Is Traditional Enterprise Software Making its Last Stand Against Cloud Licensing?

traditional software vendors opposed to cloud licensingWe’ve all seen this “movie” before.  An industry transforms, but there are always some players deeply invested in traditional models that refuse to accept it.  Think of the transformation of physical media to digital delivery in the music industry as the most recent mass market example.

The arguments against transformation are almost always based on fear mongering – in content and intellectual property-heavy spaces, it’s around piracy.  Any time a delivery medium changes, the popular public objection from the laggards always labels the movement as a way to cheat.  We saw it in music, and now we’re starting to see it in “Software-as-a-Service.”

Let’s set the record very straight: consumers are indeed willing to pay for worthwhile content and intellectual property regardless of delivery medium.  Yes there is piracy, but this exists no matter how you deliver it.  Copying cassettes and compact discs, for example, was trivial – perhaps not as trivial as copying MP3 files, but certainly not something people shied away from.  When I was a kid in the 1980’s, trading pirated software on floppy disk was about as widespread as trading baseball cards.  And that was before even “bulletin boards” became popular!

If anything, new delivery mediums prove that consumers and businesses are willing to spend more, over time, for content and intellectual property.  In many cases, these new paradigms make the point of sale much easier and convenient for the consumer.  They no longer have to go to the store to buy music, which means getting dressed, traveling, waiting in line, etc.  Now they can just purchase instantly from their mobile device, using a preauthorized payment method.  This type of convenience fuels massive expansion of revenue streams.  Piracy indeed still exists, but it’s just the cost of doing (more profitable) business.

In the software industry, it’s clear consumers are quite comfortable with pay-per-use models.  This is the favorite model of cloud providers – it’s easy for the consumer, while expanding profit margins.  Most cloud providers earn a multiple of what they would if they sold perpetual licenses, since over time, consumers and Enterprises actually pay a premium for Software-as-a-Service!  However, as businesses and Enterprises cozy up to cloud licensing, it should come as no surprise that certain vendors are resisting, just as the music industry did when consumers moved to digital media.

What really drives the objection is resistance to change, not the fear of piracy.  Vendors understand very well that they can profit greatly from the transformation, even with increased competition and perhaps increased potential for piracy.  But they also understand positioning to take advantage of this requires an investment – in many cases, a significant one.  In our short-sighted quarter-to-quarter business world, we often see businesses sacrifice long term viability for (perceived) immediate returns.

We all understand adaptation is the key to survival, in every aspect of life and business.  It’s a tough sell to a Board of Directors however, especially if executives lack the vision to see (and clearly articulate) the light at the end of the tunnel.  This is exactly why companies that don’t adapt eventually fade or die, and new players emerge to take their place.  Sometimes this process takes years, or even decades, but it happens all the time.

In the Enterprise Software world, there is an established “status quo” for how software is monetized.  There are compensation models for salespeople and channel partners.  There are also technical challenges due to years of coding for perpetual licensing.  Worst of all, there is even a comfort level that comes with locking customers in thanks to significant investment rather than competing on merit with new offerings.  Some vendors have dug in and refuse to offer pay-per-use licensing now and in the future, trusting instead that their users will continue to bend over backwards to pay them, regardless of emerging competition.  Some at least offer subscription or time-based licensing, but this is only a variation of existing models and is not really cloud licensing.  Cloud usage is billed by the hour (or minute), not by the week, month, or year.

On the consumption side, the users (and their providers) will eventually dictate how software is licensed, just like they did in the music industry.  They will clearly demand pay-per-use licensing, and that their cloud service provider simply embeds the cost in a single bill.  The software vendors who dug in will simply be replaced by other vendors or even open source providers.  “Node locked” and even time-based licenses will become a thing of the past.  Complex compliance models that some vendors offer today as a stop gap will also fade.  Look no further than the historic decline in sales of traditional PC’s in favor of “cloud receiver” devices like tablets and smartphones as evidence of how individuals and businesses want to consume content and software.

The market has spoken, loud and clear, and it wants cloud licensing for software.  Are some vendors making their last stand against it?

About Leo Reiter

Gen-X tech entrepreneur with over two decades in diverse fields of the software industry, and a passion for expressing myself to anyone who likes to listen
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