Licensing enigma

More than 50% of the world’s software vendors will be forced to make changes to their licensing models by 2005 due to a shift in the marketplace. Under the new system, software developers must be committed to providing solutions to their customers through advanced technology and new delivery methods.

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By  Maddy Reddy Published  November 30, 2004

|~|Brunswick11.jpg|~|Pierre Brunswick, AMD’s regional director for Russia-CIS, Middle East & Africa.|~|Users have been putting pressure on software vendors to provide them with solutions that match their use of the software since the first programme was written for public consumption. This pressure has been intensifying in recent years as IT managers pay close attention to their software costs.

The vendors, on the other hand, see the issues from a different perspective. They are concerned about the unrealised revenues and excess costs in the form of software piracy, excess discounts and high administrative costs.

These unresolved issues have created a strained relationship between software vendors and their customers. However, in the face of a rapidly changing technological environment, the two parties must find a middle ground and work together.

Software vendors should endeavour to provide products and services that meet customers’ requirements while vendors must realise customers are not homogenous; that they use software differently and have individual business needs. At the very heart of this relationship is software licensing, which governs not only usage but also revenues and costs for vendors and users respectively.

However, licensing agreements are complicated things. What makes the situation worse is the fact that so many different types exist. For example, GNU, the open source body, lists more than 80 different types of free and commercial licensing models ranging from per processor licensing, to per user licensing, to concurrent licensing.

Moreover, the caveat, ‘if you paid for it, you own it’ isn’t applicable with software. For instance, in a poll carried out by ACN, more than 50% of the participants confessed to not reading or understanding their software licensing agreements. 25% said they were ambiguous in their grasp of the fine print.

Even for standard applications the legal spiel referred to as end user licensing agreement (EULA) runs into tens of pages, which is beyond the grasp of most IT managers. Furthermore, employees complicate things by downloading copyright material from the internet. The bigger the organisation, the more difficult and time consuming it can be to perform a full audit of the software running on all computers and work out the associated costs.

Software is protected by copyright law, which states that a product cannot be copied without the permission of the copyright holder. A software licence grants a user the legal right to use a piece of software. So, in essence, a user only owns the licence to use that piece of software — not the software itself.

Typically, when a customer purchases a copy of a computer programme, he or she is granted a license to use that application under specific conditions. Software loaded on servers is generally purchased with several licenses, meaning that the number of licenses regulates the number of people that can use the software. Usage outside the provisions of the license is a violation of copyright.

Dean Polley, general manager of ASP Gulf, says he isn’t surprised with the apathy toward licensing. “I would challenge anyone to come forward and say that they have fully read and understood the licensing terms. If an individual has paid for the software licence, then he owns the executable and the software,” he argues.

Polley’s argument may be open to debate however. Due to legal landmines of disclaimers, agreements and contracts, vendors have total indemnity from the software licences and enjoy absolute control over their wares. Software licensing exempts software publishers from all liability under consumer protection law. In essence, what users get for their money is the privilege (not right) to use a software package in accordance with the conditions of the licence. ||**|||~|Hoda111.jpg|~|Hoda Barakat, partner and head of the IT and Intellectual Property (IP) Al Tamimi & Company.|~|The publisher may revoke that privilege at any time, with or without a cause. If the publisher decides not to support a product, users have no recourse unless they have an airtight service level agreement (SLA) in place. Furthermore, considering the complexity of the software, most enterprises end up either over-licensing or under-licensing. If a company is under licensed, then it copies the application internally, which raises the issue of breach of licensing agreements.

“With diminishing returns and depreciation, software is like any other asset. We don’t have the complete legislative framework in the Middle East yet, so compliance is not a big driver unlike in other markets, although there are companies that do not want to be publicised for being non-compliant about their licences. And only when end users come under pressure to demonstrate compliance, do they manage software as a short term exercise,” says Joe Baah, sales director, Europe, Middle East & Africa (EMEA) at MRO.

The high level of ignorance and licensing complexity is also driving piracy. Analyst firm IDC says while US$80 billion worth of software was installed on computers worldwide last year, only US$51 billion was legally purchased. 36% of the off-the-shelf software was pirated, which resulted in a loss of nearly US$29 billion for vendors. In the Middle East and Africa, software piracy stood at 55%, with total retail losses of US$ 898 million in 2003, according to IDC.

However, Hoda Barakat, partner and head of the IT and Intellectual Property (IP) department at Al Tamimi & Company, says ignorance cannot be used as an excuse. She says software licensing is no different from any other agreement, which comes with any commercial product. “There seems to be some misconception. Software licensing is relatively generic for all countries. It’s like any other contract or agreement one enters into when buying something from a third party. Customers are only buying the license to use the software while someone else [the ISV] owns the copyright. Customers only own the floppy or the CD on which it comes,” she explains.

