Licensing Models Aimed at Upgraders

Companies are starting to get more flexible software licensing options as major vendors hammer out new pricing models aimed at answering long-standing concerns about cost, simplicity and portability.

Big-shop software vendors BMC Software Inc. and Candle Corp. are quietly testing new, long-term software licensing agreements that they claim will make it cheaper for some users to upgrade or change platforms.

The new licensing models are based on users' purchasing points for software packages running on large systems. Unlike many current licenses, the new schemes are supposed to give users the ability to upgrade hardware, move software from one platform to another or expand the use of a particular product without incurring steep license-charge increases. Under the usage or capacity models that exist today, users typically would have to buy new licenses or upgrade existing ones when upgrading hardware or moving to different platforms.

There are caveats to the new schemes, however: Much of the pricing is based on long-term assumptions about the kind of platforms on which the software will run. Users could end up getting locked into costly schemes if they don't fully understand the formulas on which the pricing is based. And the points schemes may make sense only in large multiplatform environments, where information technology managers expect to move to different hardware platforms.

The new pricing models reveal how software vendors finally may be responding to growing user frustration over the current license schemes, said Patricia Cicala, an analyst at GartnerGroup Inc. in Stamford, Connecticut.

"Software vendors have been using mainframes like cash cows. Over the long term, they are discovering there is no more cash to milk," said James Moser, manager of technical services at Duquesne Light Co. in Pittsburgh. The utility is ripping out one vendor's software because the vendor is refusing to negotiate on prices.

Efforts such as those by BMC and Candle could have a ripple effect, Cicala said. The new pricing model "may be complicated to develop and agree upon, but they are very flexible once you start living within it," she said.

Under Candle's so-called Point Pricing scheme, to be launched in January, companies earn a certain amount of "licensed points" that are tied to the dollar value of their software purchases.

For instance, at US$100 for one point, a software purchase of $500,000 would be worth 500 points. The customer then is free to apply the points in moving the vendor's software from one platform to another (such as from an OS/390 mainframe to Unix systems), from one location to another or, in some cases, even to buy new products from a designated suite.

Here's how it would work for a company purchasing a three-year, $1 million software license to run an enterprise resource planning application:

The company using the software on a 500-MIPS mainframe and 25 small Unix servers might earn 1,000 licensed points. The software running on the mainframe might be worth 500 points, while software on each Unix server would be worth 20 points.

Under the point scheme, if customers migrate off the mainframe to an all-Unix environment, there would be no additional license charge as long as the company didn't use Unix servers worth more than 1,000 points.

Under most software licensing schemes, a user would have to buy new licenses to migrate from the mainframe to Unix systems.

With this kind of points system, "the primary [advantage] is flexibility and predictability," said Kevin Berry, a contracts manager at Norwest Services Inc. in Minneapolis, which recently entered into a points licensing agreement with Candle. "The most difficult part in constructing an enterprise license agreement with medium- to long-term commitments is determining which products you will truly need and the amount of processing capacity it will reside on."

BMC's Value Licensing Agreement, which the company has been offering users since August, is aimed at the distributed computing market. It's similar to the Candle scheme but takes a slightly different approach in calculating the points -- known as value units in BMC terms.

Each hardware platform has a preassigned value unit attached to it. For instance, a Unix server may have a value unit of 20, whereas a Windows NT server may have a value unit of 5.

The value units' total depends on the aggregate amount of hardware that a user estimates will be needed to run an application. Software running on two Unix servers and two NT servers might have a value unit of 50. The units then can be applied in much the same way as Candle's points system.

Whether the system will benefit users depends on the formulas that vendors use to assign points or value units to systems, said Roland Akosah, a senior asset analyst at the Student Loan Marketing Association, also known as Sallie Mae, in Reston, Virginia.

Sallie Mae, which this year will spend $5 million on mainframe software licenses, recently moved some of its database licenses to a new usage-based scheme announced by IBM. The move -- which will save the association about $120,000 this year -- made sense to Sallie Mae officials because the association knows exactly how much it used the database.

But the new pricing models from BMC and Candle involve paying for software up front, based on an estimate of the hardware needed, Akosah said. "The real challenge is in figuring out on what basis the vendors are calculating points or value units and then seeing if you can derive better value by moving to it," Akosah said.

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