Gartner predicts lower software licenses ahead

Pressure on traditional vendors from BPO and SaaS cited as major contributors to the anticipated decline in licensing starting in 2008

Gartner Research, a key analyst company for the high-tech industry, took a look into its crystal ball and announced late last week that it sees wide changes in IT having a major impact on software licensing and the software market in general.

Gartner analyst William Snyder says price reductions are already happening in the cases of renewals between enterprise ISVs and its "most prized customers with the most sophisticated negotiators," according Snyder.

The Gartner report cites seven key trends that will pressure vendors to keep prices stable or lower prices in the face of new competition.

The increased use of BPO (business process outsourcing) is expected to double by 2011, and many of those providers do not use the traditional ERP applications from the major vendors.

The report states that this will reduce the overall market opportunity for software vendors. At the same time, the big BPO providers are gaining a strong hold in the marketplace that will enable them to strike better deals with the vendors.

The increased use of SaaS (software as a service) has been widely written about as possible major contributor to more competitive pricing models from the on premise vendors as well as forcing them to offer more flexible terms.

Both technology, the broad adoption of an SOA architecture using modular service-oriented applications, and the emergence of third-party support companies using a SaaS delivery mechanism, will also push vendors to keep pricing down.

OSS (open-source software), especially its shift in focus to services, will mean more competition and "lower margins," for the vendors, according to the report.

"Gartner predicts significant interest in OSS in areas such as server, operating systems, development tools, and database technologies ," according to the report.

Finally, the competition for a toe-hold into price sensitive Asian markets, particularly China, will force lower prices in those regions and possibly spill over to affect the global software market significantly.

However, Snyder warns that vendors will try even harder in the future to compete by "locking customers in a technology and architecture and a pricing contract with a longer term agreement," said Snyder

"When a customer is locked in, especially on the architecture side of the equation, it is harder to extricate itself. IT needs to be cognizant of these factors in order to mitigate the problem," Snyder said.

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