The arrival of ASPs promises to uproot traditional software pricing
methods. Nicholas Enticknap reports
The arrival of application service providers (ASPs) promises to
solve one of the most pressing issues affecting IT sites. Software
pricing has been a bone of contention ever since IBM started to
charge separately for software in 1969, and the problem is becoming
more acute as software occupies an increasingly larger proportion
of the IT budget.
In the ASP environment, the difficulties of pricing software
according to its value to the customer disappear. Software becomes
just a form of metered service, which all organisations have
established procedures for dealing with.
According to Mat Hanrahan, a Bloor Research analyst,
"Subscription-based pricing has a lot of advantages, aside from the
difficulty of tracking client/server pricing. With the ASP model,
you pay a subscription per month, per user, and delivery is up to
the service provider. With client/ server, there is a big
investment up-front and a big investment in implementation. You
don't get that with the subscription model.
"An enterprise has to pay through the nose to ensure the system
is secure. There's always going to be a hacker, but guaranteed
security is what you get if you pay a subscription," he added.
Widespread use of ASPs is some time ahead, possibly five years,
according to Hanrahan. But already software companies such as
Microsoft are gearing up to adjust their traditional software
pricing to the new world.
Pricing for server software is traditionally related either to
the capacity of the machine on which it runs, or to the number of
registered software users. Capacity-based pricing has a number of
disadvantages:
- It means the cost of running a lightly-used application
increases when you upgrade the host machine
- It makes it more expensive to run a small, new application on a
larger machine than it does on a small one
- Pricing granularity becomes an issue: a small increase in
workload can mean a big increase in software costs.
For these reasons, Isham Research analyst Phil Payne describes
IBM's decision to introduce graduated capacity-based software
pricing in 1990 as "the great mistake, that has driven so many
small applications off the mainframe, and weakened the mainframe
drastically".
IBM has taken a number of steps to alleviate this problem. It
changed its Graduated Monthly Licence Charge (GMLC) system, where
processors are divided into capacity bands, to a new system called
Parallel Sysplex Licence Charge (PSLC), where pricing rises in
small increments of equal size.
For users running new applications such as enterprise resource
planning systems or Lotus Domino, it has introduced a new lower
pricing structure, New Application Growth Environment (NAGE), to
encourage users to develop these applications on mainframes rather
than on Unix or NT servers.
IBM has also introduced usage-based pricing for applications
that use less than 25% of the machine resources on which they run.
The initial version of this had very little uptake, so IBM revised
it and reintroduced it under the name Usage Licence Charge (ULC) in
late 1998.
The company has promised that usage-based pricing will become
more common in future and is trying to persuade third-party
developers to introduce similar systems. Even so, it appears to be
just as unpopular as its predecessor.
Mainframe software is essentially still charged on a machine
capacity basis, despite the disadvantages. Although IBM tried to
move the AS/400 over to user-based pricing in the mid-1990s, it had
to move back again.
In the Unix and NT worlds, it is more usual for software to be
charged either at a flat rate (typically for software on smaller
machines) or on the basis of the number of clients licensed to
access the server. There has been a trend towards introducing
capacity-based pricing for larger Unix machines, in line with
mainframe practice. Oracle recently offered the choice of either
capacity or seat-based pricing, depending on which is more
cost-effective.
Seat-based pricing raises the same questions of flexibility as
capacity-based pricing: what happens when you go over a boundary
and how you define a seat?
Ray Titcombe, chairman of user group IBM CUA, explained,
"Browser-based applications may make full use of your back-end
applications, but you don't have a client licence for the browsers.
With e-business a client base grows rapidly to tens or even
hundreds of thousands of users."
IBM decided that the best way to adapt software pricing to
e-business was to develop transaction-based pricing. But, said
Payne, "That's a long way off. It has proven too complex. One of
the reasons is that they charge different amounts for different
bits of middleware."
Another threat to traditional software pricing methods comes
from the open source movement. This is the main reason for the
popularity of Linux, which offers no technical advantages over
other versions of Unix, but has the advantage that it is free to
use.
Charging nothing is probably the only method of software pricing
that arouses no resentment in any circumstances. Capacity-based,
user-based and usage-based pricing all produce anomalies and
difficulties. Moving to a service-based model has promise, but it
is untried. It remains to be seen whether it solves the IT
industry's 30-year-old problem.