Software Licensing in the Cloud

February 18, 2014 VIEW ALL

cloud_licensingMany dream of a world where all software is free (as in speech and as in beer!).  In the real world, however, software licensing is not leaving us any time soon.  Companies spend enormous resources researching, developing, and supporting high quality applications, and must recover that investment.  As an end user, you get to decide if there is sufficient value in paying a vendor to use their product, or search for a free alternative that suits your needs.  Once you’ve made the decision to go commercial, software licensing becomes a key consideration in present and future use of your applications.

Before use, however, comes deployment.  If you’ve been paying attention, chances are you are trying to take advantage of cloud computing.  We all know the benefits by now.  But how does this paradigm fit with traditional software licensing and the industry’s strong resistance against change?  Let’s take a look at 3 different methods and how they work in the context of cloud computing…

Perpetual Software Licensing

This type of software licensing entitles you to use an application with certain terms and conditions for as long as you wish, in exchange for the full cost up front.  Restrictions vary, but typically cover who (or how many) may use the software.  Most vendors require a yearly fee to provide technical support and upgrades, but you can continue using the application even if you decide to stop paying for this.

While perpetual software licensing is very common and easy to understand, it’s the least friendly to cloud computing.  If you’re an end user subscribing to Infrastructure-as-a-Service, you basically have to deal with two vendors (your cloud vendor, and your application vendor).  What’s more, even if you only use the infrastructure part time (which is a major reason why you chose cloud computing to begin with), you still need to buy a full copy of the application.

If you’re a cloud service provider looking to deliver perpetually licensed applications in a Software-as-a-Service fashion, you must capitalize the product up front.  Calculating ROI on this model is both complex and full of uncertainty, requiring a bit of a “leap of faith”.  The bottom line is your customers are looking to pay for use, and you in turn must pay vendors for what is essentially inventory.  This is not an ideal situation!

Subscription Software Licensing

A friendlier way to license software for cloud computing applications is by subscription.  There are different styles within this genre of software licensing, but typically vendors charge for peak current users or devices accessing their applications.  Cloud service providers naturally prefer to pay in arrears, since that’s how they bill their customers.  This approach involves end users consuming applications during a period of time, and service providers reporting (and paying for) metered usage back to the software vendors.

More and more traditional software companies are embracing subscription licensing.  Even Microsoft’s new CEO Satya Nadella famously changed the sales compensation model for Office (perpetual) to give equal weight to Office 365 (subscription).

Typically, over some period of time (1-3 years depending on vendor and application), subscription software licensing costs more than its perpetual counterpart.  But end users enjoy peace of mind knowing they are always using a fully supported, fully up to date copy of their favorite applications, without the hefty up-front investment.

If your application vendor is your cloud service provider, then subscription software licensing is quite reasonable.  But for cloud service providers who deliver subscription licensing in a pay per use model (as most cloud computing consumers demand), the subscription periods are still way too long.  End users consume cloud applications by the hour, or even minute, which is vastly more granular than the monthly term most subscription software licensing dictates.

Pay-per-Use Software Licensing

“Nirvana” for cloud service providers and consumers alike is pay-per-use software licensing.  In this model, software vendors are paid in arrears for the exact metered usage of their products.  Consumers pay one price, which includes both infrastructure and applications.  Cloud service providers use the same model to monetize their entire stack without having to predict any more than they already have to.  Everybody wins.

Of course, traditional software vendors are very protective of massive Enterprise License Agreements that lock customers into yearly commitments for products and services.  Pay-per-use is disruptive to this model, although over time is sure to produce more revenue.  Just as infrastructure costs more to rent than to buy for full time use, so does software.  Once vendors start embracing this and adapting, one of the major barriers to cloud adoption (software licensing) will finally fall.  We can’t wait!

No matter how you pay your software vendors for the right to use their products, make sure you have a partner who can help you make sense of it all.  Nimbix offers cloud computing solutions for all software license models, whether you are an ISV, end user, or developer.


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