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Customers cool on subscription software

By Martin Lamonica, CNET News.com on October 20, 2004

Summary

A study on software licensing shows that companies are getting ahead of their customers on subscription-based billing.

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The software industry is rapidly moving to subscription-based billing, but corporate customers have not warmed up to the model yet, according to a new study.

A survey of nearly 400 software companies and 100 enterprise executives responsible for software purchases found that more than half of software companies expect to offer subscription-based software licensing within two years--a practice used by only one-third of those companies now.

However, the study found that corporate customers aren't yet buying into the change. Sixty-four percent of software buyers prefer buying a license up-front over a subscription model, the survey showed.

The survey, released Monday, was sponsored by Macrovision, which sells software for electronically tracking software licenses; the Software & Information Industry Association; and the Centralized Electronic Licensing User Group. The results of the research were released at the SoftSummit industry conference on software purchasing in Santa Clara, Calif.

The discrepancy between buyers and sellers on the question of subscription pricing could be a matter of awareness, the study's authors said. About 67 percent of software today is purchased through an up-front license with ongoing maintenance fees.

"The results of the study highlight that while some changes are being embraced by both sides, others are still in a period of flux," Dan Stickel, executive vice president and general manager of Macrovision's software technologies group, said in a statement.

In many cases, software companies favor a subscription-based model because it provides a more steady and predictable revenue, compared with selling larger up-front software licenses.

Sun Microsystems, for example, is aggressively changing its product pricing to reflect a subscription model because of the benefits of recurring revenue. About one-third of its revenue is derived from customers that pay a monthly or yearly fee for software licenses, Sun CEO Scott McNealy said Monday at a press gathering during a Gartner conference in Florida.

"The bigger that number gets, the happier I am, because then I go into the quarter with most of the business done, as opposed to having to do it in the last week, because then you are under huge discount pressure," McNealy said.

Software providers are also exploring other ways to charge their customers, including a utility model, where customers pay based on usage of software or the number of transactions performed. But the study found that about 70 percent of customers today favor traditional methods, such as concurrent-user and per-seat pricing.

The study indicated that electronic tools to track software licenses will grow in the coming years. Today, 46 percent of license enforcement is done digitally, rather than through manual checks. In two years, 62 percent of software purchases are expected to be tracked electronically.

The research also found that 21 percent of software company revenue comes from maintenance fees.

CNET News.com's Mike Ricciuti contributed to this report.

Talkback

Simply put, as a corporate policy we will refuse to buy into subsription software. Even more so, we refuse to buy into any type of ASP software. Any software manuf. that thinks they can get away with anything like this is in for a huge surprise. This feeling runs throughout my company (from the very top to the very bottom) and I don't blame them. I have a feeling some software companies are gonna be let down when they figure this out. Ah well.

-Mark

Mark October 20th, 2004 Reply
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