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Pay-Per-Use, SaaS and Subscription Software Licensing Model Blog Posts are the Most Popular of 2010 We took a few minutes to identify the most read Entitlement and Compliance Management: Talking Successful Software blog posts of 2010 and here is what we found… 1. The Myths of Pay-Per-Use Software Licensing & Pricing Models 2. What Licensing Technology is Most Effective—To Dongle or Not? 3. Enterprise Software License Models Under Attack 4. Don't be Afraid of Subscription License Models 5. Floating Software Licensing 2.0 – Virtual Machines & Cloud Computing 6. Some New Twists on Current Themes in 2010 7. Thinking Pay-Per-Use Software Licensing – Consider Remix! 8. The Inevitable Move to Usage-Based Software Licensing Will Have a Profound Impact on Software License Management 9. SaaS is More Than a Software License Model 10. SaaS Software License Models – Can Traditional Independent Software Vendors Adapt? The Myths of Pay-Per-Use Software Licensing & Pricing Models By: Cris Wendt <http://blogs.flexerasoftware.com/ecm/authors.html> A lot is being written about the eminent arrival of pay-per- use license models and how it will change the software licensing and pricing landscape. In fact, a lot has been written about the arrival pay-per-use models since the 1990’s. Nothing could be closer to the truth, yet farther away from the truth. Pay-per-use provides an intriguing and common value proposition to provide flexibility – pay for only what you use: eliminate the large up-front license costs and ongoing maintenance fees. Don’t be fooled: Pay-per-use, in a granular sense, will NEVER be deployed in a large scale across the software landscape, whether the software is hosted via SaaS, sold on an enterprise server, or distributed across the desktop. Pay-per-use software licensing and pricing have 2 fundamental flaws for large scale deployment; an unpredictable revenue (provider) or cost (purchaser) stream and high operational costs to maintain. It’s also just generally a nuisance to be measuring seconds or other fine units of usage, especially when some software can take a long time to load, or, if the software crashes in the middle of a task. Yet, if you look across the software industry, usage-based licensing models <http://blogs.flexerasoftware.com/ecm/2009/07/flexible- license-models-which-one-is-right-for-you.html> are successfully deployed, and are a part of fabric of enterprise licensing models. As the software industry has matured, we haven’t seen the evolution toward a single model, but rather, a refinement of different license models to meet the needs of different market segments. The key to success of a usage-based model is finding a balance between the flexibility of a pure pay-per-use model, with the predictability of a subscription or perpetual license model. This is well illustrated in the science and engineering markets (Electronic Design Automation; Oil & Gas Exploration; Mechanical CAD, etc) where there are a number of different models such as "Token licensing", "Subscription Licensing", "Peak Usage Licensing", "Remix", "Variable Usage" and other names. These licensing models all balance flexibility with predictability and work well for large consumers of software. The goal is to license and price software in a way that makes it easy for customers to do business with you. So, if you’re waiting for pay-per-use models to arrive on the scene, don’t hold your breath. But on the other hand, if you are waiting, it may be too late. Customers are using Flexera Software products to deploy usage based licensing models today, are you? Want to learn more? Attend our upcoming webinar <http://mktg.flexerasoftware.com/mk/get/WEBREG_ECMK EYTRENDS_WBNR> tomorrow January 28, 2010 as Amy Konary from IDC will be presenting her findings on the software licensing and pricing survey done in late 2009 and share her insights on trends and predictions for 2010. What Licensing Technology is Most Effective—To Dongle or Not? By John Frame <http://blogs.flexerasoftware.com/ecm/authors.html> The interesting aspect of using dongles <http://en.wikipedia.org/wiki/Dongle> for software licensing <http://www.flexerasoftware.com/solutions/challenge/soft ware-license-management.htm> is that most Independent Software Vendors view them as providing portability, not necessarily more security. Licensing systems allow the software to attach the entitlement rights to a specific machine or user. The core question is, how do you identify the machine and/or user in such a way that is reliable (reduces revenue leakage) but at the same time does not create a negative user experience (reduce customer acceptance and drive up costs). Dongles play a role in this balancing act and it is this balance between revenue and customers satisfaction that independent software vendors and high-tech manufacturers should explore when evaluating a software licensing and protection solution. There are two general classes for this license identification process, the traditional certificate file based and the more recent license activation style. In the certificate file