The End of Traditional Software Licensing? Not So Fast

Traditional software-licensing practices will die. That’s the intriguing and, on the surface, somewhat rational argument put forth by Forrester Research senior analyst Holger Kisker in his blog post “What’s the Price of Software Tomorrow?”

In the post, Kisker points out that due to the Great Recession and tight IT budgets, businesses today simply don’t have the cash to pay upfront software licenses and are hesitant “to take financial risks over many years when purchasing software.” And that the traditional, on-premise software-licensing model that has enriched ERP, CRM, BI and supply chain vendors during the last 40 years is under scrutiny like never before.

Agreed.

Enter cloud computing and its beauteous financial benefits: “no capital expenditures, no upfront financial risk, no depreciation and nothing on the balance sheet!” Kisker enthuses.

OK, I’m still with you.

As a result of the cloud pricing pressure, traditional enterprise software vendors (who endured up to 25 percent declines in new license revenues in 2009) have actually begun offering “longer term subscription fees as an alternative to traditional licensing,” Kisker writes. He cites SAP’s nascent “global enterprise agreements,” which, to me anyway, sound like a car salesman who stretches out monthly payments to six or seven years to ensure that beleaguered auto purchases can make their payments. (“Ya know, 80 months isn’t that long!”) “Customers are still taking the overall risk,” Kisker points out, “and have very limited choices to cancel the deal before it expires.” (Such a deal!)

Then Kisker observes that, for vendors, “the transition from upfront licensing to flexible pricing, however, needs to be managed carefully.” How carefully? He points to vendor AspenTech, which reported in December 2009 a year-over-year decline of 78 percent in Q1 FY2010 software revenues “because of their first quarter with a new subscription-based licensing.”

To me, these initiatives seem more like the desperate acts of desperate vendors—not the customer-friendly, innovative actions of vendors that are extending “flexible on-demand-like license models for all their offerings,” as Kisker urges software vendors to consider.

There’s no doubt that cloud computing and SaaS pricing agreements offer much more financial incentives for customers right now. But once the economy rebounds, rest assured that traditional, on-premise software vendors will return to the way it’s always been: licensing agreements heavily tilted in their favor; end-of-quarter manic deal-making with with substantial “too good to be true” discounts; hefty maintenance and support fees; and irksome threats of software audits.

In fact, here are four things that are just as likely to happen before the enterprise software vendors abandon (whether forced or otherwise) traditional subscription licensing agreements entirely:

1. A balanced U.S. federal budget.

2. A back-yard BBQ get-together between Larry Ellison and Leo Apotheker.

3. Tiger Woods wins a “Husband of the Year” award.

4. And I finally understand what the hell has been going on on “Lost” during the past six years.

We don’t call them “traditional” software vendors for nothing: There’s a lot about the licensing agreements of the past that vendors can’t—and won’t—do business without.

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