Ever wondered why three of the world’s 10 wealthiest people happen to be founders of software companies?
The answer lies in the software industry’s perpetual licence model. Over the decades, this has made Bill Gates and Paul Allen, co-founders of Microsoft, and Oracle’s Larry Ellison very rich indeed. Their combined wealth exceeds $90bn, according to Forbes magazine.
Businesses may grumble about software costs but such is the critical importance of software today that most businesses reckon they have little choice but to keep paying licence and maintenance fees to use a product they can never get to own.
However, this perpetual licence model that has served the industry so well is coming under threat. The growth of open source products and more innovative ways of using software are highlighting its flaws.
“While it has created enormous wealth for proprietary software com-panies, perpetual licensing has not served customers well,” says Marc Fleury, chief executive of JBoss, an open source software company.
Businesses have become tired of over-paying for licences and support contracts that seem to heavily favour the vendor.
Ray Wang, senior analyst at Forrester Research, says that businesses have learned harsh lessons about the workings of the software industry.
Today, they are less prepared to pay maintenance on unused software licences – so-called shelfware – and they complain when vendors attempt to increase maintenance charges for no apparent reason.
The rebellion has been driven in part by a clampdown on IT spending after the excesses of the 1990s. However, there is also the realisation that the traditional business model is less sustainable because of the advent of more flexible computing models.
Trends such as employee self-service, supplier portals, non-employee users and application hosting are undermining the idea that a computer program can be tied to a group of named users or a number of processors – the traditional licensing metrics.
“We are moving more into an era of functional components rather than traditional packaged software. That raises big questions about how to pay for software,” says Clive Longbottom, head or research at Quocirca, a UK-based IT analyst firm.
A recent Forrester Research survey identified three emerging licensing trends: a shift from named user licences; a preference for enterprise-wide licences over existing usage-based licences; and a dislike for processor-specific licences.
The per-processor model is now widespread and was supposed to make licensing simpler for big businesses. But it has backfired with the advent of multi-core chips, which allow businesses to get away with fewer processors than before.
Vendors have responded with rules on how to count these multi-core chips, so creating an outcry among users who complain that the software industry keeps moving the goal-posts.
Because of the growing complexity of software licensing, many experts believe that, ultimately, the only way forward will be to move to subscription models.
Salesforce.com is the best-known proponent of software-as-a-service (SaaS), which lets users remotely access its sales force automation program in return for a fixed monthly fee.
This concept of selling software as a service rather than a physical product has caught on with a lot of other software companies.
Colleen Smith, who heads the SaaS business of Progress Software, says it is particularly popular with smaller vendors who sell into specific vertical markets, such as builders’ merchants or travel agents
Progress makes software tools to turn applications into web-delivered services and it says 150 of its software partners have already taken this route. But it is not without challenges.
“It requires them to rethink their whole business model, because they are now a service organisation instead of a software company,” she says.