based systems one or more identifying characteristics are listed in the file, along with a description of the entitlement rights that the customer has. The file is then digitally signed so that it can’t be altered. The licensing system reads the file and checks to see if the signature is valid and then makes a determination if the identifying characteristics listed in the file are the same that it finds in the environment. If so, then the licensing system serves out the entitlements as they are described. The identifying characteristics that are commonly used are items such as the Ethernet MAC address, the host name, the display name, or in some cases the ID from a dongle. A MAC address or host name can easily be modified by a malicious party. A dongle is stronger but not that much stronger since dongle emulators have been in existence just about as long as the dongles themselves. What a dongle gives the independent software vendor and the customer is greater portability. Unlike an Ethernet MAC address, the dongle is easily disconnected from one machine, transported to a second, where the licenses are easily served from that second machine. The dongle is as strong an identifying factor as any other single characteristic so the entitlement rights are not significantly more secure but they are much more portable. To increase security independent software vendors and high- tech manufacturers should look at an activation style licensing system <http://www.flexerasoftware.com/products/flexnet- publisher/features.htm> . Using a single identifying characteristic presents an easy method for a malicious person to defeat. If an independent software vendor increases the number of characteristics then the solution must account for a concept called ―machine drift‖. Over time any given machine will change. Hardware is replaced, components are upgraded, and configurations are modified. When that happens if the machine drift is not accounted for the licensing system simply refuses to work until new license rights are issued. Activation style licensing accounts for machine drift by providing a much higher level of confidence on securing the entitlement rights but also by delivering a strong customer experience <http://www.flexerasoftware.com/webdocuments/PDF/fno _cs_MapInfo.pdf> . Activation style systems keep a record of both the current machine configuration and past configuration. The independent software vendor or high-tech manufacturer does not specify any characteristics, it is handled entirely by the licensing system. If the configuration has changed a little bit but has not changed too much over the past several days, weeks or months, then the drift of the machine is allowed to occur and the license rights continue to be accessible without issue. Only if the machine drifts too far, too fast does the licensing system require the entitlement to be ―repaired‖. In the activation style licensing, dongles don’t play a role since the activation style licensing is looking at the overall machine. There are several vendors, each with their own twist on the above concepts but the concepts are consistent in what you will find in both commercial solutions and home- grown implementations. If you are looking for portability, Dongles might be good for you. But if you are concerned about revenue assurance, high customer satisfaction and low cost, an activation style licensing solution should be considered. What is your experience with Dongles? Do you use Dongles or other methods for software licensing and protection? Enterprise Software License Models Under Attack By: <http:> Cr <http://blogs.flexerasoftware.com/ecm/authors.ht ml> <http://blogs.flexerasoftware.com/ecm/authors.ht ml> is Wendt Software license models for enterprise software, such as ERP, CRM, and databases have long thrived on the traditional perpetual license revenue model, with license metrics such as named user, number of CPUs, and number of cores. This means that their software was purchased for a single ―upfront price‖ that scales based upon how many users are using the software, or, by a machine proxy such as the number of CPU’s or number of cores. These models have suited the industry fine for many years as their markets have been growing into new segments and industries and the pricing could be tweaked to meet the needs of an individual customer. For this software, success of the software has been based largely upon feature and function. In many cases, the perpetual license model and associated metrics may still be appropriate. However, the market landscape is changing and these models are becoming increasingly inadequate as the markets become more nuanced and new trends emerge. More specifically: Market maturation: As more competition is entering markets, or, as markets themselves hit effective saturation points, enterprise software vendors are looking at new and innovative ways to reach customers. Tightening budgets:Customers can no longer simply spend hundreds of thousands to millions of dollars on more software, especially when the usage and value of such software becomes increasingly difficult to justify. New