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Issue of April 2005 
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Software licensing

Jaspreet Singh
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 distributed computing.

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 users.

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

Network 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.

Distributed-processing license

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 recurring revenues.

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: jaspreet.singh@in.pwc.com

 
     
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