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What Are The Types Of Software Licensing Models That Vendors Offer?


    Introduction

    In the advent of current technological evolution, it is unimaginable how far we have reached since the first Fortran was made commercially available in 1950s to current state where we are talking about Artificial Intelligence, Machine Learning, etc. The enhancement in technology, computing power, competition, adoption is so rapid that most software companies release new versions with new updates as quickly as possible. In 2 to 3 years, the software is obsolete because the upgrades in underlying hardware will not completely support it. Depending upon the application and use, the software companies largely offer three types of licenses. Perpetual, Subscription and Open Source. The software is same, how they charge the customer is different. However it still important to understand how the models work.

    Perpetual Licenses

    Generally speaking, Perpetual licensing model has following characteristics:

    1. It is a Vendor's proprietary computer software that the vendor provides to the client and its affiliates as a fully paid, non-exclusive, non-sublicensable, non-transferable software to be used only on Client computers.
    2. Client can not decompile, reverse-engineer the software, modify or make enhancements to fit client's needs
    3. It is usually installed on-prem on client's computers and servers.
    4. Once you purchase the license, you own it. However the patent, copyright, trade secret, and other proprietary rights remain with the licensor.
    5. Since you are paying for the license, it is usually comes as a high upfront cost that usually includes 1st year of maintenance
    6. The client needs to renew the software maintenance contracts on an annual basis, which is a lot cheaper than the cost of the license. Sometimes the vendor might sign up for multi-year contract in exchange of additional discounts.
    7. Vendor usually provides software updates and security patches for free
    8. Tomorrow if you decide to not renew the maintenance contract, you can still use the software. It will not have break fix support, but you can use it.

       Good

    • If you are planning to use the software over multiple years (read more than 6-7 years), it will save you a lot of money as you only pay for support cost from Year 2 onwards

        Bad:

    • You can always purchase more licenses, but you can't downsize. It would cost you more if your environment has fluctuations in demand.

    Subscription Licenses

    Software Subscriptions are very popular among software companies that offer cloud based software. They could also be called SaaS Software.
    1. It is a Vendor's proprietary computer software that the vendor provides to the client and its affiliates as a fully paid, non-exclusive, non-sublicensable, non-transferable software to be used only on Client computers. Some companies might allow you to sublicense it to your affiliates.
    2. Client can not decompile, reverse-engineer the software, modify or make enhancements to fit client's needs
    3. It is usually hosted on vendor's data center and/or a third party cloud environment such as Amazon or Azure. Client installs an agent on its computers and servers that communicates with the host software.
    4. Once you purchase the subscription, you don't own the license. The client only gets a right to use the license. The patent, copyright, trade secret, and other proprietary rights remain with the licensor.
    5. Since you are paying for the subscription, it usually has blended licensing and support cost. The client pays the same amount each year + any contractually obligated price increases (usually lower of 3% or CPI)
    6. The client needs to renew the subscription contracts on an annual basis, but you essentially pay the same cost every year. Sometimes the vendor might sign up for multi-year contract in exchange of additional discounts.
    7. Vendor usually provides software updates and security patches for free
    8. Tomorrow if you decide to not renew the subscriptions, you can't use the software and you'd be required to uninstall software from all endpoints.

       Good

    • You can downsize, that's the biggest advantage of subscription model. If you anticipate lower usage in the year to come, you can ask the vendor to reduce the number of subscriptions that will save you tons of money.

        Bad:

    • If you are planning to use the software over multiple years (read more than 6-7 years), it will be more expensive as you only pay the blended cost over multiple years. Even after the breakeven point is reached, you still continue to pay the same price.

    Open Source Licenses

      Open Source means free license! Right? I'd prefer to say it is not entirely true. Open Source Software companies do create their business models around free community software, they produce open-source code so that more programmers can make adaptations and improvements. They develop the software and create a support package to suit the needs to big corporations, who can't survive without support on the software. Open Source Companies don't have proprietary rights over the software as it is a community software, but they charge for the support they provide on the software. Some examples are MongoDB, Red Hat, SUSE, Cloudera, Hashicorp. Some of the best open source companies are public with their revenues touching $1 Billion. Open Source software is bit complicated, but I will provide high level information
      1.  The licensor provides a software licensed under an open source license. Any modifications, enhancements and derivatives remain licensed under the original open source license.
      2. It may be possible to modify the software, and if the contract allows then enhancement remain the intellectual property of the licensee. The licensor can't use the enhancements without permission.
      3. It could be hosted on client's premises or on a cloud domain
      4. Once you purchase the open source subscription, you don't own the license. The client only gets the rights described in EULA and a right to use the license. Open Source community owns the patent, copyright, trade secret, and other proprietary rights.
      5. Since you are paying for the subscription, it usually has blended licensing and only support cost. The client pays the same amount each year + any contractually obligated price increases (usually lower of 3% or CPI)
      6. The client needs to renew the subscription contracts on an annual basis, but you essentially pay the same cost every year. Sometimes the vendor might sign up for multi-year contract in exchange of additional discounts.
      7. Vendor usually provides software updates and security patches for free.
      8. Tomorrow if you decide to not renew the subscriptions, you can't use the software and you'd be required to uninstall software from all endpoints. You may be able to use the community (free) version of the software, but it doesn't come with enterprise level support
                    Good
        • Since there is no licensing cost, the cost of ownership is usually lesser.
        • You can downsize, that's the same advantage of subscription model and save money
                    Bad:
        • Nothing bad really. Since the cost of subscription is low (as it is only made up of support cost), it will always be cheaper than it's commercial counterparts.

    Summary

    Usually it is not a choice to choose between the different licensing models, the vendor only offers one model and you have to accept it. however another vendor might be willing to offer you a different model and knowing the difference will help you do that analysis and come up with the breakeven point. you'd still have to evaluate whether the software could do the job, but knowing the licensing model will give you the confidence that you would always have predictable costs and manageable budgets.

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