Licensing reaper

As users are able to download more applications from the Web, there is talk of renting software. But there's life in the current licensing model yet.

Relationships between software companies and users can often get ae is talk of renting software. But there's life in the current licensing model yet. little sticky, and the stickiest point will always be where the relationship is crystallised into the defining institution of the licence.

Like a pre-nuptial agreement, once the honeymoon period is over and the parties start to work out ongoing obligations, this seemingly humble piece of paper can command an awful lot of attention.

The middle of such a dispute is not a nice place for anyone to be, and for those firmly cemented between user and supplier, it's more than a good idea to be up-to-date with who's getting upset over what - especially as more relationships seem to be ending unhappily these days.

Recent disputes over the concurrent licensing models of such commodity products as Oracle's database and Microsoft's Windows NT Terminal Server demonstrate what can happen to partnerships when circumstances change.

The long-cherished method of charging per user has been turning into a disaster area as users start to open up applications over the Web and find themselves potentially owing for thousands of licences. The large software companies are also experimenting widely with licence models more akin to rental than purchase - just like the old days of the data centre.

Oracle concedes that a customer accessing its corporate database for something over the Web is indeed radically different to the kind of serious database use the licence originally anticipated. As a result, the Oracle UK user group has undergone a wide-ranging consultation exercise of its members to gauge the merits of the various licensing models.

'Most people are happy, but a handful are not,' admits Ronan Miles, vice president of the Oracle UK user group. 'Software licensing exists to bring revenue from the market to the supplier and sometimes complexities exist in the model. The Oracle model is incredibly complex and a large part of our customer base doesn't understand how it is being charged.'

But does he perceive the changes in software payment as a return to the days of the data centre? 'Yes - it's going back to managing IT as a cost centre and retro-accounting. People like to know how much things cost them but, typically in a business, the different departments will spend all year arguing over it. Pay-per-use is an obvious way to try to sell this, except, of course, anyone big enough will be trying to cut deals. It will be interesting in institutional terms to see how it breaks down.'

This changing model could spell disaster for resellers, warns analyst Richard Holway: 'Ultimately, it will be impossible to make money from selling product licences - you won't be able to measure them by 2005, there'll be no category for it. Firms give away products to entice customers to their services - look at mobile phones and RealAudio, for example. Even companies such as Sage won't charge £99 for its accounting software - it will roll it all up into its specialist services package, Sage Cover.'

More businesses are giving away PCs in return for signing up to use their software. It's the same as BT offering free voicemail in return for being bombarded with junk mail - it's not rocket science.

'Any product capable of commoditisation eventually will be, so companies have to be very high-volume to make any money, or move to services,' Holway says. 'I believe that people in the channel are like dodos - their whole existence is in terminal decline. Making the transition to services is very difficult - look at Compaq's woes. Even if businesses recognise this, it's still a difficult task.'

So what advice does he have for the channel? 'It's like the joke in which someone asks an Irishman the way to Piccadilly Circus, and he says, "Well, I wouldn't have started from here if I were you". I'd advise players to make sure they sell their companies quickly, or recognise that the direct vendors and the internet are taking away sales and customers. Unless they're an absolute specialist in an area, where knowledge of a particular sector such as fashion or retail is of great value to their customers, then they're stuffed.'

But apart from failing to account for a lot of the services the channel provides, an analysis so centred on the blurred and shifting line between software and services can only be of limited value. After all, there are a number of forces afoot driving the changes in the market.

Analysts identify a multitude of broad factors behind the recent disputes, ranging from software companies' sudden ravenous appetite for a steadier income, to Wall Street's ever-rising expectations of financial performance.

This has led to a squeeze on organisations, meaning the ones that don't perform get a stiff smack, as former Compaq chief executive Eckhard Pfeiffer would no doubt testify. Even Dell boss Michael Dell isn't immune from a severe scolding if his scores aren't up to scratch just once.

It could be a bad time to be caught in the middle, especially since prices are also rising, albeit by stealth. Alexa Bona, an analyst at Gartner Group, says it's definitely a case of caveat emptor - let the buyer beware.

'The year 2000 issue has meant a lot of users haven't been making their ordinary spend on non-millennium development. This means mid-to-large vendors - Oracle, SAP and Baan in particular - are very keen on the tactics used by Microsoft of looking at the contract, and garnering more revenue from it,' she says (see box, page 53).

'The mainframe community has been facing this for a while - companies will be getting less for more, so unless you watch the contracts very carefully, the terms might not cover as much support as you might expect,' Bona warns.

Ralph Seeley, senior consultant at research company Cambashi, agrees that software companies are trying to buck the long-term trend in the falling price of software at the moment, and the move to a leasing/renting model could facilitate this. 'It's quite interesting. I have a personal suspicion that the move to recent concern where price lags improvement is to help users is more driven by the likes of Linux, which is sitting out there providing the same capabilities as NT. Even if it doesn't succeed, it has injected a lot of life into the price-performance debate. There is a lot of discontent at what can amount to very large prices, although the overall movement is downwards in terms of price.'

But Steve Caunce, software marketing manager at Computacenter, says he isn't deafened by calls for cheaper licences. He sees a general trend towards meeting customer demand. 'From a vendor's perspective, it's like this: most companies have Microsoft licences of one kind or another, and it is now looking for more flexible systems. Over the years, there has been volume licensing agreements called Select, then there was demand looking for per-desktop pricing, then the Enterprise Agreement came out for per-desktop pricing.