Although the UAE and Saudi Arabia boast digital copyright laws, legislation enforcement and awareness remains low. Furthermore, with vendors experiencing growing pressure from open source models, where customers not only have total control over the software and its usage but also the source code, software companies are now being forced to adapt their licensing models through more flexible options.

“Historically ISVs sold a licence and a maintenance contract on top of that. Now the levels of discounts have gone up from 10% to 20% to as much as 50%. Even in cases where there isn’t an explicit move toward user based pricing, the centre of gravity is shifting to value-added services. So, customers are effectively buying a service rather than a software licence,” says Will Capelli, a vice president with Meta Group in the EMEA region.

Microsoft is one software vendor reconsidering its licensing methodology. Three years ago, the software giant unveiled its Software Assurance project as part of Licensing 6.0 to give the customer automatic access to new technologies through software leasing. The vendor now offers a choice of perpetual licence — owning the license rights to a specific version of the product — and a non-perpetual licensing — a lease the rights to use the product over a three-year term.

For governments and corporates, the vendor has introduced a volume-licensing programme known as Enterprise Agreement 6.0 (EA). Both agreements require users to have an installed base of more than 250 desktop PCs and 100% commitment to a choice of Microsoft Platform products bound by a three-year renewable contracts. ||**|||~|META_Will-Cappelli11.jpg|~|Will Capelli, a vice president with Meta Group in the EMEA region. |~|One regional company that has decided to streamline its licensing clutter is the Indevco Group. With over 150 servers and 2000 desktop clients spread across 20 domains at its 47 manufacturing and commercial companies in 10 countries across the world, Indevco did what companies do: buy software licenses on a ‘when the need arises’ basis, but this led to compliance and administrative issues.

“Earlier, we didn’t manage our software licences — it was a non-existent issue. The computers were all assembled and purchased locally and the software was installed based on whatever the user wanted. We used to buy the packages as stand alones, on an ad-hoc basis on a location basis as separate components. Buying such open licenses created compliance issues,” says Ghassen Khazan, IT manager at Indevco Group.

Two years ago, Indevco opted for a company-wide licensing deal, which allows it to pay a fixed, annual price linked to the total number of desktop PCs. Each year Indevco pays an upfront fee for client licenses, which are renewed automatically at the end of the agreement, thereby eliminating licence expiry issues.

The software licensing deployment is managed centrally from Lebanon, with each of the domains manned by an administrator. Each IT administrator in the respective location gives his licensing requirements to Khazan allowing him to negotiate with Microsoft and procure all the software centrally. The 52-year old group claims to have saved about 40% in licence and 50% in administration costs.

Khazan concedes that sometimes grasping the full complexity of licensing issues can be daunting. He recommends the old proverb: ‘if you don’t understand just ask’. “We went through the entire licensing agreements. If we did not understand some of the licensing agreements, we asked the vendor to clarify everything… its better to have everything clarified before signing up,” he says.

To make licensing simpler for end users, Sun Microsystems unveiled a new pricing plan for Solaris 10, the latest version of its flagship operating system. Sun will introduce the new pricing model when it starts shipping Solaris 10 by the end of January 2005, with user subscriptions starting at as low as US$120 per processor per year for bug fixes and going up to US$1,440 per year for premium support.

Furthermore, the vendor is also opening up the source code of its operating system. Sun has also filed for a patent for its company’s per-employee software pricing plan. The pending patent covers Sun’s Java Enterprise System (JES) and Java Desktop System (JDS), which are priced at US$100 per employee per year.

“Customers are looking at simplicity of licensing models. Ours is the simplest licensing model and we hope it’s given the market a jolt to make other vendors go down the same route. The pricing may vary, but it’s got to be simple, because customers get hammered every year with hidden and additional costs,” says James Bliss, software solutions sales manager at Sun Microsystems MENA. ||**|||~|GHASSAN_INDEVCO1.jpg|~|Ghassen Khazan, IT manager at Indevco Group.|~|The vendor has found a ready customer in the form of Dubai Holding, which manages high profile projects such as Dubai Internet City and Dubai Media City. The organisation wanted to streamline its software procurement on a standard infrastructure. It teamed up with Sun to replace its existing Sun iPlanet platform with the vendor’s new JES model across its 23 servers.

“Previously we had to purchase individual licences and support for all the holding companies. To solve this, we have signed a deal with Sun. Now, we are enjoying substantial savings compared to our previous support agreements,” says Patrick Legentil, operations director of e-Hosting Data Fort (EHDF), which is part of Dubai Holding. Under the new contract, Dubai Holding is able to offer application services to its customers without having to negotiate complex licensing deals when new users join its network.

