Software Licensing Said To Be Set For Dramatic Shifts

IDC says its survey of software vendors and major business customers shows the current model of perpetual licensing will soon be replaced by a subscription-licensing plan.

InformationWeek Staff, Contributor

March 23, 2004

3 Min Read

Software licensing is about to change--change big and change fast, a research firm predicted Tuesday.

According to a survey of both software vendors and major business customers by IDC, the long-time model of perpetual licensing--where software rights are purchased up front--will soon be replaced by subscription-licensing plans, in which vendors and customers adopt a pay-as-you-go arrangement that extends over several years.

"The current licensing model just does not work," said Amy Mizoras Konary, program manager for software pricing and licensing at IDC. "It doesn't work for vendors, and it doesn't work for customers."

The disconnect between value and price that customers see in current licensing models, and the unease on the part of vendors over the unpredictability of licensing revenue, will continue to grow, said Konary. This will create a groundswell of support for change.

IDC's survey uncovered two major trends: a rapid move on the part of vendors to modify their licensing programs--more than half of the vendors polled said that they're likely to make changes this year--and a desire on the part of customers to see cumbersome, complex licensing requirements simplified.

"On the vendor side, what's driving this is a need for a more predictable revenue stream," said Konary. "Customers, meanwhile, want more flexibility, and also a way to better predict costs."

The problem with traditional licensing, she added, is that customers are often unable to track the amount of software they actually use, much less predict what they need. "Most customers are guessing on how much they're using, so they tend to overbuy," Konary said.

Simplifying licensing may address that need, but it's not an easy chore, even as companies tout the glories of utility and on-demand computing. The tools to accurately track such usage on the software side, as opposed to the hardware end, don't really exist.

The shift also means that more vendors will switch from emphasizing licenses to touting beefed-up maintenance agreements, a change that Microsoft has made with its Software Assurance program, said Konary. "One of the key trends we're seeing, and which will continue, is the strategic importance of maintenance [on the part of vendors] as a high generator of deferred revenue. The boom in maintenance agreements isn't just a sign of the current economy, but a trend. Customers expect to spend more on maintenance than on licensing, and vendors need to react to that to stay competitive."

Although Microsoft's Software Assurance program--essentially a subscription-based maintenance agreement, in which companies buy the right to upgrade to a newer edition of software during the time span of the plan--has taken some serious shots from disgruntled customers, Konary sees it as the model that other major vendors will likely follow.

"One of the things that Microsoft could have done better with Software Assurance is communicate to customers the additional benefits of the program beyond upgrades and updates. Simply offering other services to customers isn't enough--you have to get that through to the customer," she said.

While Microsoft may have stumbled with Software Assurance, other vendors will learn lessons from its efforts. "Microsoft is really leading a trend here," said Konary, "and it's always tough to be the first. Other vendors will look to do the same kind of thing that Microsoft's done with Software Assurance, but they'll learn from its mistakes."

Other findings from the survey, said Konary, evidenced an optimism about open source on the part of customers, who believe that the pressure of operating systems such as Linux will drive down vendor-licensing prices. Vendors, on the other hand, seem less worried about open source's impact on their sales.

That may be overly optimistic, she said. "There's a real customer perception that open-source software is less expensive," she added, "even when in the long run it may not be." Just that perception is enough to give customers some leverage in dealing with vendors on licensing, she concluded.

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