‘Software pricing mayhem’ on its way

30 Nov 2004

Sweeping changes in hardware products such as servers in terms of new chips and a trend towards virtualisation technologies could have major implications for software licensing for Irish businesses, which could find themselves burnt by increasing costs.

Because of these changes, a traditional pricing mechanism used for years by software giants – such as Microsoft, IBM, BEA Systems, SAS Institute and Sybase – could be out of date and if Irish businesses fail to renegotiate their contracts they could see the cost of software increase 50pc by 2006, research from Gartner suggests.

Capacity or central processing unit (CPU) has been used as a metric by which to price software for many years. While new developments in chip technology are resulting in hardware being run for less, however, this saving is not being translated to customers by the software vendors. Effectively, if a company succeeds in reducing the cost of running a server, they will still have to pay software vendors for the total capacity of that server, irrespective of how much is used.

There are four key trends driving the reduction in costs of hardware capacity. These include the move towards multi-core chip architectures that increase server performance without requiring more power or generating more heat. A second trend is the move to virtualise hardware resources across physical servers, allowing businesses to consolidate hardware into fewer services. A third trend is the growing availability of servers to support capacity on demand. A fourth and final trend is increased interest in rapid provisioning tools whereby businesses can move vital applications such as payrolls from a small server to a larger server depending on workload requirements.

“Any one of these trends would present a great challenge to software vendors to maintain a fair and acceptable pricing policy,” said Alexa Bona, research director at Gartner. “The fact that all four are happening at the same time is a recipe for software pricing mayhem.”

She added: “Software companies will generally charge for the total potential CPU capacity, regardless of what is being used. They will have to change their policies, but that change will not come quickly. It is, therefore, crucial for enterprises to understand the risks and protect themselves by starting contract negotiations with their vendors now.”

Pointing to the trend towards multi-core chip architecture, Bona pointed to research that indicated the majority of software vendors surveyed by Gartner are intending to charge the current CPU fee for each core on the chip. For example, if a single-core CPU now costs US$40,000 per CPU, a dual-core chip will cost US$80,000. “If an upgrade to the new dual-core design offers only a 50pc improvement, a doubling in the licence fee becomes a tax on technology innovation with little return,” said Bona.

She added: “The current licensing model does not give software vendors an incentive to write more efficient code. It also leaves users unable to control costs when single-core systems become unavailable, perhaps as early as year-end 2006. By that time, many enterprises will pay at least 50pc more in software fees from a number of mainstream software vendors that currently licence based on CPU.”

Bona said that most companies are aware of one or two of the four trends individually, but not of the combined impact. “Enterprises need to address this convergence rapidly. By year-end 2006, the manufacture of single-core chips will end. If contracts or pricing policies on this issue alone are not addressed, enterprises will have no option but to pay significantly more. Single-core systems will not be available.”

Many vendors are still undecided as to what their policy will be. For this reason, Gartner said businesses should initiate discussions now with vendors to accelerate pricing policy changes.

Some vendors have already reacted positively to discussions of this nature. Microsoft, for example, recently announced that it intends to only charge for each CPU irrespective of the number of cores. BEA has also stated it intends to charge a 25pc additional fee for dual-core, rather than 100pc.

Bona argues that businesses should start to renegotiate contracts quickly, leveraging such announcements by Microsoft and BEA in order to get a 25pc additional fee rather than the 100pc fee hike. She also warned firms to negotiate contracts that recognise the partitioning of servers and demand to know the virtualisation pricing strategies of individual software vendors. Businesses should investigate alternative licence metrics offered by the vendors, particularly those looking for databases for their enterprise resource planning systems and other business applications.

Without significant changes in current software pricing and licensing models, businesses can expect software prices to increase without any significant increase in usage by the firm. They can also expect software prices to increase while they drive hardware prices down. Due to these issues, a knock-on effect will hit the server market in terms of limitations in the use of new server technologies by businesses because of the software licence restrictions and businesses can expect to spend more time in custom negotiations with software vendors.

Differences over the pricing mechanism are going to be a big issue in the industry going forward and are already being noticed locally. Harry Largey, enterprise group lead at Microsoft, Ireland, said: “We believe that we should only licence by processor – what’s inside the chips is always evolving. Despite the fact that the server industry is going to dual core, in our mind it is still one processor. The industry is still very mixed. We don’t believe they should be licensing by core. However, other players such as Oracle will licence per core.

“It means to us it will allow businesses to embark on predictable licensing. They can buy the hardware they want and only pay once for the software. It means they can buy more computing power and get a good ‘bang per buck’. We believe that if it’s done properly, companies can actually save money. However, other players in the industry are taking a different view,” Largey said.

By John Kennedy