Technology <http://blogs.flexerasoftware.com/ecm/2010/01/software- licensing-and-entitlement-management-some-new-twists-on- current-themes-in-2010.html> : Cloud computing, SaaS models, and the effects of virtualization are creating the need to re-consider different ways that value can be captured to more accurately reflect the benefit received. Compliance: With the added burden of the financial risk of being out-of-compliance, customers are looking to their enterprise software vendors to provide more license models and tools to ensure that the software is being used in compliance with software license agreements. What this means is that companies that can adapt to these changes are more likely to succeed in the market. In particular, what we’re seeing with clients we work with: Time-based license models <http://www.flexerasoftware.com/solutions/industry/softw are-vendors.htm> are becoming more widely adopted to offer more affordable or cash-friendly alternative to procuring licenses. Time-based licenses run a gamut from the simple subscription license model (e.g. annual license usage rights, combined with access to updates), through ―peak usage‖ models designed to adapt to variable usage patterns, all the way to more exotic models based upon usage (software remix, token license models, and some pure-play-pay per use). Software license metrics based upon hardware proxies such as the number of CPU’s or number of cores is supplemented and replaced by new metrics, as this ―physicality‖ of license tends to be orthogonal to how value is received in more virtualized environments. There is a trend to employing license metrics based upon other measures of value, such as: the amount of software instances allowed on a network or enterprise (e.g the number of jobs being performed by a simulator), the capacity of the job being performed (e.g. the total amount of reports allowed per month), and concurrent use (e.g. how many instances of software can be run at parallel by any number of users). The honor-system enforcement approach and ERP-centric back-office processes to manage software deployments are being replaced by software entitlement management systems, software licensing technology, and asset management and reporting tools to help manage and administer the deployment of these new license models. As customers are now using software in virtual environments, or, have software that may expire, it’s becoming a necessity to provide technology to help the customers remain compliant and more effectively manage their assets, as well as ensure that software vendors receive the revenue that they are entitled to receive. If you produce and market for enterprise software and are looking for new ways to protect and grow revenue – don’t just think features and functions – but look to more innovative ways to license and price your products. Don’t be Afraid of Subscription License Models By: Cris Wendt Subscription license models still seem to cause a fair amount of anxiety among customers looking into the possibility of offering such a model for their traditional software. While there are some minor variances in the interpretation of a subscription license model, it is typically defined as an annual or multi-year software license that combines the right-to-use the software with the rights to obtain software updates and service. At the end of the term, all rights associated with the use of the software and the acquisition of updates ceases. It’s interesting to see some of the same conversations occur repeatedly as more companies look to offer such a license model <http://www.flexerasoftware.com/products/flexnet- publisher.htm> . There is typically a fear that their company is going to take a "revenue hit" if they move to a subscription license model. What they are referring to is the change in accounting process for company revenue associated with the subscription license model. Revenue associated with perpetual licenses is recognized on the P/L statement when the order for software is booked, whereas the revenue for a subscription license is recognized over the term of the license, typically 1, 2, or 3 years. However, companies do like the annuity revenue-stream associated with a subscription license, usually providing more overall revenue for the company in the long run. I am usually posed the inevitable question – "why should we move to a subscription license model if we’re going to lose revenue or take a revenue hit". Most are shocked when I tell them NOT to move to a subscription license model if it’s going to negatively impact the business. However, I tell independent software vendors that the adoption of subscription license models typically occurs differently than they may think: · Use the subscription license model as a way to generate new business, and not simply as a different way to license software differently for a potential long term benefit. Software vendors, who have used the subscription license model, did so as a way to grow their business. It’s often possible to penetrate customers who have a limited capacity to pay for the software license all at one time, or, where the