficulty of "reporting, monitoring and collecting fees from software usage". And sites were not always completely honest about their usage.

Hard to count processors and users

Oracle's chief executive officer Larry Ellison said recently the per-processor model for software licensing should be replaced with a flat, annual fee that allows businesses to use as much software as they want.

"It becomes very hard to count processors and to count users," Ellison said, responding to a question on the future of software pricing at the OracleWorld conference earlier this month. "Where we'll go is towards enterprise licensing. You pay an annual recurring fee and use as much software as you want. That's a much more sensible model to use."

A few of Oracle's large customers already pay for their software in this way, according to Ellison, but he didn't say whether Oracle might adopt such a system more widely in the near future.

IBM's Interaction Australiasia User Group president Michael Sumner shot down Ellison's proposal, saying it lacked flexibility.

"On the surface it would appear that I, the customer, HAVE to buy all of the Oracle Enterprise software suite just to use one piece. The question on customers' minds will surely be: 'Why can't I just buy what I need, when I need it?'

"The flexibility question will come into play when Oracle and other software vendors give customers all the software they need and the customer activates it when they need it. Much along the same lines as IBM and HP do with their capacity upgrade on-demand - shipping a system fully populated with CPUs but only half of them are activated. You activate the others when you need them and send a cheque to IBM or HP."

Sumner said customers would react cynically to Ellison's suggestion. "Thanks a lot for nothing Oracle," he said. "[They're] just throwing the issue into the 'too hard' basket and making customers buy all the software and let them sort out the complexity around grid, utility and on-demand computing for themselves".

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