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:  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 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.

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. 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, and determine if the value propositions of the Subscription License model can be an answer.

By: Cris Wendt

In many cases, manufacturers of intelligent devices in the manufacturing, medical, and telecom markets have a "profit paradox" – do I create more price points and increase overall revenue with small variances in my devices, or, do I reduce the number of devices to simplify the offering and reduce the costs?

With intelligent device management (IDM), we find that manufacturers of intelligent devices (devices that contain software) can build a single version of their device, and then provision and price to access various combinations of capabilities (performance, configuration, capacity) via an embedded license key mechanism . This is conceptually similar to an iPhone model, except that the manufacturer themselves can create "an app for that".

This approach will support different go-to-market strategies with a simpler, more reliable device.

• I saw one company enter the market with a premium offering for a telecom product. The underlying device was a Linux processor with specialized software, but the functions were enabled with embedded license keys. The company was able to command a premium price with the initial offering. Over time, as lower-cost competitors entered the market, the company was able to easily offer a down-market version of the product by shipping the same device, but only enabling a subset of the total functions.

• Another approach we’ve seen is where a company will want to enter the market with the lower-function product to gain market-share, and then move up-market by marketing additional capabilities over time.

The "secret sauce" behind IDM is the provisioning system - the combination of the embedded license technology in the device and the supply chain add-ons that enable the manufacturer to build the device in with different models (build-to-order; build-to-inventory; etc) and track the ownership through the different sales channels as the product finds its way to market. Because the provisioning system allows the device manufacturer and distribution partners to track the device configuration and associated customer through the lifecycle of the product, the manufacturer can more effectively target up-sell and marketing campaigns. In addition, the provisioning system can help ensure the correct configuration of the device – effectively preventing someone from attempting to over-configure a device (e.g. enable 20 channels of throughput when only 10 channels are available), or, attempting to mis-configure a device (e.g. enable the device to work in a wireless network if it is connected to a wired network).

Much of what is applied to IDM has been learned from the more pure-play software market, where the discipline of this type of provisioning system has been refined over many years.

If you aren’t aware of IDM, it’s time to learn. Manufacturers of storage, networking, telecom, OEM boards, and medical systems/devices are already underway creating new market opportunities.

For all of our European followers, later this week Flexera Software will be at the European ISV Convention at the Tower Hotel in London on 25th February, 2010 as a platinum sponsor.  Be sure to stop by and see us along with other leading software vendors, high-tech manufacturers, service providers, systems integrators and solution providers. It is a great opportunity to hear what is going in the software industry and marketplace and join in panel discussions as well as engage in one-to-one business meetings and network with industry peers.

We will be hosting a panel session as well as a couple of boardroom sessions:

• Software Rights Management solutions – this panel session highlights how three different software vendors found ways to increase revenue and decrease costs by using software licensing and entitlement management
• Missing revenue opportunities because you cannot track what licences customers are entitled to? – This “Best Practices” session looks at the areas where software vendors leave money on the table because they struggle to understand what licences their customers are actually entitled to
• Electronic Downloads and Automatic Software Updates - Deliver a better service for everyone – This “Best Practices” session focuses on enabling software vendors to reduce cost, deliver a better service and drive revenue when they are able to identify and address problems associated with manually sending licence keys, software and software updates to customers

Flexera Software’s FlexNet Producer Suite has also been nominated as a finalist in the SaaS category in the IT Excellence Awards which will take place at the gala dinner after the conference.

You can find more information on the event at http://www.isvconvention.com/. We hope to see you there.

As a High-tech manufacturer, you often struggle with how to cope with grey market activity, and how easily product entitlements can pass from one entity to another. Protecting your products is essential in today’s market. One source of the grey market for your products can often be tied back to abuse of channel incentives by partners, such as misrepresenting or faking end customer information. KPMG notes:

During 2009 we saw a growing trend from high-tech manufacturers where software became the strategic differentiator for their products that are facing commoditization, but interestingly most manufacturers lack a strategic solution to manage application usage. Only recently have high-tech manufactures begun to look for ways to monetize their software offerings, innovate business and revenue models related to their hardware products, and streamline end customer experience related to delivering, activating and updating products. 

To support that observation, Ubiquisys recently announced that they will be using software licensing  to customize the capabilities of Ubiquisys-powered femtocells to meet the needs of different customer groups. They indicated that their software licensing management system will allow them to—offer reliable customization on a massive scale, allocate and activate software licenses as required to add functionality or adjust offer bundles—all independent of the underlying femtocell hardware. They plan to use embedded software licensing to manufacture “Engine-ready” femtocells, which will enable them to produce fewer hardware variants, increase mass-scale efficiencies and drive down unit and logistical costs.

Ubiquisys is enabling the mass-adoption of femtocells by reducing cost and friction in the supply chain. Their software licensing management system includes a management system to design and administer Femto-Engine licenses, an operations system to create software licenses, a license client in every Femto-Engine software femtocell, and an administration system for operators to allocate and activate purchased licenses.

Are you a high-tech manufacturer facing similar challenges and opportunities as Ubiquisys? How are you planning to differentiate your offerings and cut costs to drive adoption?

We are currently conducting a high-tech manufacturer survey to better understand the unique challenges and opportunities high-tech manufacturers face and we welcome your input.

By: Cris Wendt

Cloud Computing is beginning to deliver results for a software company’s entitlement and compliance management (ECM) solution. It’s also fitting that the company is based in cloudy Seattle.

Too often, I hear of companies wanting to "Create a SaaS Strategy" or "Move into the Cloud" as though by simply embracing these technologies a company is somehow going to achieve some results or reach the Promised Land. So it was refreshing to visit a customer recently who is realizing the benefits of cloud computing because cloud computing was a means to achieving a business objective, and not an end in and of itself. What was especially gratifying was helping the company put the plan in place and seeing it deliver on its promise!

The company is driven by a strong strategic vision of what it means to succeed in its market. They encapsulate some of their vision in the mantra "Freakishly Friendly". They believe that, above all else, the success of their products and business depends upon a very easy-to-use product, and a very "easy to do business with" experience for all facets of the customer relationship.

As we worked with the company, they said that they wanted their entitlement management and licensing and compliance experience for the user to be as "Freakishly Friendly" and as automated as possible. After the initial purchase experience, all activities such as viewing the entitlement status (what did I buy, what’s left, etc), product upgrades, and product updates should be as transparent as possible, or, done with only a few mouse clicks in the product GUI. They wanted to avoid emailing special codes, or, requiring the customer to go to a self-serve portal.

To this end, we connected the customer product to the company through "the cloud." The product calls home on occasion to retrieve updates, upgrades, and new license rights. In addition, software can be moved with a few mouse clicks. All of this is done with both the software company and the customer are able to keep close tabs on compliance. In addition, the back-office entitlement systems are also in "the cloud", ensuring that the high availability and reliability of the entitlement management systems don’t interfere with the customer experience. The result is a total customer experience that is "freakishly friendly"

Oh, and I forgot to mention. We went to visit them because their business was growing at such a rapid rate, and they were looking at new ways to improve their product (with enhanced licensing and compliance management techniques), that they wanted to ensure the the cloud solution could handle a 3x expansion in throughput.

The question for this company wasn’t "how to use cloud computing" but rather "how we can use more?" While some may argue this isn’t pure-play cloud computing, who cares? Results are raining!!

Have you considered taking entitlement management and compliance into the cloud? How do you think it would affect your customer experience and your business?

By: Cris Wendt

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 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 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.

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.

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.