Microsoft's licensing changes have tempted other major software
companies to examine their own charging models. Karl Cushing
discovers that users will have to tread carefully if they are to
keep out of the licensing mire.
It's just over a month since Microsoft's licensing changes kicked
in, ending the volume licensing deals that allowed Microsoft users
to upgrade software on a trade-in basis. Yet still the uncertainty
over the future of software procurement persists. Will other
software suppliers follow Microsoft's lead and steamroller user
organisations into signing new licensing agreements in a bid to
boost short-term revenues - as predicted by Computer Weekly back in
July?
Will suppliers use licensing changes to squeeze more cash out of
users down the line? Or will more companies go down the
subscription-based licensing route and turn us into an nation of
software renters instead of buyers?
What is clear is that a major shake-up in software licensing is on
the cards and IT directors will have to monitor the situation
closely to ensure that the way they approach software licensing
fits in with their overall IT strategy.
Analyst group Gartner has predicted that Microsoft will scrap its
perpetual licences and will offer only subscription licences by
2006. Gartner analyst Jon Mein also believes that the current
stagnation in the software market will force other software houses
to follow similar models to Microsoft to get best value from their
products. Mein points to recent Dataquest figures which predict
that the number of new software licences being sold will remain
stagnant in the foreseeable future, with double-digit growth not
forecast until 2004. Mein sees software suppliers such as Citrix
and Adobe as prime candidates for switching to the subscription
model - the extreme form of which is renting kit to the customer -
as a way to boost revenues.
Change is already in the air. Last month saw licensing changes from
both Novell, which altered its licensing model on 1 August, and
software and services firm Citrix, which announced on 5 August it
was adopting an "open licensing model" in the early fourth quarter
to simplify the way customers purchase and manage their Citrix
software licences.
Although nowhere near as broad as Microsoft's new model, Novell's
licence changes mean that all its products will now be licensed on
a per-user basis, with its Corporate Licence Agreement moving from
a forecast to an initial order basis.
Echoing Citrix's argument, Ben Pulpett, enterprise and sales
director for Novell UK, insists that the changes were made at the
behest of, and for the benefit of, its customers. "We've simplified
the models, that's all," he says.
Altruism aside, Novell will make savings through charging on a
per-user basis. When the company billed on a forecast basis there
were often marked differences in what customers ended up paying and
what they should have paid. Novell will not be following Microsoft
in the draconian way it goes about enforcing licensing changes
though, insists Pulpett. "Microsoft customers had a gun put to
their head - they were forced to do it [sign new licensing
agreements before 31 July to qualify for discounts] and we think
that's morally incorrect," he says.
Novell has piloted subscription based-licensing in Scandinavia, but
Pulpett does not think the UK market is fully ready for it yet. "It
is available but it's not something we're seeing much demand for at
the moment," he says. However, the company is about to launch a new
rental model aimed squarely at the UK public sector at a
significantly reduced cost, he says.
The fact that Microsoft made record profits in the three-month
period to June on the back of its revenue changes did not go
unnoticed by the cash-strapped supplier community. The model will
look especially appetising for companies with shareholders to
satisfy. As such, Butler Group analyst Mike Thompson has identified
Sun as a likely candidate to follow Microsoft's lead.
However, Jonathan Mills, software product marketing manager for Sun
in the UK, denies that the company plans to adopt such a strategy
and adds that the company will not force users to adopt
subscription licensing while there is so much "fear, uncertainty
and doubt" in the marketplace.
Mills says Sun has been approached by some companies interested in
switching to a subscription licensing model, such as software
service providers delivering a large amount of services to a large
amount of users, and this represents opportunities for Sun.
However, he believes subscription licensing is unsuitable for
companies with slow upgrade plans who want control over their
destiny and the software versions they use. Mills also points out
that most of Sun's software is server-based, rather than directed
at individual end users - the main exception being its Star Office
product, which Mills says would probably be most suitable for
subscription-based licensing model but is currently licensed on a
per-user basis.
Not all licensing changes are necessarily bad, however - even when
they're by Microsoft. Gartner's Mein points out that, to a large
extent, the company was playing catch-up on the likes of Oracle and
IBM, which have offered once-a-year upgrade licences for some time.
"We think that customers will find the new Microsoft model simpler
to understand and manage going forward," says Mein, who says
customers often ended up being under- or over-licensed under the
old system. However, if Gartner is correct and Microsoft moves to
force its customers to accept subscription-based licences to use
its products by 2006 and, as Mein expects, other suppliers adopt
rental-based licensing, this will necessitate some change
management and cultural shifts. Companies will be buying their
software in a different way and will need to be aware of the
potential pitfalls.
One of the main risks with fully-fledged subscription-based
licensing, in which users rent equipment from the supplier -
Microsoft's Enterprise Agreement Subscription Model is one example
- is that customers can end up paying more than the product is
worth if the life cycle is too long. "Subscription may look less
expensive in the first instance but it can work out more expensive
in the long term," says Mein. In the Microsoft model, for example,
there is a "break-even period" at five years: if you keep using a
product after that, you'll have ended up paying over the odds. But
it's not all doom and gloom.