customer wanted to pay for the software using an expense budget, and not a capital budget, as in the case where software was being expensed to a project. Also, subscription license models are a great way to penetrate large accounts and fortress against competitors where you can offer a wider breadth of your offering for a fixed annual budget. The subscription license model is a way to grow your footprint in accounts where finance and access issues tend to be the business drivers (as opposed to accounts where access to different products or product functions are the issue). · Subscription license models are typically not introduced to market in a way to replace all perpetual licenses. Typically, they are introduced as a way to extend the product line and offer customers a choice. The "revenue dip" that is theoretically associated with converting all new sales from perpetual licenses to subscription licenses (with revenue recognized up-front) usually doesn’t occur. Subscription licenses are typically offered as alternative method to buy software license, and not the only method. A few years ago at SoftSummit, an annual conference for the software industry, I asked a variety of customers in a conference session what happened to their revenue when they offered subscription licenses. None of them saw the revenue dip, and furthermore, about 60% said their revenue grew. However, I tell companies who are selling product to market for the first time and don’t have legacy products that offering only subscription licenses (or time- based licenses) may be the best way to go! · Subscription license models are a great way to "test the waters" for other time-based license models. Sometimes independent software vendors find that customers suggest that they might want license terms less than a year to accommodate seasonal or project "bursts". This can lead to other time or usage-based licenses. · Pricing subscription licenses, like pricing anything can be a complex process. But at its core is a simple 3-5 year payback analysis. Customers are typically willing to pay a yearly subscription fee that equates to a 3-5 year payback, often the lifecycle timeframe of most assets. So, unlike Grandma in the Story of Little Red Riding Hood, there is no big bad wolf hiding in subscription license models. But, think first about how to better reach new markets and customers <http://www.flexerasoftware.com/webdocuments/PDF/wp _ecm_CustomerSat.pdf> , and determine if the value propositions of the Subscription License model can be an answer. <mailto:firstname.lastname@example.org> Floating Software Licensing 2.0 – Virtual Machines & Cloud Computing By: Cris Wendt <http://blogs.flexerasoftware.com/ecm/authors.ht ml> Software licensing models evolved in the 1990’s with the emergence of the floating license model, a model still in wide scale use today, largely in technical software markets. At the time, the floating license model was an evolution of machine-locked software that was prevailing on standalone or lightly-networked personal computers. Interestingly, the floating license model is taking its next evolution, with virtual machines <http://www.flexerasoftware.com/webdocuments/PDF/ds_ FNP_Virtualization_Jul09.pdf> and Cloud Computing. However this time, floating licenses are probably going to do for enterprise software what they did for technical software the first time around. Floating Licenses 1.0 – License Mobility for Vertical Software The floating license model <http://www.flexerasoftware.com/solutions/industry/softw are-vendors.htm> evolved to meet the needs of workgroup computing in the 1990’s. In the late 1980’s and early 1990’s the computing environment began to evolve with the availability of the networked workstation from Sun Microsystems and others. In a networked environment, resources such as printers and storage are shared among users in a local area network. A natural evolution was the sharing of a software license – hence the term ―floating license‖. With the floating license model, when the user starts their software on a machine in the network, that software will automatically check-out a license from a license server (so long as licenses are available). As long as the license is checked-out, the user is able to run the software associated with the license, and no one else can use that license. When the user is done using the software, the license is automatically returned to the license server for others to use. The license server can contain multiple quantities of different licenses, allowing entire workgroups to share licenses for different software titles. If a license isn’t available for a particular user because they are checked-out, the user can wait for the license to be available, and/or, as the system administrator to buy more licenses. The floating license has an interesting attribute - because a software license is sharable, it can be used on a variety of different machines over the course of its life. This means that the software license can’t be tied to a particular machine type as identified by the number of cores, CPU’s, or processors. The floating license