Why software licensing could become more affordable, easier to understand

Trends toward user roles, clearer pricing could help the customer, Forrester report says

The price of software licentsing, and the complexity of licensing agreements themselves, could become more customer-friendly if some trends take hold, according to an April Forrester Research report.

The old traditional software licensing models aren't showing value for organizations, according to Forrester's "Software Pricing and Licensing Trends 2011." The report is aimed at CIOs and software vendor managers who must deal with the sometimes twisted world of software licensing. It offers intellectual self-defense and a call to arms to push the software industry toward more meaningful, or "customer friendly," licensing and pricing.

In the current model, a software vendor ties its product licensing to hardware, such as the number of processors in a machine or per CPU. It also may use its licensing model to deter virtualization. As organizations scale operations and use hardware with multiple cores, the cost calculations become ever more complex, and even bizarre, such as when software vendors base the licensing on the type or brand of equipment used.

These software licensing approaches arose from need of the software vendors to justify consistent annual returns to financial analysts, the report explains. Traditional models do generate those revenues, but they just alienate software buyers. The top business goal of CIOs is to reduce organizational costs, according a 2009 Forrester survey of companies in North America and Europe. However, organizations may have little control over the hardware infrastructure that in turn ratchets up software costs via licensing agreements, making cost control difficult.

The only case where tying software to hardware makes sense is with operating systems, according to the report.

Two pricing trends could start to change this scenario over the next three years. One trend is pricing software based on user roles. Microsoft currently offers this option in some of its enterprise agreements and will offer it with its Office 365 hosted solutions, the report explains. However, going that route may conflict with other licensing options that Microsoft's customers may prefer. Another trend, typified only by SAP's efforts, according to the report, is clear communication of software pricing. The complexities of many software licensing agreements tend to put buyers in tenuous positions.

"Software companies have been trying to shore up the crumbling edifice by issuing ever more complex policy guidelines that 'reinterpret' the language -- in effect unilaterally changing the contract to their own advantage," the report states.

The foil for those two positive pricing trends is typified by IBM and Oracle, which have strong product lines to protect their per-core software pricing models. The report suggests that greater flexibility in software maintenance programs is needed across the software vendor industry, but such reforms may be particularly costly for vendors such as IBM and Oracle. Software vendors make money compelling their customers to pay maintenance fees on "shelfware," or software that's licensed but not used, and any reforms there could cost IBM and Oracle "hundreds of millions of dollars," according to the report.

Traditional software licensing and pricing models are mostly being pushed today by cloud-based service offerings. The report identifies four alternative models to consider, listing the advantages and disadvantages. Those alternative models include software-as-a-service offerings (Salesforce, Netsuite, Ariba and SuccessFactors), pay-as-you-go models (Amazon EC2), "freemium" (Gmail, LinkedIn, Salesforce Chatter and Tripit), open source (Ingres, Red Hat, Oracle and IBM) and advertising funded (Spiceworks).

Reader Comments

Wed, Apr 27, 2011 John Lipsey Los Angeles, CA

We agree that software pricing models are in the throes of significant change. Last year Flexera Software conducted our sixth annual Software Licensing and Pricing survey assessing key issues and trends on the minds of software vendors, high-tech manufacturers, and enterprise IT executives and managers. The survey of 234 participants, prepared jointly with IDC, found that software vendors and their enterprise customers are looking for better strategies to derive more value for their organizations through software licensing and pricing. Some interesting findings of the survey include: • The overwhelming majority of enterprises (59%) prefer concurrent user (floating/network) licensing. However, the demand for usage-based pricing models is growing significantly – 16% (up from 11% last year). • While we saw fewer producers offering seat (named-user) (28%) and financial metric (revenue, cost, royalty) (5%) pricing models in 2010, on the whole, variety increased, with the largest growth in seat (per machine/server) (65%) and concurrent user (63%) licensing models. Producers, clearly responding to growing enterprise demand saw usage-based software licensing increase to 22% -- up from 15 percent last year. Gains were also seen in processor core pricing models. Over the coming two years, 41% of producer’s expect to offer some sort of usage-based pricing. • 39% of producers have indicated that they have changed their pricing and licensing policies over the past two years to make them more flexible. Overwhelmingly, the two reasons for this shift have been to generate more revenue (54%) and improve customer relations (50%). • Both enterprises and producers are largely satisfied with current pricing models, however. The survey asked enterprises to rate their satisfaction of pricing for database, middleware, ERP, CRM, engineering and desktop applications. Most respondents indicated they were anywhere from neutral to highly satisfied. They were most satisfied with database software pricing -- with only 10% of respondents registering dissatisfaction; they were least satisfied with ERP software pricing, but not by a significantly higher amount -- only 20% registered dissatisfaction. If interested, readers can access the full report at the following link: http://mktg.flexerasoftware.com/mk/get/softsummit-software-trends-survey-2010?utm_source=www&utm_medium=pr&utm_campaign=2010%2Bsurvey

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