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Software licensing in limbo

July 16, 1999
Web posted at: 9:23 a.m. EDT (1323 GMT)

by Dan Briody


(IDG) -- Software vendors around the world are involved in a mad scramble to reinvent their licensing models to account for the new trend of application outsourcing, and acquiring and using software will never be the same for it.

From Microsoft to IBM to Citrix, companies are number-crunching and testing new licensing structures in an attempt to protect their current revenue models in the world of rentable applications.

Microsoft, for example, is currently beta testing a variety of methods, including a revenue-sharing model in which the company would give software to an application service provider (ASP) in exchange for a percentage of that provider's profits, according to sources.
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Meanwhile, Big Blue is looking into a model in which the ASP pays the software vendor only when an application is needed, essentially pushing inventory back to the original manufacturer. But models such as these have broad implications on the way vendors derive profits.

But the industrywide issues associated with these changes are presenting serious challenges to the software makers and are likely to have an impact on the way all software is licensed in the future.

"I wouldn't be surprised to see anything at this point; this is the Wild West in terms of licensing models," said Dwight Davis, an analyst at Summit Strategies, in Kirkland, Wash. "Everyone is looking for models right now."

Concerns of losing out on hefty profit margins on the part of the software vendors will fuel a melange of creative contracts and licensing structures going forward.

"There are certainly bottom-line implications to these models," said Steve Oriola, global marketing executive at IBM's ISP unit, in Armonk, N.Y. "It is an issue that is being wrestled with across IBM."

Microsoft and IBM are not the only companies wrestling with this issue in the short term. Citrix, a supplier of Windows terminal software, is in the process of revamping its licensing model for its MetaFrame multiuser Windows product with a new version geared toward ASPs. It is set for release this fall.

The company is pushing a fresh way of looking at total cost of ownership (TCO), countering with its own version, called Total Cost of Application (TCA) ownership, developed to de-emphasize the costs of hardware ownership.

Ultimately, software makers that decide to sell their wares to ASPs will also likely create a backlash among enterprises that still buy directly through the manufacturer.

"Enterprise IT managers are known to use every tool they can to negotiate better deals with vendors," said Traver Kennedy, chairman of the ASP Industry Consortium, in Wakefield, Mass. "Are enterprise customers going to want to go down the road they have in the past? That is an open question."

But some industry observers also believe that packages like these will wrench software-acquisition decisions out of the hands of IT departments and into the realm of business and finance managers.

"This is throwing software licensing on its ear and there won't be just one model emerging," said Bill Willis, vice president of engineering at InterPath, an ASP in Research Triangle Park, N.C.

"These will become business decisions and not IT decisions. The CIO doesn't care who owns the software license," Willis added.

But the time may be ripe for IT managers to leverage the confusion and unrest in the software marketplace to obtain better deals on their existing contracts.

"There is so much confusion and complexity in this market right now -- it's a mess," said one IT manager at a Fortune 500 company. "But we can leverage it by trying to negotiate an aggressive deal."

At the end of the day, however, the ultimate answer to software licensing issues may rest with ASPs.

"The ideal solution is one in which the ASP will deliver the entire solution," said Jeff McNaught, vice president of marketing at Wyse, a thin-client vendor in San Jose, Calif. "Server time, operating system, applications, desktop hardware, and support will all be wrapped into one cost."

Ephraim Schwartz contributed to this article.

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