A 2nd Hand Software Market Challenge for ISV’s

Posted on July 16, 2012

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On 3 July 2012, the Court of Justice of the European Union (CJEU) ruled in UsedSoft v. Oracle that irrespective of the terms stated in any licensing agreement, software bought with a perpetual right of use that acquiring third party could re-sell the license 2nd hand without any recourse to the software vendor. This is irrespective of the fact that the software may have been downloaded or supplied as a boxed physical media set purchasers of software may resell copies of their downloads provided that they render the original download unusable.

There is a good summary online by Edwards Wildman

What this means for the software industry is that there is now legitimate scope, for a second-hand software industry to emerge. Legitimate in so far as there is now a basis of judicial precedent. Although it is unlikely this will be the last word on the matter and broader challenges will help to clarify this.

This ruling however does not apply to any software purchased under a subscription, rental or lease agreement.

Irrespective of any potential reversal of this ruling this should be taken as a wake up call by the Independent Software Vendor (ISV) community that it is time to stop ignoring the inevitable. This is a precursor event building on the wider shift that has been rumbling under the surface of traditional software production, delivery and pricing models influenced by Cloud computing and the new generation of subscription licensing models that underpin a new way of delivering and servicing software to shifting expectations of consumers and enterprises alike.

A precursor event because it will not be defining in itself. It heralds the prospect of a very different software future. Whilst it may not be the floodgates opening it confirms that change is inevitable at a deepening institutional level across ISV’s. Change that will challenge not just pricing and licensing models but the way software is developed, delivered and maintained at the core of organisations operations and culture. As the perpetual fixed incensing model get’s subsumed by the new agile subscription orientated licensing models it will demand a new type of business cultural and agility that many big ISV’s will struggle with. I can point to the short horizon strategic myopia that Cisco is demonstrating and HP’s doldrums’ to highlight two household names, which will be the tip of the iceberg.

Some points that jump out at me:

  1. An important undertow is the judgment seems to reflect common practice across both consumer and commercial entities that vendors have turned a blind eye to notably reselling and make copying of software media (albeit the latter for internal use). Many have and do re-sell licenses, furthermore vendors in part are inadvertently underwriting this. In cases where these licenses are of significance, the 2nd hand owner contacts vendors to review support and or upgrades. Vendors see the loss of a sale as ‘cost of sale’ for persisting or regenerating support/maintenance/upgrade revenue from a new customer. Often these are customers who would not have made the leap to such a product outside a 2nd hand market, but once on the ramp they represent fish in the net.
  2. This hints at acknowledging a shift change which has started to be driven by the new wave of Cloud based licensing models, largely led by subscription formulas. This I believe across many broader horizontal markets will be inevitable, the niche specialised industries less so, at least for now.
  3. As Cloud enables the cheaper development, delivery support and maintenance of software the niche markets will slowly feel the pressure of attack from ‘Born in the Cloud’ start-ups who will see opportunity in the big margins and price tag’s that specialised software areas attract. For now there is plenty of easier low hanging fruit.
  4. For Vendors in specialised areas they need to move, now and create roadmap at a strategic level. If they are not able to have flexible discussions with customers then they will be heading towards the off-ramp, flexibility in the future will be lower initial costs of purchase but a readiness to commit to slow burn subscription value use payment models. There are many permutations in between; there is no one size fits all in this new generation.

So what is the answer?

Reflecting on one of the industry’s largest and software vendors, Microsoft, who has undoubtedly the broadest range of software it is possible to see how ISV’s can adopt some best practices learnt at Microsoft’s expense. This reflection could deliver short term ‘Quick Fix’ adaptation to address any immediate exposures with minimal impact on product development but cannot replace an inevitable need to start now to plan product roadmap for the medium and long-term sustainability.

A Software Assurance ‘Quick Fix

For some years now Microsoft has included a new dimension to their traditional Software Enterprise Agreements (EA) and Volume Licensing called Software Assurance (SA). The thinking behind SA being to give users the ability to spread payments over multiple years, while offering inclusive upgrades to newer versions during that time period. Many additional benefits were also bundled in to sweeten the price premium of SA, these vary depending on the type of EA and product licensed but include:

  • Deployment Planning days.
  • Training
  • Employee home use rights
  • Enhanced telephone support
  • Technical resource access normally chargeable such desktop support and virtualisation tools.

Historically SA has been criticised for the lack of included updates during a contractual period, but in latter years the move to a faster release cycle has started to demonstrate much stringer value in this and Microsoft has reported acceleration in the SA adoption over the more traditional fixed EA.

An interesting survey supporting this value was produced by IDC ‘The Business Value of Microsoft Software Assurance for Volume Licensing’

My idea of a short term ‘Quick Fix’ here is where a form of Software Assurance (not strictly the Microsoft Model of today) is adopted and the licensee’s principle value point in the agreement is the SA benefits rather than the perpetual license right. This could side step the CJEU ruling with minimal impact on Enterprise customers as the updates and benefits are subscription based. The perpetual license right being the baseline license that was acquired when the agreement commences NOT the upgraded. As such should there come a point when the licensee moves off that software platform the value of the license they hold to sell is negligible having been eroded by the age of the agreement.

Medium &Long Term Sustainability

As SA demands a regular flow of value to the licensee the ISV must adapt and optimise their development and deployment cycles and ultimately their support and maintenance to a subscription, real time anytime model.

Examples of such models are already in existence. I spoke last week at Microsoft’s Partner Conference on the subject (Making Money with Microsoft Cloud, the Real-World How-To) and had accompanying me on the stage to communicate first-hand the benefits Peter Senescu CEO of Metavis Technologies. MetavisTech have the definitive value proposition for todays Cloud world. A solution that is delivered maintained and supported across the Internet from the Cloud, with bug fix refreshes every weekend. Their solution is by no means simple, it is an Enterprise grade migration and management platform for Microsoft SharePoint and demonstrates the agility that is possible with correctly optimally architected product to deliver seamlessly in the cloud.

Returning to the case in point Oracles problem is the way they price and license their products. This drives an asset sweating behaviour in their customers who max out the utilisation of licenses. This means as competing products level the playing field and customers Oracle upgrade horizons becomes imminent there is an increasing shift to alternative more cost effective and value driven solutions from SAP and Microsoft Dynamics. The perception being that to upgrade Oracle the pain can be as much as a shift to a more cost effective platform. At which point they will liquidate and recover whatever value they can from the Oracle asset by selling it on. In essence Oracles licensing model allows itself to be swapped out.

On the other hand deliver more core productivity stack based software such as Microsoft Office and or desktop or server OS is harder to get rid of, these vendor offerings have less exposure in their core market.

There will need to be a reflection as to how this judgment stand’s up to a wider market response and inevitable challenge. Will the market accept the changing state of software and make a licensing shift or push back and drive some review of the ruling that will see some degree of reversal? I would bet on the former rather than the latter.

For now if you are an ISV don’t stand still, for the agile this type of threat is a receding legacy issue as product is moved to a Cloud based, real time subscription modus operandi. For the laggards who are sticking firm to traditional proprietary models this is another unwelcomed challenge to bottom line margin.

As for the rest of us, we will be watching this space….

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