model works very well in markets where customers require access to a wide variety of software titles over the course of a day. Over time, the flexibility of the floating license model and associated license server technology provided the basis for more flexible license models in wide scale use today (such as subscription licensing, time-based ―peak usage‖ licensing; forms of pay-per-use licensing models), along with a variety of asset management and reporting tools associated with the license server technology. This in turn, allows for more efficient usage and tracking of software, and, the capability to construct more sophisticated license agreements with both the consumer and independent software vendor understanding usage information. Floating Licenses 2.0 – License Mobility for Enterprise Software Fast forward to a year in the future, say 2011, or 2012. The floating license model is becoming the paradigm for the use and management of enterprise level software, for similar reasons it became popular with technical software. With virtualization technology, enterprise software licenses previously dedicated to physical machines are increasingly being deployed in unique virtual machines. This virtual machine can be moved to the particular physical machine that is available and best suited to the requirements of the user. With virtualization moving technology such as VMotion, the situation becomes more interesting. Now users, have the capability to dynamically move those virtual machines from one machine to another, without disruption and without delay. For now, this is a convenient method to provide a high-availability solution for enterprise software. If the machine running the main virtual machine fails, the virtual machine can be ―auto-magically‖ moved to another physical machine. Now, let’s extend the paradigm. Suppose an enterprise has several enterprise applications running on premise, but they are running out of machine bandwidth, perhaps due to some seasonal variability in the business. Wouldn’t it be convenient to move one or more of the virtual machines to another machine on-premise or, into the cloud and let another hosting center run the application for awhile? Alternatively, suppose an enterprise initially decided to have their purchased enterprise software hosted by a cloud provider initially, but over time, decided to move on-premise to lower costs or gain more control? Wouldn’t it be ideal to simply transfer a virtual machine (including all associated data) from the hosting provider in the cloud to an on-premise machine? Of course, this is a reach right now with virtual machine moving technology, compliance technology, and security, but it’s not too far-fetched to think we may see it in the next few years. Software Licensing and Entitlement Management : Some New Twists on Current Themes in 2010 By: Cris Wendt With 2010 upon us, I thought I’d share some of our field observations about industry trends we see in the field for software licensing and entitlement management. While some of the topics below are certainly well documented, we have been seeing some twists. From Device Revenue to Software Revenue: We have been working with more high-tech manufacturers <http://www.flexerasoftware.com/solutions/industry/high- tech-manufacturers.htm> in 2009 and in 2010 who have been traditionally viewed as hardware manufacturers, that is companies who have derived most of their revenue from hardware. This seems especially true in the medical equipment, industrial automation, and the telecommunications industries. As the underlying hardware becomes commoditized, an increasing number of companies are looking at new ways to create more annuity-based revenue streams from software, maintenance, and services. This includes the design of new entitlement management systems to track the deployment and even of their software through complex sales channels to know more about who is using their products Server Virtualization in Production: While the general growth in virtualization <http://www.flexerasoftware.com/pl/virtualization- resource-center.htm> is certainly no surprise, what did surprise us wasn’t the use of server virtualization per se, but the increased deployment of virtualization into production environments (as opposed to just development and test) as a way to take advantages of technologies such as WMware’s Vmotion to create lower cost business continuity solutions. This trend has also been driven by the improved performance of virtualization offerings. Evolution & Maturation of SaaS: Almost all companies we work at are in some phase of planning a SaaS solution to bring to market, if they haven’t already done so. Certainly, many small companies offer exclusively SaaS-based solutions, but what surprised us is how many mature companies are looking to create new revenue opportunities from hosted offerings. This means that simply offering a solution in a SaaS model may no longer be a unique way for startups to differentiate themselves against the more traditional software companies. For the mature SaaS companies who realize SaaS isn’t enough, we’ve been working also