Software by Subscription Shows Rising Interest

The majority of software publishers participating in an industry survey will favor the subscription licensing model by 2006.

The survey of 496 executives — 396 from software companies and 100 from enterprise customers — was completed in September. It was paid for by the Software & Information Industry Association (SIIA), the Centralized Electronic Licensing User Group (CELUG) and Macrovision Corporation , a vendor of electronic licensing, installation, and digital rights management technologies.

Macrovision executives presented information from the study at the SoftSummit 2004 Conference Monday in Santa Clara, California.

According to the study, one out of every three software vendors already is using subscriptions as its primary pricing model. The number is expected to grow to more than half of publishers within two years.

“There is a marked trend to move away from licensing toward the subscription model,” said Fred Hoch, vice president of software programs for the SIIA.

“The likelihood is that the subscription model will continue to rise across all segments of the software industry, but we believe the perpetual license model will continue for some time.”

The on-demand model, in which customers pay based on their usage, was preferred by 25 percent of vendors, while 12.6 percent favored basing their prices on the customer’s finances, that is, charging by revenue, cost or royalty. By 2006, on-demand pricing is expected to rise to 45.7 percent, while financial-based pricing should rise to 23 percent.

“Pay-per-use is the lowest risk profile to an enterprise, in that you only pay for that which you use,” said Daniel Greenberg, vice president of marketing for Macrovision. “However, you don’t know that your organization isn’t going to end up using twice as much as you expected. Your expenses aren’t as well known.”

On the buy side, the survey found that enterprises prefer perpetual licenses to subscriptions 2 to 1. Only 36 percent of enterprise executives in the study favored purchasing software through subscriptions; among companies with more than $500 million in revenues, that proportion rose to 44 percent. In all, more than 70 percent of enterprise executives preferred pricing based on concurrent users and per seat.

Hoch said that the subscription model has benefits for both buyers and sellers. For vendors, “It provides a recurring revenue model,” he said. Instead of seeing spikes in revenue when a new product or feature is released, subscriptions let software companies even out the revenue flow.

More important, he said, “It allows them to have a relationship with the customer. With the subscription model, they must always justify themselves — and that’s a good thing for the software industry.”

Greenberg said that customers also benefit from not having to license software upfront. “Instead of having a huge financial outlay upfront in the beginning of the relationship, before a vendor’s products are even proven, you can flatten out your risk profile,” he said, “assuming you have negotiated the option to cancel your contract at any time.”

While 51 percent of vendors surveyed use a versify the legal contract license, such as a EULA or paper contract, the survey predicts a 42 percent increase over the next two years in the number of software publishers who will enforce licenses with new technologies such as product activation and network licensing — technologies that survey sponsor Macrovision provides. The number of software vendors who enforce licenses primarily through electronic or digital means is expected to rise from 45 percent to 61 percent in that timeframe.

Enterprise customers also prefer enforcement via technology. Nearly two-thirds preferred digital product activation and network licensing to methods such as serial numbers, dongles or USB keys. Only 2 percent of respondents selected dongle/USB keys as a preferred method.

Macrovision’s Greenberg said advised software vendors to work with customers, rather than forcing a particular pricing model on them. “One thing they can do is not drop one model cold turkey,” he said. “Instead, they could offer a hybrid approach, so customers can buy the way they want to buy.”

Updates prior version to correct reference to the SIIA

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