Similarly, Novell is trying to follow Sun’s licensing model. The vendor recently released its Novell Linux Desktop (NLD) in the region. Priced at US$50, the offering includes an operating system, office suite and all the standard business applications. “We are not selling the licences, but the maintenance, support, updates, renewals and testing. We are also offering an annual upgrade protection. The money we are charging customers is for packaging and services,” says Satya Murthy, regional channel manager, Novell Middle East.

Whatever the semantics may be, the vendor’s move is a huge transition to simplified licensing model. Such models may make the payment process easier for enterprises, but not necessarily result in savings and flexibility. Companies still need to purchase hardware upfront. For instance, Sun’s JES offer is valid only to regional companies with more than 100 employees, which means the benefits are far from the reach of small-to-medium sized companies.

To combat this, software publishers are trying to find new and better ways to price, licence and distribute their products. By allowing hardware and software to be purchased on-demand through business models such as utility computing, application service providers (ASP) and using technologies such as software provisioning, software capacity planning, web services and grid computing, the vendors are trying to replicate the successful pricing models of electricity, gas, and telecoms companies.

For those vendors wanting to protect their intellectual property, the emerging ‘software as a service’ (SaaS) distribution model may hold the key. Vendors are hoping to smooth the transition to new licensing models with maintenance plans. In doing so, IDC estimates that maintenance revenue will account for 41% of the software revenue by 2008. However, what appears to be a win-win situation for all parties concerned is not necessarily so.

For software vendors used to the traditional selling cycle, where large deals with big discounts are closed at the end of a fiscal quarter, the shift is one of reluctance. Barring start-ups such as Salesforce.com, which has no offline software sales and relies completely on online software subscriptions, the bigger and traditional ISVs do not appear to be too enthusiastic. ||**|||~|ferhadpatel11.jpg|~|Intel’s market development manager for MENA region, Ferhad Patel.|~|“ISVs aren’t actively supporting or promoting the pay-as-you-go model. Try getting the pricing as a reseller or as a partner for such hosted services in the region. Most vendors want their revenues from licences upfront. They don’t want subscription-based revenues. It’s pretty straightforward why they are not encouraging the subscription model,” claims ASP Gulf’s Polley.

If a software vendor is selling a 25-user licence, the company earns its revenues from the upfront sale in the first month, which could be a few hundred thousand dollars. It is also assured of at least 20% recurring income from other services wrapped around the software licence. However, the same deal offered through a subscription model will mean the ISV has to wait for two to three years.

While both customers and vendors struggle to find the zenith of software licensing, Intel’s market development manager for MENA region, Ferhad Patel, says technical issues will eventually force the market to review software pricing. Key to this is the argument over whether software should be licensed per core or per processor — something that is becoming increasingly important as the next generation of AMD and Intel server-based CPUs will contain two cores per CPU, which makes a single CPU appear to be two devices.

“With more complex multi-core chips, virtualisation and other technical advances, customers will have to change the way they procure their software while ISVs will have to look at alternate ways of licensing. They [the IT community] should really address this problem right now to overcome it when it arises in the future,” says Patel. ||**|||~|Jamie-Bliss_sun_micro_211.jpg|~|James Bliss, software solutions sales manager at Sun Microsystems MENA. |~|Currently, Microsoft has decided not to charge additional licence fees for multi-core processor technology. For example, if Microsoft SQL Server Standard edition is running on one-processor server with dual-core processors then only one license is required. This saves customers money, and it could also force other software vendors to reconsider their own licensing strategies as, to date, vendors such as IBM, SAP and Computer Associates (CA) have defined a ‘core’ as being identical to a ‘processor’, and therefore have indicated that dual-core processors will require two licences for each processor, doubling the software licensing cost.

“With such initiative Microsoft has put the customer needs first and proved to be understanding of the changing nature of IT. It also puts pressure on other software vendors who took a different route on multi-core licensing,” says Rene Fourie, licensing manager, Microsoft South Gulf.
Unsurprisingly, the chip manufacturers support Microsoft’s approach to licensing as it means they won’t use it as an excuse to stop buying servers powered by their technology. For example, Pierre Brunswick, AMD’s regional director for Russia-CIS, Middle East & Africa, says; “Users will not be penalised for using multi-core processors. Customers can use the same software on several processors and they will be charged for one software license only.”

While Patel is also in favour of Microsoft’s approach, he also believes that the licensing debate is far from over and that, as chips and software packages continue to mature and new applications are developed the model will have to change once again. “While we endorse software vendor’s move to support multi core, we also empathise with how they will generate their revenue,” he says. “We still [believe] software companies should be charging on a per socket basis. If it is dual core, taking up one socket, then it should be charged for one CPU — they shouldn’t be charging per core.” ||**||

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