with some to evolve their solution to increase revenue through improved authentication, and improved entitlement management. The Next Phase of M&A: We see many larger companies creating initiatives to simplify and consolidate product offerings that have evolved through years of M&A. By consolidating complex and often overlapping product lines into fewer, "high impact" products and license models <http://www.flexerasoftware.com/products/flexnet- operations.htm> , larger companies are finding it easier to do business with channel partners and customers and simplify the sales process. In addition, the reduction of clutter enables companies to focus development and support on newer generation products. Interested in hearing more on trends and predictions? Join us on January 28, 2010 as Amy Konary from IDC will be presenting the software licensing and pricing survey findings and share insights during a Flexera Software Webcast <http://mktg.flexerasoftware.com/mk/get/WEBREG_ECMK EYTRENDS_WBNR> . Thinking Pay-Per-Use Software Licensing – Consider Remix! By: Cris Wendt <http://blogs.flexerasoftware.com/ecm/authors.html> Usage-based software license models that are effective will tend to balance two criteria – flexibility to meet the needs of the software consumers who are using the software to accomplish a task, and predictability of costs in order to satisfy the Finance departments of both the software vendors and consumers. Usage-based software license models can be difficult to perfect because of the seeming complexity, but by balancing predictability with flexibility, a practical model can be developed. The "Remix" software license model was developed in the Electronic Design Automation <http://www.edac.org/industry_what_is_eda.jsp> (EDA) market in the late 1990’s. EDA software is provided from suppliers such as Synopsys, Cadence, Mentor Graphics, Magma, Atrenta and others is used by manufacturers of electronic components and systems, such as Apple, Intel, AMD, nVidia and others to design their electronic products. The EDA software market has several characteristics that led to the creation of new software license models: High Value and High Software Licenses: The software performs complex design and analysis functions in a wide range of computing environments (desktop, server, or compute farm) that are crucial to developing electronic products in a short time frame. It’s very expensive to simply overbuy and over-equip engineers. A wide portfolio of products: There is a design flow that starts with "design capture" and proceeds through functional simulation and physical design. After all, it’s important to know if a particular chip will really work at lower power in the complexity of an iPhone before you manufacture millions of them. But there is a challenge; it is difficult to know when a project start the exact profile of software that is required due to nuances and problems in the electronic design process. The Need to Use Operational Expense Budget (OPEX): Many electronic companies prefer to expense the software costs to particular projects, in order to manage the ROI on a project basis. The resulting Remix License model evolved after iterations and experiments in the larger enterprise customers. The essence of the model is to allow customers to replace low utilization software (shelf-ware) with software that is expected to be used with higher frequency. There are some variations to the model, but the framework is characterized below: At the core is multi-year license usage agreement, usually 2-3 years for a fixed yearly fee. This provides an element of financial predictability. Each software title is assigned yearly usage price values, that when added up, yield the total yearly price of the agreement. At the beginning of the agreement, the customer will declare a mix of software titles (and associated quantities) to meet the bulk of their usage requirements. Adding up the yearly price of the software mix, will yield the total yearly price of the deal. Periodically (quarterly, semi-annually, or annually), the customer can change a fixed percentage of their mix of software licenses to reflect changing usage patterns Typically, 25% of the total yearly value of the agreement can be changed. For example, if there is a $1M annual fee, then any collection of software in the contract whose yearly license fees multiplied by quantity are equal to $250K can be swapped out for a similar total value of software licenses. A few things to note about the model from a revenue recognition perspective (which requires good counsel from your Finance department to understand): As with most time-based license models, the software vendor must recognize revenue ratably over the course of the agreement. You need to be careful to avoid providing access to products not available at the time the agreement was constructed, or more severe revenue deferral processes may be involved. The tactical deployment of the model requires the users of the software to be able to measure and report on software usage in order to identify software utilization profiles. To date, that hasn’t been an issue in