News

Forrester Calls for Software Licensing Reform

• By Kurt Mackie
• April 15, 2011

Traditional software licensing models aren't showing value for organizations, according to a report released this month by Forrester.

The research company's "Software Pricing and Licensing Trends 2011" report indicates that software licensing and pricing would be more customer-friendly if some changes to the current structure were made. The report, aimed at CIOs and software vendor managers who must deal with the sometimes twisted world of software licensing, offers a call to arms to push the software industry toward more meaningful, or "customer-friendly," licensing and pricing.

In the current model, a software vendor ties its product licensing to hardware, such as the number of processors in a machine or per 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 ever more complex, and even bizarre, such as when software vendors base the licensing on the type or brand of equipment used.

These software licensing approaches arose from need of the software vendors to justify consistent annual returns to financial analysts, the report explains. Traditional models do generate those revenues, but they just alienate software buyers. The top business goal of CIOs 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.

The only case where tying software to hardware makes sense is with operating systems, according to the report.

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).