Software licensing faces critics

Software licensing policies are none too popular with existing customers according to IT research houses. The pressure for simplification of software licensing and maintenance models is growing.

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By  Stuart Wilson Published  March 27, 2004

The leading lights of the IT research sector claim that existing perpetual software licensing models are unpopular with customers.

Citing dissatisfaction with the current licensing system, some customers even feel ‘betrayed’ by their application vendor according to recent surveys by research houses. IDC and AMR have both lined up to point out the flaws in the existing model and recommendations for the future.

IDC’s latest study on the subject, called The Future of Software Licensing, discovered that more than half of enterprise software vendors questioned will alter licensing models during the next year. “Software vendors generally agree that traditional licensing models are no longer suitable in today’s environment,” said Amy Mizoras Konary, programme manager for software pricing, licensing and delivery at IDC. “The software market will move towards licensing models and practices that increase the predictability of vendor revenues, make it easier for customers to manage and comply with software licence contracts, and clearly establish the business value of software.”

AMR Research surveyed several hundred executives buying application software and came up with a catalogue of issues where customers felt hard done by. It found that while customers were only ‘moderately unhappy’ with the way vendors charged for their products, they were ‘furious’ about the ‘cost to maintain those products and the policies that the vendors have established for enhancements and upgrades’.

AMR’s survey uncovered that 38% of those questioned were training internal staff to provide software support, 35% would look to renegotiate maintenance contracts and 22% would consider switching to a more accommodating software vendor. It also revealed that 21% intend to stop taking upgrades, 12% will discontinue paying maintenance and 11% are interested in new software delivery models such as on demand.

IDC’s report shows that more than half of the 100 vendors it spoke to will consider changing their licensing model in the year ahead. It found that 75% of the revenues generated by these vendors were linked to perpetual licensing methods as opposed to subscription licensing. Whereas perpetual licensing models involve revenue recognition up front, subscription licensing sees this being recognised over time.

Perhaps the most revealing figure to come out of all this is AMR’s discovery that 22% would consider switching to a more accommodating vendor. The problem is that in core areas of application software, the vendor choice is extremely limited.

Given that companies may have invested millions of dollars over many years implementing a company-wide ERP system from one vendor, integrating it with legacy applications and training staff accordingly, the decision to switch supplier is never taken lightly. It is often a case of lock-in and a need to sweat existing assets until some real return on investment is possible from past software implementations. Companies often feel compelled to make existing software work, however much effort this involves, by virtue of the investment they have already made.

The implications of an evolving licensing model to the channel will be immense. In a subscription-based licensing model, vendors will have to clarify the role of partners and decide whether or not they should receive a cut of the subscription as recurring revenue.

For vendors and partners, the transition from perpetual to subscription licensing models represents a huge financial obstacle. There is the sudden loss of up-front revenues for a couple of quarters as the new model is introduced and income is amortised over the lifetime of the licensing contract. This is often a difficult move to explain to the financial community and shareholders.

The Middle East represents a fairly unique region inasmuch as it is an area where application and enterprise software vendors still have the opportunity to make new licence sales into greenfield customer sites.

There is a clear opportunity to start introducing innovative licensing models early on. Software delivery is changing, and even though outsourcing remains in its infancy in the Middle East, an embryonic application service provider (ASP) sector is emerging and laying the foundations for hosted software delivery. Integrators and resellers need to keep a close eye on the various changes in software licensing models and build business models that keep them closely aligned to the delivery mechanism of choice.

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