* Alternative software pricing models help ASP model
First off, a happy 2005 to everyone, and I wish you all a prosperous new year and express my condolences to those affected by the recent tsunami.
This week’s article concerns the resurgence of the application service provider (ASP) model, and why recent changes in software licensing by the independent software vendors (ISV) have helped to reinvigorate this model. I have been a fan of the ASP concept since it first came of age way back in the late 1990s, and am pleased to see that many service providers are now able to support this model (and make a profit).
One of the reasons for this is a gradual shift to on-demand software licensing models. I give Microsoft credit for instigating one of the first pragmatic “on-demand” pricing models that enabled ASPs to pay Microsoft on a monthly basis for both back-office as well as PC software. This model allows the costs of delivering services to parallel the revenue being derived from such services, and enables service providers to scale linearly as their customer base grows, without requiring a renegotiation of the license terms.
Today, virtually all major software vendors are supporting the on-demand licensing model. Computer Associates, for example, has a “FlexSelect” licensing scheme, which allows customers to pay for software using a number of mechanisms that include usage-based pricing. IBM has also pioneered a number of “on-demand” licensing models for hardware and software that they supply.
In October 2004, organizers of the SoftSummit software pricing, purchasing, and licensing conference published a report entitled “Key Trends in Software Pricing and Licensing,” which showed a number of illuminating shifts in the way that software is licensed. The report data was obtained by surveying 396 software vendor executives and 100 enterprise executives via e-mail in September 2004.
One of the key shifts depicted in the report is that software vendors are quickly moving to the subscription model – vendors report an anticipated 17% increase in subscription-based licensing over the next two years, with a corresponding 17% drop in perpetual licensing. Interestingly, IT executives still prefer the perpetual model (64%) to the subscription model (36%), which mirrors the current licensing mix as reported by software vendors: 67% report that the perpetual model is still the most prevalent pricing model in use today.
In terms of the most prevalent license models in use today, seat-based (per machine/per user) pricing still dominates, at 56% of those surveyed, with 40% of vendors also supporting concurrent user models and 35% supporting named-user and 25% supporting CPU- and metric-based licensing respectively. Interestingly, when asked about future growth of the various licensing models, software vendors indicated that usage and financial metric-based licensing will double in popularity over the next two years. The survey also indicated that vendors are gradually abandoning CPU and per-server licensing models.
Interestingly, IT executives surveyed still prefer concurrent (42%) and per-user (29%) pricing models. Why the disparity? I think that there are a couple of reasons for this. Growth in the ASP market, which is highly dependent on these models, is partially responsible. I also believe that IT is gradually accepting the concept of metric-based licensing, and as technologies that measure and audit these metrics continues to mature, acceptance will also continue to increase. It only makes sense-these licensing models tend to scale much more efficiently than the older models for enterprises as well as service providers.
I applaud the movement to “on-demand” pricing models, and feel that service providers are naturally positioned to leverage these shifts as they occur. As the technologies continue to mature, service providers as well as enterprises will recognize the scalability and efficiencies that can be gained through metric-based licensing, and I believe that by 2010 metric-based pricing and licensing will be the dominant software (and possibly hardware) model.
As always, I welcome your ideas, suggestions and comments on the subjects of outsourcing and information security; my e-mail address is below. Thanks for reading.
