Dramatic changes ahead for software licensing

24 Mar 2004

The floodgates have opened for software licensing change with more than half of enterprise software vendors likely to change their licensing models over the next year, according to a new landmark study from IDC called “The Future of Software Licensing.” Some 43pc of software vendors believe that their revenues will be derived from subscription-based software by 2010.

IDC expects that vendors will be motivated by financial desire, industry dynamics and customer demands to make fundamental changes.

Software customers, IDC predicts, should see their licensing options open up dramatically as vendors seek to better address customer business needs, make it easier for customers to evaluate how much software they need and align pricing with value.

The study covered 100 software vendors and 100 software customers, focusing on three key perspectives: today’s software licensing landscape, disruptive forces impacting traditional licensing models and the direction of the industry in light of these impacts.

In the study, some 75pc of participating software vendors’ aggregated software revenues were associated with perpetual, versus subscription, licensing methods. Perpetual licensing sales are generally recognised as revenue up front, while subscription revenues are recognised over time.

Customers and vendors involved in the IDC study are considering a move towards subscription licensing. In fact, 43pc of software vendors and 26pc of customers believe the majority of worldwide software revenues will be derived from subscription-based software offerings by the year 2010.

Customer complexity is also driving change. IDC’s study revealed that medium and large-sized software customers are managing an average of more than 40 software contracts, and 70pc of these customers expect the complexity of managing these contracts to increase. This complexity leads to increased costs for customers and makes it more difficult for them to track software license compliance. Both customers and vendors will benefit if the business complexity of managing so many software contracts is alleviated for customers.

Another key dynamic fuelling change is the disconnect between current licensing models and business value. Although this disconnect varies according to software market, 72pc of software vendors and 70pc of software customers strongly believe that the software industry must place a greater focus on clearly establishing the business value of software.

Vendors believe that customers must be more forthcoming when disclosing business requirements so vendors can better establish value and help customers maximize their investments. IDC believes that in order to reach a consensus on value, software vendors and customers must shift away from adversarial negotiating tactics and work together to determine the most appropriate licensing approach.

“Software vendors generally agree that traditional licensing models are not longer suitable in today’s environment,” said Amy Mizoras Konary, programme manager for software pricing, licensing, and delivery at IDC. “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.”

By John Kennedy