the EDA community, where such tools have already been widely deployed. In other technical markets with similar challenges, the "token license model" is another license model variant that has been successful. Next time – how do you approach software pricing <http://mktg.flexerasoftware.com/mk/get/ss09-software- trends- survey?lead_source=ECM%202009%20Key%20Trends%20in% 20Software%20Pricing%20and%20Licensing%20Survey&pcode =fnp <http://mktg.flexerasoftware.com/mk/get/ss09-software- trends- survey?lead_source=ECM%202009%20Key%20Trends%20in% 20Software%20Pricing%20and%20Licensing%20Survey&p code=fnp> > such a license model, especially if your perspective is a classic perpetual license model? The inevitable move to usage- based software licensing will have a profound impact on software license management By: Randy Littleson In a recent blog post entitled "Predictions for software license management in 2010: Usage-based software licensing models on the rise <http://blogs.flexerasoftware.com/elo/2010/01/predictions-for- software-license-management-in-2010-usagebased-software- licensing-models-on-the-rise.html> ", I talked generally about the trends we’re seeing in the market related to usage-based software licensing models and cited our recent research report entitled "2009 Software Pricing and Licensing Trends <http://www.flexerasoftware.com/company/newscenter/pressre leases/press-releases_10725.htm> " on the topic. What I’m seeing is that the application market is maturing and historically mature markets have moved to value-based pricing, which for applications is usage-based. Whether you’re a software company selling applications to enterprises and/or governments or a high-tech manufacturer increasingly differentiating your products with applications, this trend is gaining momentum and will surely impact your business. I’m hearing this in the discussions I’m having with various vendors. Making this more challenging are technology changes like virtualization, cloud and SaaS that are taking place at the same time. These add new wrinkles as most licensing models have not been usage-based and they have been tied to the physical hardware where the applications run. Both of these fundamental software licensing premises are under increasing pressure. In fact, in my discussions with vendors, it is virtualization that seems to be the key driver today. Users want virtualization to consolidate their computing infrastructure, save money and provide a more dynamic environment to adapt more quickly to changing business conditions. But, from a vendor perspective as noted above, virtualization introduces a host of software licensing and entitlement management implications. Another vendor I spoke with shared the story of how their customers are increasingly looking for "time bound" or "lease for use" (just different terms for usage-based) licensing. Their customers realize that they have peaks and valleys in demand for their applications and don’t want to pay the same rate in a valley as they do in a peak. High-tech manufacturers see the same thing as many products need to be able to dynamically allocate capacity and/or enable specific functionality but only at certain times. Almost everyone I talk to acknowledges that change is underway. Of course, like all change, this too brings uncertainty. There’s a lack of standards today, vendors struggle with the implications to their business and revenue models (both software licensing models and the entitlement management infrastructure needed to manage their customers’ rights to use the applications), etc. These all need to be figured out, and some are further along than others, but the trend seems inevitable and users are going to continue to push these issues. The question for vendors then is what to do about it? Are you seeing a growing interest in usage-based software licensing models? If so, what are you doing about it? SaaS is More Than a Software License Model By: Cris Wendt <http://blogs.flexerasoftware.com/ecm/authors.html> Many, if not most Software-as-a-Service (SaaS) offerings are typically offered using a named-user license metric and a subscription license model. Salesforce.com is the most popular example of this approach. But SaaS is really much more than a license model because: Offering your software in a SaaS model usually provides faster time-to-benefit, especially for enterprise software as configuration costs can be reduced through more standardized workflow templates and eliminating the need for complex software installations and in some cases, customization. SaaS reduces upfront software and hardware capital expenditures (CAPEX) and ongoing maintenance costs and replaces it with a predictable operating expense budget (OPEX), which many software users find attractive. Corporate risk for compliance is reduced as provisioning to the service is typically managed by the SaaS provider at the point of access. However, I often hear SaaS described only in the context of the named-user, subscription license model. This perception does bring up a few interesting points about SaaS and license models in general: Subscription license