Adoption of cloud computing combined with other technology and business model changes—such as virtualization, SaaS and open source—are forcing software makers to rapidly evolve their pricing and licensing models to meet customer needs.
The 2010 Key Trends in Software Pricing and Licensing Survey of 234 software companies and enterprise IT directors, prepared jointly with IDC, found the challenges of the current economic downturn are driving both groups to look for better strategies to derive more value for their organizations through software licensing and pricing. While, not surprisingly, some of those strategies diverge between vendors and customers, many are complementary and serve to strengthen the positions of both.
The 2010 Key Trends in Software Licensing and Pricing survey was conducted by Flexera Software and IDC’s Software Pricing and Licensing Research division, under the direction of Amy Konary. This annual research project looks at the software licensing, pricing and enforcement trends and best practices around the licensing of software. The survey reaches out to executives at software vendor firms, high-tech manufacturers and enterprise customers who use and manage software and devices. Now in its sixth year, the survey is previewed at the annual SoftSummit Conference and made available to the industry at large each year.
Key findings from the survey
A closer look at the study’s top line findings finds software companies dealing with a variety of issues impacting their pricing and licensing strategies. Consider the following:
1. Cloud computing on the rise
The 2010 survey reveals that cloud computing is on the minds of software producers, who are planning on a significant market shift towards private and/or public cloud-based models.
Sixty percent of publishers indicated that their licensing will need to adapt to the cloud over the next two years, and 30 percent expect that the change will be significant.
Implicit in this trend will be the need for both publishers and enterprises to manage the heightened complexity associated with cloud-based computing. For publishers and high-tech manufacturers, this means more sophisticated entitlement and compliance management. For enterprises, this means more sophisticated software asset management and enterprise license optimization to ensure, among other things, continual compliance.
2. Flexible licensing models
The survey also reveals an increasing demand for more flexible licensing models, which in turn is going to fuel the demand for more sophisticated application usage tracking tools. For instance:
Twenty-two percent of publishers currently offer usage-based pricing (up from 15 percent in 2009), and over the next two years it is expected to rise to 41 percent.
In the midst of this shift, while 70 percent of enterprises report that tracking software license usage is important:
One-third of the software publishers that have or plan to have usage-based pricing do not track usage at all today – not even manually.
Just over 50 percent that have or plan a usage-based pricing model in the next two years are offering tools to help their customers track application usage. For both publishers and enterprises, the ability to track and understand current usage is a prerequisite to making an intelligent decision to migrate to a usage-based model. Thus, both sides will have to acquire better tools to assess their current and future needs and determine whether usage-based pricing is, in fact, appropriate.
3. Publishers still lagging in usage tracking and enforcement
The 2010 survey indicates that despite the growing complexity of software licensing models and increased enforcement, publishers are not adequately tracking software usage.
Forty-three percent of publishers indicate that either they do not monitor software usage or they do not know if they do. Likewise, 13 percent of publishers indicate that they still have not implemented any means of enforcement, although this number is a vast improvement over 2009 when 28 percent said they have no enforcement mechanisms.
These numbers belie the growing importance of software compliance and speak to an absence of industry-wide standardization and automation of software usage tracking and enforcement.
4. Preferred enforcement mechanisms converging
Given that software license enforcement is a necessary reality, the 2010 survey indicates a convergence of both publisher’s and enterprise’s preferred enforcement mechanisms. Overwhelmingly:
Sixty-six percent of enterprises prefer network-based licensing enforcement, up from an already-strong 60 percent in 2009.
Software publishers are responding to this preference, with 46 percent now reporting that they use networking licensing (more than any or method), up from 28 percent last year. This enterprise desire matches the findings around trends towards more usage-based licensing models.
5. Software audits: a growing reality
Only 13 percent of ISVs report in 2010 that they use compliance team audits as an enforcement mechanism.
While this number is low compared to other methods, including serial number checks (39 percent), product activation (36 percent) and dongles (24 percent), audits are on the rise.
Last year only three percent of publishers used audits as a compliance mechanism and 18 percent of publishers expect the use of audits to increase over the next two years. This increase in audits, often initiated as a result of mergers and acquisitions, and changes in environment such as virtualization, while adding to the publishers’ coffers can also add tension to the relationship between publisher and customer.
Tools that help publishers and enterprises better track usage and ensure continual compliance would ultimately serve both parties more effectively by better identifying under- and over-utilization and spreading the costs to the parties that are actually using the licenses.
