Consultant, Business Solutions, IT Risk Management, PricewaterhouseCoopers
The software industry is facing the challenges of more sophisticated
network environments, greater competition, increasingly dominant players and,
at least in the PC segment, substantial price cuts, and lower margins. More
software than ever before is being distributed on a high volume, mass-marketed
basis. High-end commercial software has been the most resistant to price cuts
while workstation and PC software prices continue to dip. Other issues in the
foreseeable future include the evolution of distributed processing aspects of
today's client or server computing to more complicated global enterprise wide
At the same time, the scope and nature of available software products are ever
expanding. They range from graphical user interfaces familiar to PC users to
applications programs like mass-market spreadsheets to more sophisticated software
used in designing integrated circuits. Less obvious is embedded software, critical
to equipment in locations as disparate as the factory floor and a doctor's office.
In fact, instruments and devices of all types depend more and more on software
because software provides the flexibility to meet the needs of a variety of
The changing business conditions continue to impact the direction of the software
industry and software licensing practices. The result is more flexible license
arrangements for all types of software. Licensing practices must be constantly
monitored so they fit this real world business environment. In particular, licensing
approaches must match changing network usage and evolve toward the vision of
the virtual corporation in the information infrastructure.
Developing a structured, consistent approach to the review of software license
agreements will expedite the review process, reduce overall costs, and ensure
that key issues are not overlooked. Over the years, organisations will develop
certain approaches to its licensing transactions. It will identify its own key
issues and learn from its mistakes.
The overwhelming majority of software licenses entered into every day lack two
critical elements. First, they contain no detail whatsoever regarding the software's
required functionality, interoperability, interface capabilities, etc. Apart
from a vague reference to the undefined "documentation," the agreement
is generally silent regarding what the software will achieve for the licensee.
Second, the software, even applications licensed for crores of rupees, is not
subject to any acceptance testing by the licensee. There is no procedure in
the agreement permitting the licensee to test and evaluate the software to ensure
the software satisfies the licensee's requirements and, worse yet, provides
no remedy if the software fails to meet those requirements.
Types of software licensing
License agreements and related pricing must be consistent with current network
environments. The proliferation of networks is causing licensing practices to
evolve even faster to accommodate both users' and vendors' needs. Current primary
network licenses are applicable for concurrent use, site, enterprise, and nodes.
Concurrent use licenses authorise a specified number of users to access and
execute licensed software at any time. Site licenses authorise use at a single
site but are losing favour to enterprise licenses that cover all sites within
a corporation because of more virtual computing environments. Node licenses
are becoming less appropriate in the client/server environment, since the licensed
software may be used only on a specified workstation which a user must log on
to in order to access and execute the application.
Measurement software ("license manager") is allowing vendors to be
more flexible in licensing arrangements. This management software monitors and
restricts the number of users or clients who may access and execute the application
software at any one time. This is important as a user pays only for needed use
and a vendor can monitor such use to protect intellectual property.
Other innovative, use-related approaches have also been welcomed by users, such
as currency-based licenses. Currency-based licensing provides a user with a
specified monetary amount of software licenses, i.e., licenses for different
business application software, as long as the total value in use at a given
time is less than the preset limit.
Flexible software license pricing needs to develop in
ways that optimise bottom-line profitability for both vendors and users.
The business issue is whether the pricing models result in requisite revenues
to fund the next generation of products
Licensing for client/server and distributed processing environments
must become even more flexible. Distributed processing may ultimately create
a seamless virtual global computing environment in which new licensing approaches
will be needed. More flexible licensing schemes that are easier to administer
will be needed for the growing client/server and distributed processing environments.
Keeping track of which software is licensed for use by 'x' number of users can
be a full-time job. The shift to client/server computing is the most significant
trend in the software industry today. This shift will ultimately move toward
enterprise wide, peer-to-peer, distributed processing environments. Eventually,
any platform may be able to function as a client or server.
Microsoft recently announced a new pricing policy for Back Office, a suite of
integrated network, e-mail and database applications, in which servers and clients
are licensed independently. Customers obtain a single server license for each
server and a single license for each client. Most current licensing practices
assume that a client needs access to only one server and, therefore, client
and server pricing is bundled together. This requires a user to pay extra when
a client may access more than one server.
Evolving pricing models
License-based pricing models are evolving at the same time as computing environments.
User and vendor pricing requirements must be balanced so that new, as well as
existing licensing approaches result in enough working capital for R&D for
the development of new and enhanced software products. Flexible software license
pricing needs to develop in ways that optimise bottom-line profitability for
both vendors and users. From a vendor's viewpoint, the business issue is whether
the pricing models result in requisite revenues to fund the next generation
of products. Revenue and profit estimates are more difficult to project in the
changing computing environ-ments. Revenue pressure is also causing some vendors
to consider shifting from the widely-used model of a perpetual license fee with
about fifteen percent recurring maintenance revenues to other models with greater
Free and open
Free software and open source software are freely licensed, not sold; but it
is indisputable that many software vendors still prefer to do business only
by collecting substantial fees from software licenses, and many have earned
billions in revenues doing just that-selling software, hiding computer source
code, and suing anyone believed to have stolen the source code that the vendor
originally copied from someone else.
Software development is often a messy state of affairs, and one might conclude
that a movement that promotes the development of free software, where the source
code is open, the software is free, and others are encouraged to take the code
and do with it as they desire, is doomed to failure. Indeed, the opponents of
open source have probably wished for exactly that unfortunate fate. Certainly,
you have read about the alleged blackhat hackers who supported Napster or those
who dared to view a movie recorded on DVD by using a computer that did not have
an operating system produced by Microsoft.
Users and vendors must make adjustments as computing environments evolve. Vendors
need to offer more flexible licensing options that fit the evolving environments
and also protect their intellectual property. On the other hand, pricing for
such options must be balanced in a way that the Indian software industry continues
to generate the revenues needed to fund R&D and to retain its advantage
over foreign competition.
The author is Consultant, Business Solutions, IT Risk Management,
PricewaterhouseCoopers. Email: firstname.lastname@example.org