Software Licensing Models Will Change in 2005, IDC Predicts

Researcher foresees move to a subscription-based model by 2010

If you’ve ever felt that your software vendor has you over a barrel when it comes time to renegotiate the terms of your enterprise agreement, there’s light at the end of the tunnel. According to a new report from International Data Corp. (IDC), more than half of all ISVs will make changes to their licensing models in 2005, which should open up new licensing options for customers.

For the study, titled “The Future of Software Licensing,” IDC surveyed 100 ISVs and 100 customers. One upshot, the market researcher predicts, is that over the next year, the software industry will increasingly focus on addressing customer needs, which should make it easier for customers to make purchasing decisions based on just how much software they need.

"Software vendors generally agree that traditional licensing models are [no] longer suitable in today's environment," said Amy Mizoras Konary, program manager for Software Pricing, Licensing, and Delivery at IDC, in a prepared release. "The software market will move toward licensing models and practices that increase the predictability of vendor revenues, make it easier for customers to manage and comply with software license contracts, and clearly establish the business value of software."

Among the study participants, IDC found that the vast majority—75 percent—of software vendors were still deriving most of their aggregated revenues from perpetual (as opposed to subscription) licensing. IDC found that momentum is slowing building in favor of subscription-based licensing, however, with 43 percent of software vendors and 26 percent of customers expressing a belief that most (worldwide) software revenues will result from subscription-based software offerings by the year 2010.

Another factor driving change is customer complexity, particularly with respect to the abundance of software packages—and licensing agreements—in any given enterprise environment. IDC found that medium and large-sized software customers are managing an average of more than 40 software contracts, for example, and 70 percent of these customers expect that the complexity of managing contracts will increase over time.

Not surprisingly, another factor contributing to the popularity of subscription-based licensing is what IDC characterizes as the “disconnect” between current software licensing models and business value. According to IDC, 70 percent of customers “strongly believe” that ISVs need to place more emphasis on clearly establishing the business value of their software offerings. What’s encouraging is that even more software vendors than customers—72 percent—endorse this same view. In fact, IDC says, ISVs “believe that customers must be more forthcoming when disclosing business requirements so vendors can better establish value and help customers maximize their investments.”

IDC says customers and ISVs must—and will—abandon the adversarial tactics that have thus far characterized the negotiating process.

About the Author

Stephen Swoyer is a Nashville, TN-based freelance journalist who writes about technology.