The next wave of software licensing

Note: This story has been corrected since its initial publication online. See end of article for details.

Users are fed up with the way vendors sell them software. How upset are they? A recent survey by software management provider Macrovision found that only 28 percent of enterprises were satisfied with their vendor’s pricing and licensing strategy.

That means the door is open to a number of alternative, emerging models, notably subscription and per-use schemes. Meanwhile, changes in where and how software runs -- including SaaS (software as a service), virtualization, and multicore processors -- are accelerating the rate of change.

Take SaaS, for example. Typically, SaaS has a per-seat, per-month scheme that averts the up-front costs incurred by conventional licensing. That low cost of entry -- reduced even further by the lack of hardware and installation costs -- is clearly a key reason why, according to a recent Aberdeen Group study, more than half of companies surveyed were either using SaaS or actively exploring its use.

Other areas, such as virtualization, have yet to arrive at a consistent licensing model. The main purpose of virtualization is to run multiple sessions -- and/or multiple operating systems -- on one machine to vastly increase server utilization. But most of that advantage could be blown if traditional per-machine or per-processor licensing were applied, which is why both vendors and users are struggling to find a sensible answer.

Adding to the complexity is that big customers are enjoying the fruits of new licensing models favorable to them before anyone else. Many vendors are dragging their feet in introducing such schemes to the wider world for fear of disrupting predictable licensing revenue streams, which themselves have been shaken by a tough enterprise software market.

Click for larger view.

“Software companies can’t afford to change their licensing models too quickly for fear of them affecting revenues,” says Alvin Park, research vice president at Gartner Research. “They know they’ll eventually have to go to utility pricing, but they don’t want to cannibalize revenues from other models.”

But change they must if they want to retain their increasingly cranky customers.

Enterprises are under the gun to improve productivity as IT budgets shrink, and that means they need to cut costs or squeeze more out of their IT dollars. These emerging models, even with some details still to be worked out, offer an opportunity to do just that.

Pay as you go

The Macrovision study gave a clear idea of the way users’ licensing choices are going. About 7 percent fewer enterprises than the previous year said the expensive perpetual license was their preferred choice, whereas the same number opted for getting more of their software through monthly, yearly, or term subscriptions.

It also showed that vendors are listening. Some 40 percent of those surveyed said they were offering subscription models in 2005, up from 33 percent in 2004, and fully 60 percent expect to be doing so in 2007.