Software // Enterprise Applications
News
4/16/2004
03:02 PM
John Foley
John Foley
Features
Connect Directly
LinkedIn
Twitter
Google+
RSS
E-Mail
50%
50%

Power Shift

Users gain flexibility and influence with new software pricing models

The approach is far from the norm, and the results may stand conventional investment wisdom on its head. For instance, by standard measures, Mercury Interactive's stock sold at a premium back in February to that of Siebel Systems Inc. Mercury Interactive traded at 44 times Merrill Lynch's estimate for 2004 earnings per share, while Siebel traded at 40 times estimated EPS.

When Merrill Lynch ran the numbers through its new index, however, it got a different outcome: Mercury Interactive's stock was actually trading at a discount to Siebel's when cash generation from subscriptions was included. Mercury Interactive ended 2003 with $150 million in deferred revenue from subscriptions--sales that will get recorded in future quarters--which was 150% more than it had at the end of 2002.

"Taking bookings into consideration, it looks to us like Mercury is much cheaper than conventional [price-to-earnings] wisdom might imply," Maynard and associates wrote in a February report introducing their On-Demand Index. Since then, Siebel's cash flow has improved, while Mercury Interactive's stock price is more in line with its peers' when cash flow is taken into account.

Merrill Lynch buys and sells the stocks of the software companies it tracks, and its investment-banking division sometimes represents them in business deals. But Maynard dismisses any suggestion the index is meant to give new shine to a dulling sector. "I lambasted the software industry," he says of the February report. Maynard points out that Merrill Lynch's analysis could highlight overachievers, but it could also reflect poorly on software companies that lag their peers.

Yet, even proponents of subscription licenses agree they aren't the best choice for every situation. Scott Hicar, CIO of Maxtor Corp., a hard-drive manufacturer, has experience with subscription licenses from Salesforce and RightNow Technologies Inc. and regards subscriptions as easy, flexible, and low risk.

But the last two software deals Hicar signed--one with Vignette Corp., the other with NCR Corp.'s Teradata division--were for perpetual licenses. Hicar says neither vendor pitched a subscription-license alternative, but he would've chosen perpetual licenses anyway. The rationale: Hicar believes perpetual licenses provide a higher return on investment for software that will be deployed for more than a few years, as he plans to do.

Now, Hicar is mulling what to do about Maxtor's enterprise agreement with Microsoft that's about to expire. Microsoft's Software Assurance program doesn't look as attractive, given the flux in Microsoft's product road map, with no clear delivery date for the next version of Windows, he says. "They know they have to put a story together."

But if one of the risks to customers of a subscription model is paying for software upgrades that don't arrive during the life of the contract, the parallel to that problem when signing perpetual licenses is paying for more software than needed. Fewer than 20% of users surveyed by IDC say they're taking full advantage of the software they licensed.

The large amount of licensed but unused software is a key indicator that the perpetual model needs fixing, says IDC analyst Mizoras Konary. It's also evidence of a glaring gap between the cost of software and its value to the customer. "Everybody recognizes some pretty big changes need to take place," she says.

On that point, virtually everyone agrees. The result will be new relationships between software buyers and sellers, represented most visibly, but not exclusively, in the documents that seal their deals. "There's going to be winners, and there's going to be losers," Merrill Lynch analyst Maynard says. "We've got to get on top of this because it's got big repercussions."

Photo by Viktor Koen

Previous
3 of 3
Next
Comment  | 
Print  | 
More Insights
Building A Mobile Business Mindset
Building A Mobile Business Mindset
Among 688 respondents, 46% have deployed mobile apps, with an additional 24% planning to in the next year. Soon all apps will look like mobile apps and it's past time for those with no plans to get cracking.
Register for InformationWeek Newsletters
White Papers
Current Issue
InformationWeek Government Oct. 20, 2014
Energy and weather agencies are busting long-held barriers to analyzing big data. Can the feds now get other government agencies into the movement?
Video
Slideshows
Twitter Feed
InformationWeek Radio
Archived InformationWeek Radio
A roundup of the top stories and trends on InformationWeek.com
Sponsored Live Streaming Video
Everything You've Been Told About Mobility Is Wrong
Attend this video symposium with Sean Wisdom, Global Director of Mobility Solutions, and learn about how you can harness powerful new products to mobilize your business potential.