Subscription-Style Software Licenses Continue Upward Trend

The trend toward subscription-based software licenses continues to inch ahead, according to the latest results of Merrill Lynch's On-Demand Index, which provides a new way of measuring how software vendors license their products.

For the quarter ended June 2004, Merrill's index rose slightly to 20.6, compared with 20.5 in the first quarter. The company's software industry analysts first released the index in April, based on an assessment of the licensing practices of approximately 75 software companies, including Autodesk, Computer Associates, IBM, Mercury Interactive, Microsoft, PeopleSoft, and SAP. The index is meant to reflect the software industry's use of subscription, or on-demand, licenses, with an index score of 100 representing a pure on-demand model. Earlier this week, Autodesk announced a new application, Autodesk Civil 3D 2005, that is available only via subscription.

Software vendors with subscription-based licenses and hosted services "weathered the tough June quarter relatively better than those without such offerings," according to a statement issued by Merrill Lynch. "We believe that customers are beginning to realize the advantages of on-demand models as they seek greater efficiency, better [return on investment], and flexibility in purchasing when spending becomes tighter." Salesforce.com's revenue, driven by its hosted applications, grew 88% in its most recent quarter, to $40.6 million.

Merrill Lynch divides its ratings into three categories: infrastructure, infrastructure management, and enterprise applications. Infrastructure management jumped the highest on the index in the second quarter, two points, to 25.3. Merrill Lynch attributed the rise to the influence of companies that are further along with subscription-based offerings, including Computer Associates, McAfee, Mercury Interactive, and Symantec.

The infrastructure category declined modestly, to 21.9 on the index, which Merrill Lynch attributed to "muted" software numbers from IBM, which bears a heavy influence on the category's overall rating. The applications category rose to 16.5, from 15.8, which was held back somewhat by Microsoft's influence in that category.

Merrill Lynch added Blackboard Inc. and Motive Inc. to the index for the first time. In its written analysis, the company noted that RightNow Technologies, Salesforce.com, and Blackboard, all of which have become public companies in recent months, are trading at levels above their initial public offerings, an indication "investors see the value" in their on-demand models, according to Merrill Lynch.