Utility Pricing

By Jeffrey Rothfeder  |  Posted 2004-02-26 Print this article Print

Some large customers say they would be willing to consider utility computing for more critical applications if software providers offered a trial period, with a fixed rate for a short period of time, during which the vendor gathered data about software activity to help the company decide which pricing and delivery approach it should choose. Just as an energy company can give a consumer advice on how to conserve electricity based on an analysis of his daily usage, a vendor delivering software as a utility could provide usage metrics from many different data views. "Perhaps wed pay a predetermined charge no matter how much we used for six months so I can compare the costs against normal licensing fees," Dan Griffith, Motorola Inc.s senior engineering manager, said at a meeting of software companies last year. "I want tools available as needed—I like that approach—but I need better reporting about our software usage so I can understand exactly how much its all going to cost."

In fact, whether as an argument for considering utility computing or not, many customers are using their newly gained leverage to demand that kind of cost-based analysis from their software vendors, even those offering programs with traditional perpetual licenses. They feel theyve purchased too many licenses and signed too many support contracts without knowing how much software they need, how many users they have at any given time, and how much maintenance they require. They argue that if software companies want to sell them additional programs, then they must become true partners, offering not only new products but also hard usage data to help them make better purchasing decisions. Software vendors are not opposed to this idea. As revenue gets tighter, many of them are taking the possibility of misuse of software licenses, and the lack of compliance with software piracy rules, more and more seriously. As many as 10 percent of all end users are not conforming to licensing agreements, according to McKinseys Berryman. That represents $19 billion in lost sales for software companies every year. More than 30 percent of respondents to an IDC survey in October 2002 blamed their noncompliance on the amount of software purchased, the frequency of staff changes, complex licensing rules and not enough staff to monitor software use. To recapture the revenue lost through noncompliance, many software companies are beginning to add to their programs tracking technology that can measure software use and produce detailed reports about individual activity. These reports will also provide what customers are now missing as they navigate new pricing and delivery programs: the ability to make purchasing decisions based on reliable information.

When this data is commonplace and available to end users, the pricing and delivery options that appear so radical now will seem tame compared to what customers will be demanding and what software companies will be forced to offer, says Stephen Graham, IDC group vice president of global software partnering and alliances: "The experience of other industries has been that the balance of power in a supplier relationship resides with the company that amasses information and then leverages its knowledge. Despite the structural problems and the changes that favor end users weve already seen in the software industry, vendors still have the balance of power. But not for long."


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