While software vendors may occasionally make policies up as they
go along, they generally make the reasonable assumption that their
customers don't particularly want to hear about them.
Which is why it is so surprising to hear so many of them
publicly debating how they plan to license and charge for their
software in future. "I can't say where we will get to in three
years. We have to experiment," says Stephen Udon, head of partner
marketing at Microsoft.
"We're going to try a number of different licensing models - all
different types," says Mark Stradling, Citrix's managing director
for northern Europe. "It's overkill, but we'll get a much better
idea of what users want."
And they are not alone. Dale Vile, a senior analyst with Bloor
Research, explains: "No one really knows what they are doing. Look
at a new IT project going into any company today. They are looking
at five or six sets of different licensing deals for the software
The cause of all this confusion? "The internet," says Udon. "The
internet," says Stradling. "The internet," says Vile. It appears
that the net has turned licensing, previously a dull-but-lucrative
pastime for software vendors, into an experiment in how to
The net effect
On the one hand, the web alters the sheer number of customers that
use their software. Instead of a countable number of users
connected to a local area network, there are innumerable hordes of
partners, customers and home-workers dialling in through the
And this affects the way in which customers want to buy their
software: instead of purchasing boxed applications from a reseller,
they want to buy licences in bulk by filling in an online form.
On the other hand, the internet also affects what users are
prepared to pay. Instead of forcing customers to pay the fees
indicated in country-based price lists, which bear little relation
to the prices paid by large customers, the internet promises global
pricing with a transparent discount structure.
The first problem particularly worries Microsoft and led to its
announcement in June of per-processor pricing for its Windows DNA
2000 products. These include its SQL Server 2000 database, Commerce
Server 2000 and the delayed BizTalk Server 2000, which will enable
users to exchange ebusiness documents.
The change means that instead of buying a server licence and an
additional client application licence (CAL) for each user,
customers will now pay according to the number of processors that
the server hardware runs on.
But per-processor licensing is an experiment, Microsoft says -
albeit one that IBM and Oracle are also trying. So far, it is
simply an option on a subset of the company's new products.
If the scheme proves workable, however, it will be extended in
the next few months to cover far more offerings, although Microsoft
admits that it does not know whether it will work.
Bloor's Vile explained: "It's crude, but it's the only sensible
way to do it. It cuts through all the variables. You can budget for
it. Financial directors love it because it is predictable."
It is a lot easier for IT managers to count the number of
processors in their IT department than try to estimate the number
of potential users of an internet-based application, he added.
"What we're seeing from the internet is that companies are not
only giving access to their systems to their trading partners, but
also to ordinary people out there in consumerland. The numbers of
users of any application is much less predictable," said Vile.
While Microsoft's Udon accepts that counting processors only
gives a very rough idea of how 'useful' a piece of software is, it
is the only workable idea that the supplier has found to date.
"The CAL in the internet world is clearly nonsense," he says.
"Some people have been able to run very large internet sites for
license costs of a few thousand dollars, so we're not sure yet how
we capture that value. But it certainly isn't by using our
traditional licensing models," he says.
Made to measure?
Ideally, Microsoft would love to charge 'per transaction' - the
more customers use its software, the more they pay. But even if
customers could get used to the idea of a software licence fee that
could not be predicted in advance, usage would still be too
difficult to measure until customers were in a position to rent
software from application service providers.
Also, when selling software licences is a company's only source
of revenue, the risks of getting its sums wrong are
"Anyone running a licensing programme is making a trade-off
between what they want to do, and what it's possible to do," Udon
admits. "It's not a great area for shooting from the hip. The
harder you make licensing to administer, the more blood customers
have running out of their ears."
And Citrix's licensing experiment has left shareholders with
blood running out of their ears, following a profit warning that
sliced expected profits for its second quarter, which has just
ended, in half. The move even prompted the resignation of the
firm's chief executive.
Last October, Citrix announced that customers wanting to
purchase its software could buy licences in bulk from resellers
over the internet instead of purchasing boxed products.
Today, it says that three out of 10 licences are being sold this
way, leaving distributors with large inventories. But the company
admits it had no idea this was going to happen. "We wanted to make
it easier for them to buy the product. But it was a surprise to us
the scale at which our internet licensing increased," Stradling
Undaunted, the supplier is now about to launch several new bulk
licensing schemes. Some customers will pay a one-time cost, while
others will pay according to how often they use the software.
Others can choose to pay per user.
Stradling admits that it is a massive experiment. "I'm not sure
which ones will work," he says.
A turn up for the books
Oracle, on the other hand, is trying to teach its sales force - and
its customers - how to use a global pricing model and a formal
discount structure. In effect, the company has rewritten its sales
manual after a quarter of a century of deal-making.
Stephen Millard, product marketing director for Oracle UK, says:
"The days of some of the hard-nosed negotiations that our salesmen
probably enjoyed have gone. It certainly focuses their attention
because they just don't have that flexibility any more. Customers
have worked us as well. They know the game they play. But that game
is no longer there. They will know up front how much we will charge
them for the licence."
Oracle's chief executive Larry Ellison last year promised to
introduce a global price list, using the internet to ensure that
pricing is clear and there is a single sales point for
So far this idea has proved easier to talk about than to
implement. As Bloor's Vile points out, the UK sales force still
advises potential customers to use the price list as a 'rough
guide'. But, Vile adds, he will be surprised if a formal, global
pricing structure is not operational within 12 months.
Researcher IDC predicts that revenues from ecommerce applications
will boom from $1.8bn in 1999 to $23bn in 2004. And the company
believes that the sales explosion will occur in innovative
licensing areas such as pay-per transaction, renting applications
over the internet, advertising sponsorship and shared revenue
models with business partners.
This implies that the changes many software vendors are making
today are simply a first step towards this goal. But suppliers also
know that a single mistake in licensing policy can be far more
damaging to their revenues than releasing any number of buggy
products or missing endless deadlines.
So whether it is Oracle, Microsoft, Citrix or any other software
vendor, the dull world of licensing is about to be shaken up. But
will more companies be issuing profit warnings in future as a
result? "It depends on whether they learn from our mistakes," says
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