Unravelling licensing enigma

Software vendors will be forced to change their licensing models by the end of 2005. Under the new model, the majority of software revenues will be derived from subscription-based offerings. However, it remains to be seen if vendors will welcome the change.

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By  Sarah Gain Published  July 26, 2005

|~|Al-Qaizi-DIB-Body.jpg|~|Al Qaizi: By choosing well from among the available payment and purchasing schemes, DIB often generates real savings.|~|CIOs are becoming increasingly aware of their organisation’s software costs. On the other hand, vendors’ concerns about the unrealised revenues and excess costs in the form of software piracy, excess discounts and high administrative costs are growing. Working towards a mutually acceptable solution is becoming difficult because of the complex nature of the licensing agreements.

The open source body GNU claims there are more than 80 different types of free and commercial licensing models. Since the legal spiel referred to as the end user licensing agreement (EULA) runs into tens of pages, it is little surprise that a poll carried out by ACN revealed that more than 50% of CIOs confessed to not reading or understanding their software licensing agreements and 25% said they were ambiguous in their grasp of the fine print.

When end users purchase a copy of a computer programme, they are granted a licence to use that application under specific conditions. Software loaded on servers is generally purchased with several licences, meaning that the number of licences regulates the number of people that can use the software. Any usage outside the provisions of the licence is a violation of copyright and the high level of ignorance regarding this fact is 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 stands at 55%, according to IDC.

Because of the veritable minefield that surrounds the issue, corporations are outsourcing the handling of software product licensing to a third party. The Mashreq Bank is one such organisation, having passed both the management of its existing software licences, and the analysis of licence terms and related ongoing maintenance needed to build a cost for company year-on-year for the validation of the return-on-investment (ROI) of new projects, to its group IT company, Mindscape IT.

Hariharan Iyer, manager of information security and consultancy at Mindscape Technology Business Solutions, is responsible for licence management. “[The job] typically includes managing licensing requirements, establishing a scientific method for deriving the bank’s software needs, and then managing those needs. I have to consider things like volume, commercial and better usage of products,” he explains.

Other companies are battling to get to grips with their options in order to get the best out of the multifarious licensing options on the table. Prior to making any decision, CIOs must consider whether their organisation requires multiple copies of software, and whether it is important to deploy the most current versions.

Consideration must also be given to the organisation’s buying behaviours, with CIOs thinking about whether it is best for their business to acquire licences for software when needed, whether standardisation is important, or whether it may be better to spread out payments. By reflecting on all these issues, it is possible to establish the model, which will best meet the business’ priorities.

“Certain companies have a complicated way of licensing their software, and if this is the case we will meet with the vendor to clarify any doubts we have and find a way of licensing the software that will suit our budget. By choosing well from among the available payment and purchasing schemes, we often generate real savings,” says Musabbah Mohammed Ali Al Qaizi, vice president of Information Technology at Dubai Islamic Bank (DIB).||**|||~|Prakash-ExecuTrain-Body.jpg|~|Manickavasagam: To succeed with subscription-based license models, vendors have to be aware of customer needs.|~|To make licensing simpler for end users, Sun Microsystems has unveiled a new pricing model for Solaris 10, the latest version of its operating system (OS). The vendor introduced the new pricing model when it started shipping Solaris 10 at the beginning of the year, relying on low-cost user subscriptions calculated per processor per year, as well as opening up the source code of its operating system.

“Customers are looking at simplicity of licensing models. Customers get charged every year with hidden and additional costs, and now they are beginning to demand a better model,” says James Bliss, software solutions sales manager at Sun Microsystems MENA.

Dubai Holdings, which manages high profile projects such as Dubai Internet City and Dubai Media City, was one of the first local companies to adopt the simplified licensing model from Sun. The company wanted to streamline its software procurement on a standard infrastructure and teamed up with Sun to replace its existing iPlanet platform with the vendor’s new Java Enterprise System (JES) model across its 23 servers.

“Previously we had to purchase individual licences and support for all the holding companies. To solve this, we 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 Holdings. Under the contract, Dubai Holdings is able to offer application services to its customers without having to negotiate complex licensing deals when new users join its network.

