Wednesday, March 25, 2009

Seat-based software licensing has to stop

I just wrote a blog on this subject for CMS Watch, available here. The basic premise (just to boil it down) is that monitoring, auditing, enforcing, administering, and just plain dealing with seat-based licensing of enterprise software is a huge, huge problem, in a world that doesn't need more problems.

More to the point, it's out of step with reality. It's certainly not how large IT organizations want to do business these days. Everyone I know hates seat-based pricing. It's antiquated.

In my CMS Watch post, I didn't specify what I would propose as an alternative to per-seat pricing. That's because my proposed alternative might strike some people as a bit radical.

IMHO, the way to price enterprise software going forward is to charge a monthly subscription fee for support. That's right: give away the software for free. Charge only for support. And maybe charge something here and there for high-value specialty add-ons (your connector-du-jour), but mainly for support. To account for scalability, maybe set fees on a per-server or per-installed-instance basis (but certainly not on a per-CPU or per-core basis). Install an instance of XYZ CMS on one box, pay one monthly fee. That's how it should be.

The era of million-dollar lump-sum front-weighted CapEx-accounting enterprise software deals is over. It's gone, just like the newspaper business. Dead, finished, done. I have blogged on this before.

Oh sure, there are still million-dollar deals being cut as we speak. It's like the tail of a dead brontosaurus still flailing around, days after the brain has died.

Can big software vendors survive by giving software away for free and charging only for support and services? Actually, yes, I think so. It will be a painful transition for many big-name software giants. But in the end, I think it will work. A number of commercial open-source vendors have proven, in fact, that it will work.

But also, the cable company has proven that it will work.

As I told a colleague at CMS Watch, the cable company (very wisely) does not charge you $10,000 for a cable box. Instead, they give you the cable box (and even install it for free, on site). Then they charge you a nominal monthly fee (if $100 a month, plus or minus $60, can be called nominal) for content. After 8 years, you've paid the cable company $10,000. But you've paid them in a manner that's acceptable to you. And in the meantime, you're free to switch to something else, or cancel.

Big software vendors who "get" this will survive. Those that don't, won't. This is a time of structural change for many businesses (such as, for example, the newspaper business), and the world of enterprise software is not immune. Serious changes are ahead. The survivors will stay out in front of these changes, starting yesterday. The non-survivors... well, they're still flailing their tails.


  1. Anonymous7:07 PM

    Nice thought. I'm not sure it would fly, at least not at first. They would need a transition model and maintenance fees would have to increase from current levels.

    However, pricing by "installation" versus CPU is great. If they did that, lowered the cost and increased maintenance, that would improve things somewhat. Then in 5 years, after they have a larger maintenance stream, they could switch the rest of the way.

    Just my 2 cents.


  2. Anonymous7:08 PM

    To account for scalability, maybe set fees on a per-server or per-installed-instance basis (but certainly not on a per-CPU or per-core basis)

    Doesn't that involve monitoring, auditing, enforcing, administering licenses? And for desktop software "installed-instance" would equal "seat".


  3. Fascinating to me that you wrote this today.

    Our company, an ISV, met with our customer advisory board today to discuss 'new' strategies and marketing approaches. The main topic was cloud computing and how to take advantage of the cloud for our customers and ourselves.

    During that discussion, we all arrived at the same conclusion that licensing and pricing models for software vendors will *HAVE* to change, not just *NEED* to change.

  4. The razor and blade model has been around for a while. I wonder if there isn't a distinction between charging for support vs getting new cable content or replacing worn blades or subscriptions for ongoing software as a service.

    A good program is supposed to work, and doesn't that mean it shouldn't need support? Bug fixes are often viewed as flaws in the promised product and provided so that the product does what it was advertised to do. Yes there's updates to support new OS releases or releases of other integrated products, but is that worth a monthly fee? Support for ongoing installation or customization, sure, but maybe that's more like consulting fees. But when I think of "support" I think more like "insurance" and in tough economic times, that's often the first thing people give up as willing to take a risk.

    Do you start selling the software only with a support contract for a fixed term to make sure you do recoup the costs? The cable company takes back that cable box when you stop paying the monthly fee. I think this is why the software as a service model took off a few years ago. It makes the relationship more explicit. Stop paying us, stop using the software. Then we get into who owns the data you put into the software?

  5. But... that would put all the Microsoft licensing specialists out of business! ;)

    I agree though. With a nuance: rather than to tell vendors to stop seat licensing, I'd advise customers to stop accepting it. There's plenty of alternatives. If you don't know any alternatives, you probably haven't properly done your homework...

  6. Hi,

    I work for a software company that made this transition. We develop PLM Software (Product Lifecycle Management), and converted to open source a little over 2 years ago. In our case, as a small vendor with some very large competitors, it was the only way to get traction.

    We have seen revenues grow significantly. We are making money from support contracts, training, and consulting. The loss in license revenue was roughly offset by the loss of sales costs.

    Tom Gill

  7. Moreover, this monthly-charging price system you describe, implemented with a term commitment will give the vendor a stable income flow. In our days of financial crisis it's the most important factor for business survival.

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