The Changing Face of Software Licensing

IT organizations don't yet have software vendors by the tail, but they do have new leverage, thanks to disruptive technologies such as SaaS and virtualization.

• By Stephen Swoyer
• 05/04/2010

The days of software vendors having customers over a barrel, come license renewal time, appear to be over. In fact, a new report from market-watcher International Data Corp. (IDC) concludes that those days are long gone.

Although enterprise buyers don't yet have the software vendor tiger by its proverbial tail, they do have new leverage and options thanks to disruptive topologies or delivery mechanisms such as software-as-a-service (SaaS), virtualization, and cloud computing. These technologies have forced vendors to adjust their licensing schemes -- radically, in some cases. The custom, on-the-fly license negotiations between vendor and customer will increasingly give way to a more clearly-delimited and, from the perspective of potential customers, more transparent software licensing policy.

"In general, custom licenses created on the fly had previously been done in the spirit of what is good for the account executive -- and his/her manager -- in that specific case at that specific time, as opposed to what is good for the company over time," said Amy Konary, research director of software pricing licensing and delivery with IDC, in a statement. "Now is the time to change this practice."

What should software buyers expect? Konary has some suggestions, starting with "a coherent policy that allows software vendors to clearly communicate [their] business practices, terms and conditions, and underlying rationale to their customers." This, she observes, "is increasingly becoming a competitive differentiator." Not only does it make for good PR, Konary explains, but it can also help force the hands of vendor competitors.

"Public articulation of customer-friendly licensing practices not only sends the message that the vendor is listening to customer concerns, but challenges competitors to offer a similar level of transparency," she says.

The result, for customers, is something of a win-win, according to IDC.

Software buyers can expect to see a number of innovations, starting with greater transparency in subscription pricing. Today, IDC notes, almost all software vendors support subscription pricing of some kind. Competitive pressure is forcing vendors to articulate clearly-delimited policies with respect to their subscription practices. IDC says vendors also need to do some catch-up work on the virtualization front. Many ISVs still haven't tweaked their licensing schemes to address the disruptions -- from a software licensing standpoint -- of virtualization (or to accommodate virtualization topologies). That's a position which is rapidly becoming untenable.

"Vendors need a strategy, and ideally a policy, to address the proliferation of virtual machines in the customer environment," the IDC release indicates.

Other likely changes include SaaS licensing agreements that incorporate provisions for hosting by service providers. Currently, most SaaS providers host their own services; next-gen licensing agreements would likely address the provisioning of SaaS offerings by service providers, too. Also needed are more flexibility in disaster recovery (DR) options; new kinds or types of software buying programs (to simplify software purchasing for customers); new OEM programs; the long-awaited advent of pay-per-use licensing; IP indemnification policies; and (finally) improved communication and transparency during the software licensing process.