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IDC: Software vendors chart licensing sea change

Software makers are moving toward subscription-based licensing, as changing demands from customers dictate a shift from the paradigm of a one-time sale with upgrades, a report says.

Software vendors are increasingly considering product-licensing practices based on a subscription model, as changing demands from customers and investors dictate a shift from the time-honored paradigm of a one-time sale with upgrades, a report from researcher IDC says.

The report, released Tuesday, concludes that many software makers will derive a majority of their revenues from subscription agreements, rather than perpetual licenses, by 2010. Some 43 percent of the 100 software vendors IDC polled believe that subscription licenses will represent the majority of sales in six years, with 26 percent of the 100 end users surveyed in agreement. IDC said 75 percent of the software vendors it spoke with for the report currently use the perpetual method of sales.

This significant business change is being spurred by a number of factors, according to Amy Mizoras Konary, the IDC analyst who authored the report. Mizoras Konary observed that software makers are most concerned with making it easier to predict revenues, an effort made tricky by the long-term nature of perpetual licenses, but that they are also attempting to appease to customers who ask for increased IT budget flexibility.

"While the key vendor issue is creating more predictable revenues, there is clearly some disconnect with customers in determining the price of licensing software versus the value it delivers," Mizoras Konary said.

The analyst believes that changing buying patterns among customers, in addition to the emergence of companies such as Salesforce.com that sell subscriptions to hosted applications, are driving the move away from perpetual licenses. Mizoras Konary said end users have typically overbought software, based on the perpetual model, but she feels that most customers are less willing to do so in the current economic environment.

IDC found that customer complexity is another important client-side issue that's driving the shift to subscription licensing. The research firm said midsize and large software customers manage an average of 40 software contracts or more. It concluded that 70 percent of these end users expect the complexity of managing these contracts to increase. By eliminating some of the software license compliance issues that are related to perpetual deals, subscriptions could potentially free up dollars and employee hours currently spent managing those agreements, Mizoras Konary said.

"The old adversarial sales model, where vendors attempted to shove software down customers' throats and leave for the next deal, is becoming a thing of the past," she said. "If you look at the software market, revenues are flat, and users are leveraging open source to deal with vendors. This is causing major reconsideration of licensing models all around."

However, the analyst does not expect the shift to subscription software licensing to happen overnight. A number of barriers involving software vendors could slow the transition away from perpetual sales, including issues related to channel partners, sales compensation and overall revenue concerns. Mizoras Konary also pointed out that many companies will retain perpetual licenses for certain products and customers, offering a range of potential license agreements in the future. Some companies already have subscription licenses as an option for customers but do not yet advertise deal availability, she said.

Another indicator that the subscription model is a growing trend is increased scrutiny from the investment industry. Last month, Merrill Lynch announced that it was launching a new stock index to follow the performance of companies selling software via subscriptions--what it calls software on demand.