Desktop software is usually priced per user, which is discounted based on the number of licences acquired through what is widely referred to as a volume licence agreement.
The principle is simple enough: an IT manager needs to purchase a licence for each end-user who has access to the software. But the licensing situation can quickly get out of hand.
First, there is an assumption that all software is purchased centrally and administered by the IT department. However, this is not the case and individual departments or even users, may purchase applications independent of the IT department.
Don't forget your homework
Second, the licences need to cover all uses of the software. If a company allows its staff to work from home, then those people need to have licences to cover remote working.
The software they run on their home PCs clearly needs to be licensed, but the IT department also has to consider what happens if a user connects over a dial-up Internet connection into one of the company's servers, such as an e-mail server, or runs a server application remotely via this connection.
This last scenario poses a serious problem. In the UK software use is governed under the same laws as copyright of intellectual property. A licence gives a user the right to "copy", ie install or run the licensed software on a given computer.
With the explosion of Internet-based applications, the cost of traditional volume licensing quickly becomes exorbitant. Bruce Richardson, senior vice-president for research strategy at analyst group AMR Research, predicts that licensing will become more complex as users start to see the benefit of collaborative computing - giving customers and suppliers access to internal IT systems.
Suppliers are struggling to provide an adequate licensing model for this type of usage. "SAP has tried to price its system based on the maximum number of users accessing the system at any one time, " Richardson says. "But it drove users crazy." He has found that IT directors look for predictable costs when buying IT systems. "They do not like unexpected price increases."
He said that some ERP companies - Peoplesoft, for example - offer a risk sharing type arrangement. The agreement involves the software firm taking a percentage of revenue from the company, based on the projected savings or amount of new business the software creates. This can be attractive but gets messy if the company undertakes a merger/acquisition or devolves parts of its businesses.
It is worth differentiating between two types of licence: namely development and deployment. Thankfully suppliers have recognised the importance of developers whether they are in-house or independent software vendors.
For instance, Ovum analyst Gary Barnett points out that IBM makes a significant discount on the single server version of WebSphere, the company's application server middleware.
He has noticed that in middleware there is a shift among suppliers. "They have a habit of charging less for developer licences and more for deployment." Some, he adds, almost go as far as giving away the developer versions for free.
As for deployment licences, "pricing structures tend to reflect usage and the perceived value of the middleware." A popular type of licensing is per-CPU, which charges licence fees based on the power of the processor.
Broadly speaking, the suppliers define two main camps of CPU. First, there is Intel-based, industry standard PC server technology. The second is the RISC (reduced instruction set) category comprising the Unix servers: Sun Solaris powered by the Sparc processor, Hewlett-Packard 's HP-UX with PA-Risc and IBM's AIX with the PowerPC.
Generally, middleware for Unix systems tends to be priced higher than equivalent software on Intel-based servers.
Pay for what you use
One of the interesting models to come from application service providers is pay-for-use: for a monthly subscription users only pay for what they use.
For Tony Lock, senior analyst at Bloor Research, one of the key licensing issues today is that multiple devices can now access licensed software. "It is the old dilemma of whether to licence by user or by device."
Lock says that many licences today take into account the configuration of IT infrastructure. For instance, "with storage users can buy per server or per terabyte of data". He believes pay-per-use has to be adopted by software firms to simplify licensing from a user's perspective.
As an example, he points out that IBM's Z series mainframe offers a licence based on usage. Another example is Hewlett-Packard, which has a way of measuring the amount of CPU usage on its Unix boxes for a given application.
While no software company is using this metric yet as a measure of software usage, clearly in time it would provide an accurate and fair account of what's happening.
Model-making today and tomorrow
The industry's attempts to restructure pricing have led to an awful lot of confusion and understandable anger among users. Many consider they have been mistreated by the supplier when the new pricing takes a larger chunk of an already tight IT budget.
Business software companies, on the other hand, have found themselves in a Catch 22 situation. They rely on sustained software licensing revenues. Users expect more from the software with each new release. But software firms are inevitably finding it harder to add enough features to make the upgrade worthwhile.