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Low Prices And High Complexity

Software companies are slashing prices amid consolidation and competition, but the new licensing landscape can be tricky to navigate
Software companies are responding with new licensing plans. Satish Ajmani, CIO of Santa Clara County, home to California's Silicon Valley, says Oracle, SAP, and PeopleSoft have all urged the county to move from licenses in which the county pays by the number of people who use an application to per-CPU licensing contracts, which guarantee consistent revenue no matter how much an app gets used.

Oracle has been trying to package and price its software to appeal to different customer segments. It's taken steps to make its per-CPU licenses flexible enough to shift computing power to applications that need it, offered lower prices on bundles of its applications, and delivered more hosted options, such as an on-demand version of its E-Business Suite, which starts at $150 a month per user. Jacqueline Woods, VP of global pricing and licensing strategy, says the company is headed toward even more license and package options that target specific types of customers according to their industry and size. "What we're going to be doing is slicing and dicing, both vertically and horizontally," she says.

SAP is trying to make its business software more attractive to small companies. A recently signed contract for SAP's Business One software lets Barrier Group, a 14-person startup that sells a computer security server, use multiple software modules without paying multiple fees, CEO Steve Sahl says.

But Gary Fromer, senior VP of SAP America's small- and medium-business and hosting unit, says SAP has resisted licensing schemes built around how its software will be paid for or delivered. Customers trust their most important computer systems to vendors with the best products, he says. "A customer is willing to pay a certain amount of money for something based on its value to them," he says. "How it gets delivered is a separate discussion."

Then there's the matter of customers who think they're paying for things unnecessarily. Microsoft, whose software is the industry's most pervasive--and perhaps most maligned--has long raised hackles with its licensing policies, which some view as too expensive or restrictive. Those complaints reached a crescendo two years ago, after Microsoft introduced licensing rules called Software Assurance that took away many customers' ability to buy low-cost upgrades when they wanted. Instead, the rules assessed annual fees for the right to upgrade at all. Customers who buy Software Assurance are entitled to upgrades whenever Microsoft releases them, but they have to pay the fee even if they want to skip a release.

Microsoft lost customers as a result of the policy, says Cori Hartje, the company's director of marketing for worldwide licensing and pricing. Last May, two years after it introduced Software Assurance, Microsoft changed the program to include additional features such as training vouchers, home-user rights, employee software-purchase programs, and source-code licensing programs. But the value still isn't clear today, she concedes.

Microsoft has its work cut out, says Kurt Schlegel, an analyst at research company Meta Group. "A lot of these customers are saying, 'I just don't need it. It's cheaper to upgrade every four or five years,'" he says. "If you have [a] three-year maintenance agreement and no upgrades come out, where does that leave you? Customers aren't convinced they've received fair value."

In a buyer-friendly market, companies may have more options to find what they're looking for.