News

Alternative software licensing models gain traction

• By John K. Waters
• October 25, 2004

The perpetual software license is slipping as subscription and utility models gain market traction among both software makers and their customers, according to a new industry survey released last week.

The survey results were published in a report sponsored by Macrovision Corporation, a Santa Clara, Calif.-based digital rights management and software licensing company; the Software & Information Industry Association; and the Centralized Electronic Licensing User Group. The report, "Key Trends in Software Pricing and Licensing," concluded that software vendors and customers are "aggressively adopting new software pricing and licensing models.

The survey of approximately 500 software industry executives and their corporate customers was conducted in September. Its authors found that, although 64% of enterprise customers prefer the perpetual licensing model, one in three vendors is offering subscription-based alternatives as its primary pricing model. Half of all respondents from the software industry expect to be offering subscriptions by 2006.

These statistics "could be a reflection of current market norms," the report authors write, in which "67 percent of software is sold on a perpetual license… [T]his discrepancy between software vendors and their customers means that there could be an expectation gap between vendors and their customers in the future."

The report found that the most prevalent pricing models in use today are per-concurrent-user and per-seat models, but new pricing models based on metrics are rapidly gaining in popularity. Roughly half of all survey respondents expect by 2006 to offer pricing based on such metrics as number of uses, transactions, or time used.

The chief value of the new licensing models to both vendors and customers stems from their tendency to require greater collaboration between the two, said Erik Larson, director of product management at Macromedia. "Subscriptions in general, and utility models in particular, will bring product development and customer needs closer together because vendors will get paid for use," Larson said.

Larson served on a panel of industry experts gathered last week at the annual SoftSummit conference in Santa Clara, Calif., hosted and sponsored by Macrovision. The consensus among the panelists was that, although traditional licenses may be losing ground, they will be with us for the near future and are unlikely to fade away completely.

Small vendors striving for competitive advantage are leading the trend toward alternative licensing schemes, said panelist Jason Maynard, a software analyst at Merrill Lynch, while large vendors, which tend to be addicted to selling cycles that revolve around big deals, will be slower to change.

"If you look at some of the large vendors, this is still an industry hooked on the crack of the upfront licensing model," Maynard said. "The notion of the software business model is broken."

For the bigger software vendors, utility pricing poses a real threat to the bottom line, Maynard said. He pointed to "upstart" Salesforce.com, which has built its business entirely on alternative pricing, as the kind of company that can afford to offer new licensing schemes.

"I don't think you're going to see the big vendors change out of inspiration," he said. "This is going to be a slow transition that happens as customers demand this."

Enterprise customers haven’t exactly been demanding pay-as-you go licenses, said David Rowley, VP of business development at Macrovision. Many are uncomfortable with the idea because of concerns about security and application usage metering techniques. The situation is similar, he said, to telling your mobile phone company "you can keep track of my minutes but not whom I'm calling."

Subscription models are unlikely to replace perpetual licenses altogether, Rowley said, but will add to the number of licensing options customers will demand from vendors. "What we'll see over time is different market segments gravitate to different models," Rowley said.

In many cases, customers seem to feel that they just don’t know what they’re getting into with alternative licensing models, said Dan Griffith, software asset manager at Motorola's Freescale Semiconductor subsidiary. What’s missing is the software equivalent of an electricity meter to monitor usage. "As the utility model moves forward, somebody needs to make a meter the customer accepts and the vendor accepts," he said.

"When you go in and lease a car, the contract says so many cents per mile, and people have a pretty good idea of how much they're going to drive in a year," Rowley added. "Software isn't necessarily like that."

Software vendors are also moving away from non-technical, manual forms of licensing enforcement and toward electronic, digital, and Internet-based processes, the Macrovision report concluded. Today, 46% of software providers are enforcing licensing primarily through electronic means; the report’s authors expect that to grow to 62% over the next two years.

"It's clear from this study that the software industry is in the midst of a period of dramatic, fundamental change," Ken Wasch, president of the SIIA, said in a statement. "We believe the emergence of new business models and technologies will deliver tremendous benefits to both software providers and buyers, as well as play a vital role in maintaining a healthy and vibrant industry for years to come."

Subscription pricing puts the spotlight on software maintenance, which is a major, ongoing concern among enterprise customers, and a key source of recurring revenue for vendors, IDC analyst Amy Konary said during a conference presentation. Some vendors are hoping to smooth the transition to new licensing models with maintenance plans, which customers tend to see as logistical substitutes for new licenses and costly upgrades, she said. Konary predicted that maintenance revenue, which accounts for 41% of all software industry revenue, will make up about half of all software sales by 2008.

"It's becoming harder and harder to make money as a software provider today," Konary said.

(A free copy of the Macrovision report is available for download at www.softsummit.com/surveyresult.)