News

Is Friendlier Software Licensing and Pricing Ahead?

Forrester Research report details pricing, licensing trends for 2011.

• By Kurt Mackie
• 04/19/2011

According to a new Forrester Research report, software licensing and pricing could become more customer friendly if particular trends take hold.

Trditional software licensing models offer organizations less value, according to "Software Pricing and Licensing Trends 2011" from the research firm.  The report targets CIOs and software vendor managers who deal with the complex world of software licensing. It includes a call to arms to push the software industry toward more meaningful (customer friendly) licensing and pricing plans.

In the current model, a software vendor ties its product licensing to hardware, such as to the number of processors in a machine or to the CPU. It also may use its licensing model to deter virtualization. As organizations scale operations and use hardware with multiple cores, the cost calculations become more complex, such as when software vendors base the licensing on the type or brand of equipment used.

These software licensing approaches arose because software vendors needed to justify consistent annual returns to financial analysts, the report explains. Traditional models do generate those revenues but they alienate software buyers. CIOs' top business goal is to reduce organizational costs, according a 2009 Forrester survey of companies in North America and Europe. However, organizations may have little control over the hardware infrastructure that in turn ratchets up software costs via licensing agreements, making cost control difficult.

Only with operating systems does tying software to hardware make sense, the report points out.

Two pricing trends could start to change this scenario over the next three years. One trend is pricing software based on user roles. Microsoft currently offers this option in some of its enterprise agreements and will offer it with its Office 365 hosted solutions, the report explains. However, going that route may conflict with other licensing options that Microsoft's customers may prefer. Another trend, typified only by SAP's efforts, according to the report, is clear communication of software pricing. The complexities of many software licensing agreements tend to put buyers in tenuous positions.

"Software companies have been trying to shore up the crumbling edifice by issuing ever more complex policy guidelines that 'reinterpret' the language -- in effect unilaterally changing the contract to their own advantage," the report states.

The foil for those two positive pricing trends is typified by IBM and Oracle, which have strong product lines to protect their per-core software pricing models. The report suggests that greater flexibility in software maintenance programs is needed across the software vendor industry, but such reforms may be particularly costly for vendors such as IBM and Oracle. Software vendors make money compelling their customers to pay maintenance fees on "shelfware," or software that's licensed but not used, and any reforms there could cost IBM and Oracle "hundreds of millions of dollars," according to the report.

Traditional software licensing and pricing models are mostly being pushed today by cloud-based service offerings. The report identifies four alternative models to consider, listing the advantages and disadvantages. Those alternative models include software-as-a-service offerings (Salesforce, Netsuite, Ariba and SuccessFactors), pay-as-you-go models (Amazon EC2), "freemium" (Gmail, LinkedIn, Salesforce Chatter and Tripit), open source (Ingres, Red Hat, Oracle and IBM) and advertising funded (Spiceworks).