'Software rental is starting to be asked for more, but not much more.

Microsoft has been a pioneer in software pricing for years - it's pretty much the leader in trying things out, but nobody's renting software from Microsoft at the moment,' he adds.

Is Caunce hearing any demand from customers for pay-as-you-go deals?

'Certainly some firms would welcome that, especially in application products, particularly in the cases of Visual Basic or Project that would only be used occasionally,' he says. 'When concurrency was removed, it was an issue, but businesses have come to accept it - we certainly don't see it as a problem. In a few weeks, Microsoft will be announcing changes in Select licensing agreements for the rest of the year, as well as moves towards EU price harmonisation and tweaks to operating licences. I don't expect any big surprises.'

So it may not be all change quite yet, but broad changes are most certainly afoot in the market. And as Bona describes recent Microsoft activity: 'It's out there experimenting with everything'.

Phil Cross, head of Backoffice tools at Microsoft, agrees: 'It's fair to say we're expanding our licensing to be more flexible but it's not to say we're moving towards the rental of software. We can have a box with the software in it, you can have a piece of paper and get the software to cover a network. We have ways of doing most things, but if people are confused, we need to clear it up.'

Until recently, under the licensing model used for Windows NT Terminal Server, Microsoft demanded a payment for every user. When one UK university wanted to make an NT application available to an estimated 10,000 potential users on the Web, it was horrified to discover it would be liable for 10,000 client licences. 'There was some concern over that, but we've sorted it out,' Cross says.

So is Microsoft moving towards a rental model? 'No. The model is changing, but we're not planning on renting software.' So the Microsoft line for now, is that it is not moving towards renting or leasing software. But is it finding pricing in general a sensitive issue? How can users be made to feel they're getting a good deal?

Cross says: 'If I've just bought a new car, did I get the best deal? I don't know. There's lots of features to a car, but it's fairly straightforward - you can drive it away. But with software it's more complex. Because Microsoft has software in various places, its size can make software pricing more complex. But it's probably the same as buying software from someone such as Oracle or IBM.'

Oracle and Microsoft certainly bear some similarities in terms of what recent licensing disputes have been over - concurrency of users, and the classification of public, non-customer access over the Web. If software firms are listening to users and keeping them happy, can the uncertainty over how they'll be paying for software in a few years have an upside?

Some people see considerable benefits for all in the leasing licence model.

Peter Greenall, European licensing manager at Ingram Micro, explains.

'When Microsoft offers a product, there is a huge tranche of licences as the big users upgrade. But now this poses a problem for the user - they must buy at a particular time, so the cost of doing so will be very high, and this keeps the user from adopting new technology. That kind of lump payment also presents a problem for the reseller that has to persuade the user of its cost-worthiness.

'And, of course, it's tough for software companies to sustain their revenue flow,' Greenall adds. 'We need a better model. It's a problem for everyone - the common 50 or 20 year licences people have for Microsoft Office aren't going to be used. It doesn't reflect reality in any way. No one is going to continue that long - they'll all want to upgrade to the next version.

'I think that for a reseller, a model in which they have a smoother cash flow too, would be viewed positively,' he says. 'I don't see software companies eating into the market as long as the channel relationship remains. We'll still be able to make money.'

Ultimately, as long as a company is satisfying customer need, it is going to keep making money. But the idea that software rental could kill the channel, as Holway thinks, is not a common one.

But with so much change in the way software is being paid for, it is perhaps worth keeping a closer eye than usual on those licensing agreements.

It's always, in the very least embarrassing for customers to find themselves on the wrong side of the agreement - and there will be no doubt that there's plenty of alteration in the small print of payment models in the future.

MICROSOFT'S LATEST SQUEEZE

Alexa Bona, analyst at Gartner Group, has just finished a paper examining changes in the Microsoft licensing model. Interestingly, it has led her to the following 'strategic planning assumptions', which will almost certainly frighten a few Microsoft customers:

- By 2000, Microsoft will offer non-perpetual (where customers will pay for the use of the software for a fixed period) licences as a standard option within their corporate licensing agreements.

Throughout 2001, non-perpetual licences and bundled maintenance will cost as little as 50 per cent of the price of equivalent perpetual licences.

However, by 2004 non-perpetual licences will cost 20 per cent more than equivalent perpetual licences.

By 2002, Microsoft will eliminate the perpetual option.

So how did Bona reach these conclusions? 'There's a pervasive move to non-perpetual licensing - perpetual being the right to use one version of the software indefinitely.

Non-perpetual, which has many names, is more like renting - you're licensing to use the software for a set period.

In this model, upgrades are generally thrown in with the right to use.

But where is this happening with Microsoft customers? 'Microsoft has already been doing this within the academic community with its Campus Agreement,' she explains. 'It is experimenting with these heavily in the corporate environment too, as well as here and there with different things.

Many other vendors are trying out this type of thing, too. But most organisations are not familiar with non-perpetual deals unless they are mainframe users. Users may come away from the bargain thinking they've got a deal but find the terms let them down.'

Bona is looking very closely at Microsoft's terms and conditions at the moment, and in a paper entitled More than one way to play monopoly, she has been examining how software companies can 'put up prices without putting up prices - the cost of licensing Microsoft software has grown through changes in the terms and conditions'.

'Concurrent use was eliminated from Office in December 1997, and for Exchange, though NT and SQL Server still carry it,' Bona adds. 'Home use and pro-rated maintenance have been eliminated, too.

Microsoft's strategy is definitely to squeeze.'