Although Peter Mansbridge, IT director at power protection product
firm Chloride, describes the subscription licensing model as "still
a bit raw", he believes it will work out well in the long term and
should be easier to manage than the current situation. Mansbridge
points out that from an IT management perspective the model makes
sense because it can reduce management effort and overheads and
maximise the business benefit of what you're buying. He points out
that managing licences takes effort and says that if suppliers were
to take over the work companies put into policing their internal
software usage that would be a major benefit. "That's the sort of
benefit I see eventually coming from Microsoft," says Mansbridge.
"When it settles down it will probably be the way to go, but we're
happier owning our own licences at the moment," he adds.
However, Mansbridge is less sure about the issue of software
upgrades. The idea behind subscription-based licensing is that you
get as many updates as come out, but there are fears that
unscrupulous software houses will release lots of minor or
pointless upgrades to fleece users of yet more cash. "What we're
striving for in IT management is a degree of stability," says
Mansbridge. "You have to keep up but you also need to make sure
that the upgrade is delivering benefit to the business and the
users and you're not just spending money on the latest version."
Interim IT director Ed Darnell also believes that the
subscription-based model makes a lot of sense. "Subscription-based
licensing is a more honest way of telling you what software really
costs you and it clearly makes an enormous lot of sense from the
supplier point of view," he says. Darnell believes there is often a
large disparity between what companies think they have bought and
what they actually get, because of add-on costs for services
including maintenance and upgrades. "If you look at a company like
Oracle you pay very high licence costs, but you also have to spend
a lot of money on getting value out of their products," he says.
However, while subscription-based licensing makes sense on the
desktop, Darnell believes that for other areas a more service-based
approach is better. This is where he sees the open source approach
coming into its own. He says two main models will emerge and "stack
up against each other": a subscription-based one and an open source
model with no licence fees but costs for integration and squeezing
out value.
Software companies looking to dramatically change their licensing
models to boost revenue should not take it for granted that users
will toe the line, however.
Take the situation with Microsoft. While the IT user community
largely accepted its fate and went along with signing new licence
agreements in the months leading up to the July 31 deadline, it is
still unclear how they will behave in the long run. Stories abound
of companies slowly stripping out Microsoft kit in favour of open
source alternatives such as Linux and Star Office on the desktop,
in order to reduce their exposure to Microsoft.
The danger is that other main suppliers may go down the Microsoft
same path and you could find that by switching over to another
platform you've jumped from the frying pan into the fire, incurring
huge transformation costs in the process.
Guest editor's comment
Microsoft's recent licensing
changes have obviously caused great consternation in the industry
and are quite clearly an indication of where the software vendors
are going in general.
My company has embraced the subscription model and we have seen
much tighter control in our Microsoft space over the last 12
months: if you don't use it, un-install and you don't have to
subscribe to it. However, this was not the only change that was
made: the focus on enterprise agreements has moved from employee
headcount to client numbers - a 10%-20% increase for many
organisations - and continued unbundling of software, such as
Frontpage, has created extra subscription line items when
previously they had been included in other products.
What next? The whole area is a minefield and organisations will
need to continuously scrutinise their environments to ensure that
they have optimised licensing and use only what they need. Perhaps
we should all buy shares in companies touting software metering
tools!
Subscription licensing: pros and cons
Pros
- No big, one-off costs upfront
- Less administration and lower management overheads as you're
not looking after all your licences
Cons
- You could end up paying too much if the life cycle of the
product is too long
- You could end up paying for unnecessary upgrades that don't add
value
Verdict
Subscription licensing can make sense for some companies, but it's
still at an early stage in its development. One to watch.
Licensing changes: the key suppliers
Microsoft
Following the company's licensing changes which came into effect on
August 1, ending the volume licensing deals that allowed users to
upgrade software on a trade-in basis, Microsoft customers can now
either opt for three options:
- MS Select, a forecast-based (ie asset-based) agreement
- MS Enterprise Agreement, an asset-based commitment agreement
where you commit to buy a number of licences over a three-year
period; or
- Enterprise Agreement Subscription model, a rental-based
three-year commitment
Citrix
Identified by Gartner analyst Jon Mein as a prime candidate for
adopting a subscription model to boost revenues. Recently announced
it would be switching to an "open licensing model" in the early
fourth quarter. President and chief executive officer Mark
Templeton claims the changes will simplify the way customers
purchased and manage their Citrix software licences.
Adobe
Identified by Gartner analyst Jon Mein as a prime candidate for
adopting subscription licensing. No significant changes as yet
Oracle
Again, no significant changes as yet. Along with IBM, the company
has been offering once-a-year upgrade licences for some time.
However, in a bid to clear up uncertainties over its labyrinthine
pricing structure, Oracle plans to release a new 'software
investment guide' on its Web site this month. Earlier this year the
company was criticised by both Gartner and Meta Group for its
licensing practices
Novell
Recent licence changes mean that all its products will now be
licensed on a per-user basis, with its Corporate Licence Agreement
changing from a forecast to an initial-order basis. Novell has
piloted subscription-based licensing in Scandinavian countries, but
doesn't think the UK market is fully ready for it yet, although it
is available. However, the company is about to launch a new rental
model aimed squarely at the UK public sector
Sun
Identified by both Butler Group and Gartner as a prime candidate to
follow Microsoft's lead and change its licensing structure to boost
revenue for shareholders. Sun denies this, however, and claims that
the company would not force users to adopt subscription licensing
while there is so much uncertainty in the marketplace. A
subscription licensing would be most suitable for the company's
desktop product Star Office, which is currently licensed on a
per-user basis.