Software licenses seem like the second oldest business. After the first computer was perfected, it needed software and then some smart guy figured out how to monetize his work to infinity. How do you sell something that only exists as electrons? And how do you resell it when you run out of new ideas?
In my first job where I was responsible for a budget, it was software license costs. It was difficult to justify because it wasn’t received; you couldn’t touch it and the cost went up with each new computer purchased. But the justification came in the form of a perpetual license – one that I could use and reuse as long as I was within the confines of the license parameters. Buy once, use forever.
And now that is all changing with one word, subscription.
A subscription is the action of making an advance payment to receive something. Newspapers and magazines were the first to utilize this payment process. Services can also be acquired by subscription. When I quit paying for my newspaper, it stops being delivered to my door. When I terminate a subscription service, I can’t call the technician anymore. This goes for software licensing as well.
Subscription licensing is the next turn of the crank for software vendors. What is the difference compared to selling traditional software? Why would a customer want one over the other? Why are software vendors flocking to this change? We will try to answer those questions. But we won’t try to justify them because subscriptions are here to stay, as we will see.
A typical perpetual license required a large, upfront license payment for the rights to use a piece of software. If the client wanted some protection or future-proofing, they could pay a maintenance or support fee, typically between 15% and 30% of the license cost. A subscription license on the other hand is paid for monthly or annually, upfront, on an ongoing basis. This subscription fee covers the license, maintenance, and support, but it is a pay-it-or-lose-it model. Stop paying for your subscription and can no longer use it. Specialized uses of a subscription model called Software as a Service (SaaS) even included infrastructure to run the workload. Subscription costs are all known and paid up-front in the model and perpetual costs are obscured by maintenance and upgrade costs that may change over time. Perpetually licensed software may sound like buy once, use forever, but that is seldom the case. The software runs on hardware, supported by operating systems. There are many opportunities for unmaintained software to fail due to other environmental changes.
Why choose one licensing option over the other? In the short term, a client may have a choice about which model to use. Using Total Cost of Ownership, TCO, as a model, we see a wash over a 3-year period on subscription vs. perpetual with maintenance payments. The reason is the large up-front payment for perpetual software. In the long term, perpetual software tends to be cheaper as the maintenance payments are less than a subscription payment. The key in the decision, when given the choice, is the upfront payment, Capex vs. Opex. A cashed-strapped company may prefer acquiring the needed functionality for an ongoing, but lower payment in the short term. In the future, there may not be a choice as all new software and many traditional vendors are only offering subscription models.
The short answer is that subscriptions bring understood, consistent revenue streams. Vendors can no longer be threatened by a client not paying for maintenance in support. Under a subscription model, a client is locked-in and seldom will leave. This is especially true as the software becomes pervasive in the client environment. It is difficult to tell a user group that the product they built their process around is no longer available.
For both vendors and clients alike, another benefit is the need for audits no longer exists. Subscriptions require registrations and credentials to utilize the software. Those credentials can easily be terminated when a client stops paying for software, rendering the product unusable. The vendor knows who is using a product and whether it is paid for. Audits are expensive for both clients and vendors; eliminating them is a win-win.
Vendor licensing is changing with the advent of the subscription model. As mentioned, even traditional vendors, including mainframe providers, are including subscription language in their contracts. The thought of eliminating perpetual licensing and the assured, consistent payment stream is the biggest reason. While decisions can still be made in the short term, the long-term horizon for both vendors and clients is that subscriptions are the way of the future and are here to stay.