In the international market, the perpetual licence, still the dominant approach for purchasing software, is inexorably giving way to yearly or monthly subscriptions. Meanwhile, traditional arrangements based on one name, or one box, per licence have been overtaken by concurrent licensing in which companies buy a certain number of licences and divide them up among users.

Even tier-one vendors such as Oracle, which in the past, only quietly offered subscriptions to large clients, have softened their stance in response to customer demand. "We have had some form of subscription pricing [for many years], but now it comes up more often," says Jacqueline Woods, Oracle's vice president for global pricing and licensing strategy.

Customers are drawn to software subscriptions because these plans limit large upfront expenditures and do not lock them in to costly long-term relationships with vendors. In addition, where software is purchased and licensed out right by a company it is considered an asset and is therefore eligible for tax. Acquiring the software by subscription, however, converts it into an ordinary business expense, making it tax deductible.

While this argument has been a big draw, entailing sizeable savings for many companies around the world, for businesses based in the Gulf States’ tax-free free zones the issue is essentially irrelevant. “One of the major reasons why subscription hasn’t taken off in this region in a big way is because there is already no tax, so it doesn’t matter whether or not it is possible to write off a software purchase,” points out Haider Salloum, marketing manager at Microsoft South Gulf.

Under the subscription–based model, software vendors typically provide updates as part of the plan, which means companies do not have to worry about whether or not they should purchase new versions of software to replace a large number of perpetual licences.

In addition, many CIOs feel that, because they re-evaluate their use of the software every time they renew, it is fairly easy to monitor how many software subscriptions they have purchased and whether they meet their organisation's needs, mitigating the expensive problem of ‘orphaned’ perpetual licences. “To succeed with subscription-based licence models, vendors have to be aware of customer needs and behaviours in order to find a model that will be popular, but also will continue to make them money. This can be good for customers, bringing them better value and more choice, but can be a challenge for the vendors,” says Prakash Manickavasagam, senior training specialist at ExecuTrain.||**|||~|Salloum-Microsoft-Body.jpg|~|Salloum: One of the major reasons subscription-based model has not taken off in this region is because there is already no tax — it doesn’t matter whether it is possible to write off a software purchase.|~|The subscription-based licensing model is receiving something of a mixed reception from most vendors. For those 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.

“One way or another, customers will end up paying, whether that is through direct costs or hidden ones, and most customers actually resent hidden costs more,” Manickavasagam continues.

From a financial standpoint, vendors seem to be struggling with this model. While the model is winning over some with its promise of a steady revenue stream, as opposed to the inconsistent sales generated by one-time licensing, many vendors are still concerned the model may ultimately result in lower profits.

Although subscriptions over a five-year period are generally more expensive than perpetual programmes, according to one industry insider, “Most customers will end up paying less and the vendors are very concerned about protecting their existing revenues.”

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 several hundred thousand US 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 vendor has to wait for two to three years to see the returns.

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. The independent software vendor (ISV) community, as well as many mainstream vendors, do not appear to be particularly enthusiastic. “ISVs are not 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,” claims Dean Polley, general manager of ASP Gulf.

While many vendors struggle to find a solution to the software-licensing dilemma, Microsoft has already laid out its plans not to charge additional licence fees for multi-core processor technology. If Microsoft SQL Server Standard edition is running on one-processor server with dual-core processors, then only one licence is required.

This saves customers money, and it could also force other software vendors to reconsider their own licensing strategies. “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 to take a different route on multi-core licensing,” says Microsoft’s Salloum.||**|||~|Iyer-Mindscape-Body.jpg|~|Iyer: Enterprises have to be creative to make different licensing models work for them.|~|Unsurprisingly, chip manufacturers support Microsoft’s approach to licensing because it means customers will not be forced to stop buying servers powered by their technology. For example, Pierre Brunswick, AMD’s regional director for Russia-CIS, Middle East and 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 licence only.”

Intel agrees, saying that technical issues will eventually force the market to review software pricing. “With more complex multi-core chips, virtualisation and other technological advances, customers will have to change the way they procure their software, while ISVs will have to look at alternate ways of licensing. [The entire IT community] needs to address this problem right now to overcome it,” says Intel’s market development manager for MENA region, Ferhad Patel.