6. Value satisfaction — is value equal to price?
Software publishers and enterprises are largely in agreement that pricing models capture the value of the software. The survey asked enterprises to rate their satisfaction of pricing for database, middleware, ERP, CRM, engineering and desktop applications. Most respondents indicated they were largely satisfied. Enterprises were most satisfied with database software pricing — with only 10 percent of respondents registering dissatisfaction; they were least satisfied with ERP software pricing, but not by a significantly higher amount — only 20 percent registered dissatisfaction.
On the vendor side, 79 percent of software publishers, likewise, said that their company’s pricing and licensing strategies captured the value of their software effectively.
Notwithstanding current satisfaction levels, publishers also understand that their customers want more choice in licensing models. Most publishers are increasing the flexibility of licensing by adding more choice. They are doing this in order to generate more revenue (72 percent) and improve customer relations (69 percent).
7. Implications for software vendors
- Cloud computing will change pricing. The survey confirms that the cloud is the next “big thing.” The key characteristics of the cloud, including scalability, self service provisioning, integrated design and simple adoption, provide significant benefits — reducing overall costs, improving quality, simplifying access and the ability to automate key processes.However, with these benefits comes increased complexity in terms of licensing entitlements, usage and optimization that both ISVs and enterprises will have to manage. From the enterprise perspective, understanding who is entitled to use what, and ensuring continual compliance has been an ongoing challenge for many organizations — especially those without enterprise license optimization tools. Adding the cloud to the IT mix adds to this challenge.Likewise, ISVs will need more sophisticated processes to manage entitlements and ensure compliance in this more complex environment. While both sides are getting there, the survey reveals that they have a long way to go to integrate the necessary tools and processes to ensure smooth operations in the cloud.
- Greater flexibility in pricing and usage is needed. The survey clearly reveals that enterprises want more options and flexibility in software licensing and enforcement, with a clear preference for concurrent user pricing, and growing demand for usage-based models. While ISVs prefer perpetual, per-seat and concurrent pricing, they are getting the message, with 20 percent offering usage-based pricing this year, and more expected to over the next two years.However, for usage-based pricing to take hold, both ISVs and enterprises need the facilities to track actual usage — and many still do not (only one-third of ISVs that have or plan on implementing usage-based pricing do not track usage at all today — even manually). Enterprises are in a similar position. This implies that for usage-based pricing to truly take root and deliver on its perceived benefits, both ISVs and enterprises are going to need the capability to track and manage usage and enforce compliance on this granular level. We should expect to see a strong trend towards adoption of better automated tools and processes that will enable this.
- Continual compliance remains a challenge for enterprises. Enterprises continue to be challenged by compliance issues. The survey revealed that for 53 percent of enterprises, at least some of their software license spend is associated with applications that are overused and therefore out of compliance. Eighty-five percent responded that at least some of their software license spend is associated with under-used software, or shelfware.This means that money is being left on the table – a circumstance that we do not think is sustainable in this economy. The lack of automation in usage tracking and compliance (46 percent of enterprises do not have licensing optimization tools to track this) is likely the culprit for such significant levels of under- and over-utilization. As enterprises awaken to the need for continual compliance and the savings that optimization tools provide, we believe the magnitude of out-of-compliance licensing penalties will diminish.
- Audits as a means for compliance are on the rise. As unpopular as they are, software audits are on the rise — up about 500 percent year over year. A total of 13 percent of ISVs in the 2010 survey have conducted physical audits this year — up from three percent last year. This means that despite the inevitable friction audits cause between software publishers and their customers, the revenues they generate for ISVs in this difficult economy is compelling and driving audit activity. While we believe that this trend will continue, with the growing adoption by enterprises of next generation Software Asset Management or Enterprise License Optimization tools, the results of these audits will shift over the coming two years.As these tools enable enterprises to settle into continual compliance mode, audits will become less about surprises (i.e., suddenly learning that companies are over-utilizing and having to pay large true-up penalties) and more about even-handed license renegotiation. Both ISVs and enterprises will have a clear picture of actual, ongoing usage and will be able, therefore, to more accurately modify license terms to reflect that usage. In the long run, this will serve to strengthen the ISV-customer relationship and provide greater confidence in licensing terms.
Mark Bishof is president and CEO of Flexera Software.