models are widely adopted for traditional desktop, enterprise, and device management software, with adoption increasing. There's no need to wait for a SaaS deployment <http://blogs.flexerasoftware.com/ecm/2010/05/saas- software-license-models-can-traditional-independent-software- vendors-adapt.html> of your software if the benefits of a subscription license model. SaaS offerings are moving beyond the single subscription- based named user license model into models based upon capacity used (storage) over a period of time, and, also to concurrent user models, where pricing is based upon the maximum number of concurrent users that can access the software in a time period. We're helping a company with such a deployment. Other companies use more granular transaction- based pricing (Travelocity or Expedia's booking fee is a good, simple example). As I've blogged before, I think the train has left the station on the widespread adoption of pay-per-use license models <http://blogs.flexerasoftware.com/ecm/2010/01/the-myths-of- pay-per-use-software-licensing-pricing-models.html> for common desktop and enterprise software. However, as end- customers embrace SaaS offerings and paying for their software as a service, there will be more license model innovation with SaaS offerings. But, most software ISV's do offer their software to some percentage of their customers using a form of a usage based model. "Remix" which I described in an earlier blog, is one such sample. So, if you're think that a subscription license model works for your customers, then don't wait for SaaS. And, if you think that a SaaS deployment makes sense for the use of your software, then don't think you have to use a subscription- based, named user license model. SaaS Software License Models – Can Traditional Independent Software Vendors Adapt? By: Cris Wendt <http://blogs.flexerasoftware.com/ecm/authors.html> Most SaaS companies sell access to their SaaS software with some form of named user or managed capacity metric, using a subscription license <http://blogs.flexerasoftware.com/ecm/2010/03/dont-be- afraid-of-subscription-license-models.html> model. In these license models, software access is sold based upon the amount of access to the SaaS offering that is being used. Customers are then invoiced monthly or quarterly for access. Revenue is "recognized" accordingly – on a periodic basis as the SaaS service is being consumed. Since SaaS is really a service, that type of licensing and pricing model makes sense and works well. This creates a recurring revenue model that grows over time as the SaaS offering gains market acceptance. This is more of a "farmer model" to growing revenue, and works well for companies who are pure-play SaaS providers. The real challenge is for traditional Independent Software Vendors (ISVs) who sell their software using a perpetual license model. For these companies, their business is built for the accounting model of recognizing their revenue up-front, at the time the software is booked. For these companies, there is a large infusion of revenue that occurs, typically well in advance of the software being operational and productive. The financial model, Wall Street expectations (for public companies), and internal sales and management compensation models are built for these large bursts of revenue as deals are signed. This is more of an "elephant hunting" model to revenue creation. I see the difficulty many ISV's have in changing this model even for adding simple subscription license models to their offerings. I've seen the subscription offering fail because sales compensation <http://blogs.flexerasoftware.com/ecm/2010/01/want-to- accelerate-market-success-of-new-software-license-models- align-compensation-with-results.html> was not aligned with the recurring revenue model. Individual sales compensation plans were based on an "elephant hunting" model. Even in cases where more sophisticated time-based models were offered, there was often dysfunctional behavior to structure the deal in such a way that more revenue could be recognized up- front. The real question with a SaaS offering for traditional ISV's isn't so much that is it technically possible, but, can the organization really adapt and adjust the business model? So, how does a traditional ISV succeed in providing a SaaS offering? Clearly, some companies have succeeded. Usually, they follow a few simple principles that also apply to rolling out a successful subscription model: Use the SaaS offering to initially grow or develop a new market opportunity, where the overall revenue impact to existing revenue streams are not large, and, where there are incremental revenue opportunities. Align sales compensation with to the new model. In some cases, a different sales channel may be required. This may work well if the SaaS offering targets a different market. Consider creating a new business unit with its own P&L so that it can be isolated from the pressures on the mainstream business. Be patient, grow, and learn. Do you have other approaches to bringing a SaaS offering to market?
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