On an international scale, the growing popularity of subscriptions is generating interest in a delivery model that until recently was struggling for customer interest: web-based, hosted applications known as applications-service providers (ASPs).

The majority of end users in the Middle East, however, still view ASPs with mistrust, primarily because much of the software is not as fully developed as licensed software and does not integrate well with programmes from other vendors. There are also fears the internet-delivery approach will prove to be high risk from a security perspective. “The model requires users to be connected via the internet to license such facilities and as a financial institution this presents too high a risk to even consider. Using an in-house system is much more secure,” says DIB’s Al Qaizi.

However, opinions of DIB and Mashreq Bank differ. While Mindscape explains that many of Mashreq Bank’s appliance-based packages are subscription based, Al Qaizi of DIB says he would not consider this delivery model for anything other than non-critical applications.

According to Iyer, in addition to the low cost of subscription-licensed software in comparison to other models, this method of delivery means that Mashreq Bank benefits from greater control over areas where legal regulatory compliance are an issue. He would also consider the so-called usage model — in which software is distributed via the web, but not as an ASP, and is charged by usage, not by preset fees and a contractual arrangement: “A heterogeneous group of models would have to exist in order to support the various needs of the bank. You need to be very creative to make the variety of models work for the business needs, although if an organisation has more than three different models, it can become an administrative nightmare,” he explains.

Al Qaizi takes a more conservative approach, choosing to keep the management of the majority of DIB’s software and applications under the control of the bank’s IT department. He remains unconvinced by the security and malleability of the delivery models currently available: “Some banks do use subscription and outsourcing services, but all our systems are internal and there are no plans to change that, at least at the moment. We may consider [subscription] for non-financial applications, maybe translation applications and so forth, but not banking. For non-critical applications I may consider some areas of subscription maybe two or three years down the line, but at the moment we do not license in this way,” he says.

For many high-end enterprise customers, it is this preference for keeping IT operations in-house that is one of the most significant barriers to their adoption of subscription-based licensing. IT, including software, is increasingly being seen by organisations as a key factor in developing and maintaining competitive advantage.

If all companies were to license the same standard software and services from a few major providers, they would stand to lose their unique differentiating features, as Microsoft’s Salloum points out. “Big companies prefer to keep control of the things that set them apart from their competitors in-house to maintain their individuality. Although subscription may save a few dollars in operational costs, this would not make up for the drop in profits that would result from losing their competitive edge, and for this reason it will never completely take off at the top end of the market,” he says.||**|||~|Bliss-Sun-Body.jpg|~|Bliss: Customers get charged every year with hidden and additional costs; hence the demand for a better model.|~|Despite Salloum’s prediction, financial institutions such as Mindscape and Mashreq Bank see the subscription-based model as a way of meeting business requirements and are confident enough to juggle a variety of licence types in order to derive maximum business value. Others are more conservative according to ExecuTrain’s Manickavasagam, who says that, “[To many companies], software’s role in business is too intimate and too intricate to be commoditised and consumption-metered like electricity.”

Many customers are demanding cost-based analysis from their software vendors, even those offering programmes with traditional perpetual licences to help them with the weighty decisions of licensing. The feeling is that they have purchased too many licences and signed too many support contracts without knowing how much software is actually needed, how many users there are at any given time, and how much maintenance they require.

“The argument is that if software companies want to sell them additional programmes, then they must become true partners, offering not only new products but also hard usage data to help customers make better purchasing decisions,” explains Sun’s Bliss.

To meet these demands from CIOs, and to recapture the revenue lost through non-compliance, many software companies are now beginning to add tracking technology to their programmes. This enables CIOs to measure software use and produce detailed reports about individual activity. Such reports will provide what customers are now missing as they navigate new pricing and delivery programmes: the ability to make purchasing decisions based on reliable information.

In the meantime, regional enterprises will watch the licensing developments and experiences of the companies in the more dominant markets of the US and Europe with interest, biding their time until a successful and mutually acceptable model emerges. As Mindscape’s Iyer suggests, “Once companies have analysed the various options and seen evidence that one model holds more benefits, the licensing processes will once again stabilise and that model will surface as the best one.” ||**||

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